Globalization an Understanding of the Problem Thesis

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An Understanding of the Problem and How it Relates to Globalization

Two Perspectives on the Impacts on Managers

Recommendations for Managers

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In the winter of 2007, a crisis emerged in the U.S. subprime housing market. The potential impact of this crisis on the global economy was initially downplayed, in large part because the degree to which the global financial markets had become integrated in recent years was unknown. As the crisis has unfolded, two things have become apparent. One is that the global financial markets are intertwined to a high degree. The other is that the world's major economies rely on mutual strength in order to flourish. At the outset of the crisis, it would have been difficult to conceive that some of the outcomes would include the bankruptcy of Iceland (Capell, 2008), and the deflation of China's seemingly unstoppable economy. The issue, after all, was that American banks and mortgage companies were writing too many bad loans. Now, managers around the world are faced with a global economic slowdown. From Saudi oil barons to retailers in Asia, the subprime crisis is affecting businesses all around the world. Globalization has made a domestic American issue the most dominant global economic issue of our time. Managers in the U.S. And around the world must now cope with the economic slowdown, but they must also prepare for the risk of other such market failures in the future. In essence, globalization has increased the potential reward for corporations but it has also increased the level of risk. All around the world, managers today must find a way to measure this risk, and to hedge against it.

An Understanding of the Problem and How it Relates to Globalization

Thesis on Globalization an Understanding of the Problem and Assignment

There are several roots to the subprime crisis. Interest rate policy led to an excess of capital in the banking system, which in turn compelled banks to lend more freely. A consistent pattern of deregulation had led to the loosening of controls within the banking system that allowed for two things. One, it allowed banks to ignore basic financial sense in their lending practices, by lending to borrowers who had no hope of paying back the loans. The other thing deregulation allowed for was the packaging of the subprime loans into mortgage-backed securities.

Increased globalization had resulted in the outsourcing of the U.S. manufacturing industry, which in turn resulted in a deterioration of the current account balance. The reduction of trade barriers had allowed for increased flow of goods made overseas into the United States. This meant that many countries held an excess of supply in U.S. dollars. Those countries then invested the dollars first into U.S. Treasury securities. When those were made unavailable by the U.S. government, the flow of those investments moved down the line to the next best securities, those by quasi-federal agencies such as Fannie Mae and Freddie Mac. When those became scarce as well, the next securities were the mortgage-backed securities. Globalization gave these countries their excess U.S. dollars, and allowed them to easily invest in what were ultimately risky U.S. securities (Wade, 2008). Worse, because of the complex nature of these securities, not all investors were aware of the precise level of subprime exposure. Thus, the subprime crisis was able to spread beyond U.S. borders. Had trade not been as liberalized, these other countries would not have the same high degree of exposure to the U.S. dollar and to the subprime crisis in general.

Globalization has also spread the impact of the crisis around the globe. While the majority of the effects of the crisis are being felt in the United States, the dependence of so many other countries on the U.S. economy has resulted in the crisis spreading globally. Reduced trade barriers have opened up the U.S. market to foreign companies. Through the 1980s and 1990s, companies such as Nike and Wal-Mart rapidly increased purchases from foreign factories. The result was a shift in the orientation of the American consumer from higher quality to lower price (Gainor, 2004). Globalization was heralded as bringing these lower prices which were equated with a higher quality of life.

However, this reliance on trade with low-labor-cost countries resulted in those countries being exposed to U.S.-derived economic risk. Thus, when the subprime crisis hobbled the U.S. economy, it also hobbled the economies of countries around the world that had depended on the U.S. market for their growth. Globalization allowed these countries to develop economies based on sales of low-priced goods to the United States. When the U.S. banks began to tighten credit, demand for these goods began to tail off. The result has been factory closures and layoffs, particularly in China (Associated Press, 2008). In the era before globalization, the credit crunch would have had significant impact on the U.S. economy. The factory closures, under that scenario, would largely have been limited to the United States. Globalization moved those factories to other countries and therefore the impact of a credit crunch in the United States has been expanded to the international sphere.

Two Perspectives on the Impacts on Managers

The response of some managers, particularly in China, has been somewhat less than heroic. Workers have received their paychecks late, plants have closed without notice and foreign managers have simply fled the country rather than deal with the problems (Ibid.). There are two main schools of thought regarding how managers can better prepare for and respond to such crises in the future. One school argues that globalization should be curtailed or restrained in order to mitigate the risks involved. The other school argues that management decisions are a more important factor in such failures than globalization. Therefore, this situation offers important lessons for managers as the deal with this scenario and prepare for such eventualities in the future.

Globalization has increased the risk and the reward in the world's economic system. The result has been a steep increase in global wealth, but when crisis hits, the suffering is equally harsh. Opponents of globalization argue that keeping more jobs at home is more beneficial. Thus, the risk of localized events, be they the subprime crisis, or the Asian financial crisis in 1997, have limited impact outside of their regional spheres of influence. The impacts of catastrophes such as the subprime crisis are difficult to predict. This makes it difficult for managers in far-removed industries or parts of the world to guard against such eventualities. For example, the toy manufacturing industry in China has suffered greatly because the subprime crisis has weakened U.S. demand for Chinese toys. One estimate has some 3600 Chinese toy companies having gone out of business already in 2008 (Ibid.). Knowledge of the subprime crisis arrived in early 2007, but many U.S. experts did not predict the crisis would spread. There was no way for even the executives of the toy factories to understand how exposed the global economy was to the bad mortgage debt, nor would they have been able to anticipate the sharp decline in demand, particularly in the face of continued high ordering from U.S. importers and retailers. That those goods would go unsold was not a reasonable expectation. The solution to this problem would therefore not be at the managerial level, but at the governmental level. A policy of reduced dependence on the economies of other countries may have stifled the opportunities for growth but also would have reduced the suffering of the Chinese economy when the crisis emerged.

Another aspect of this argument is that globalization today has taken on a form that uniquely benefits the larger countries and stronger economies. The current system, opponents argue, should be curtailed because it does not provide developing economies to properly develop in the way that today's developed economies were able to (Chang, 2007). Not only would such economies be able to better protect their infant industries, but they would be more insulated from dependence on external markets as well. Moreover, foreign investments would be curtailed as well. Many of the Chinese toy factories are run by firms from Japan, Taiwan and Hong Kong. By allowing for the development of domestic firms, reduced globalization would allow such companies to take a longer-term view of their growth. Instead, we have a situation where as soon as the plant shows signs of struggling, the foreign owners close it and abandon the country.

Others argue, however, that managers must accept their share of blame for the suffering of their firms as a result of this global financial crisis. Better management practices would result in lower exposure to risks. It is not, proponents of this school argue, inevitable that the global financial crisis result in suffering. The Chinese toy factories, for example, had for years engaged in a business model that was not sustainable. They had competed with each other strictly on price, what Michael Porter would term a cost leadership strategy (Porter, 1980). However, these firms did not adopt business-level tactics that supported their choice of strategy. Instead, they were subject to rapidly… [END OF PREVIEW] . . . READ MORE

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APA Style

Globalization an Understanding of the Problem.  (2008, November 24).  Retrieved July 10, 2020, from

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"Globalization an Understanding of the Problem."  November 24, 2008.  Accessed July 10, 2020.