Regional Trade Associations Replacement of National Trade Barriers

ABSTRACT

Introduction

A wave of events has transpired in the last two decades.  These events have been so significant that even they have caused the formation of a new system – globalization.  This system has given birth to a number of new concepts – international standards, global economy, information superhighway (the Internet), borderless economy, multinational and transnational companies, regionalism, trade blocs, and so many others.  This research aims to extrapolate and understand further how the system works so that necessary preparation can be done.

Summary

            This research will discuss the main players in the global village – how they interact with each other, how they affect business transactions, and what have they done to alleviate (or the reverse of it) the economic status of developing as well as developed countries.  An in-depth review of how the technological revolution brought about by the Internet and information and communication technologies (ICTs) will be done, with specific focus on e-commerce and business process outsourcing.

Conclusion

            Governments and regional organizations have to intervene to ensure that the positive side of globalization is what the global village would experience.  A win–win formula has been figured out, and it is only up to the players to make sure that this formula will be implemented.

CHAPTER 1

BACKGROUND OF THE STUDY

Identification of the problem

Globalization has given birth to a number of new concepts – international standards, global economy, information superhighway (the Internet), borderless economy, multinational and transnational companies, regionalism, trade blocs, and so many others. It has affected or altered how traditional affairs of, between, and among states (e.g., political, commercial, economic, and socio-cultural) are being handled. Not so long ago, corporations could be successful by focusing on manufacturing goods and selling services within national boundaries.  This does not exactly mean we do not make any trades with any of neighboring nations—corporations simply do not give many investments on international trade due to the cost adherent to such a transaction. Globalization and internationalization of markets have affected not only governments, but more importantly since this is the topic of this research, corporations and how people transact business.  The main concern of this paper is to look at the effect of globalization (and phenomena associated with it) on how to perform business transactions now.

Statement of the problem

            In this period of multinational and transnational corporations, international markets, and information superhighway, how does globalization impact the competitiveness of business?

Aims and objectives

            The general aim of this study is to explore further how we do business, in terms of competitiveness, now that markets as well as resources have expanded from their traditional boundaries.  Markets in virtually all parts of the world can be accessed by any investor with minimal to no additional cost at all depending on the commodity or service to be offered. Even the manpower resources of an Asian economy can be tapped by a customer or investor from America.

            Specifically, this study will look into the following:

• The key players and catalysts of globalization that may or may not affect how we do business today – the Bretton Woods institutions, regional trading associations or blocs, multinational or transnational corporations, and the technological revolution (ICT and the Internet);
• Electronic commerce (e-commerce or e-business) through a borderless economy and how Internet changed the business setups within and among national economies;
• E-commerce and the case of small- and medium-sized entrepreneurs – challenges, opportunities, and trend;
• New technologies and how it changed transactions of traditional businesses;
• Emergence of new industries due to globalization (business and knowledge process outsourcing, call centers, etc.)

This study will also try to look at how other scholars see globalization in the coming decades, i.e., will the whole world become nothing but a global village, or is the emergence of regional trade associations an attempt to suppress this expanding village?

Significance of the study

            The aims and objectives of this study will be beneficial not only to existing industries relying on the extensiveness of market, resources, and channels to do business, but as well as to bold entrepreneurs who would like to venture to any related area presented in this study. More importantly, however, is how other scholars would probably utilize the findings in this study to support any of their arguments or conclusions in a study related to this one.

Theoretical framework

            This study will utilize the “systems analysis” approach as originally discussed and used by David Easton.  This tool was discussed in his book A Systems Analysis of Political Life (1979). Systems analysis is composed of four major elements: INPUT, SYSTEM, OUTPUT, and FEEDBACK.  A fifth factor, although not a major element in the framework will also be used in this study – the ENVIRONMENT. In traditional systems analysis, the ENVIRONMENT does not have an “active” role in the system, i.e., it influences the other elements depending on how active it is but in most cases, the ENVIRONMENT is a silent observer which may or may not have an effect on the system.  This study will be a bit contrarian as the ENVIRONMENT will have a significant effect in what is happening inside the system to the point that it is functioning like an INPUT.  This will not just be an observer, but more so, a catalyst in processing the INPUT.  As what the writer will be discussing later, a possible sixth element will surface: a FILTER. In the original model, a FILTER is not an explicit part, but in this study, this is somehow part of the system.  We will be using it as a result/action of the feedback towards the system but not inherent in it.  For a model representation of this theoretical framework, please refer to Fig. 1.

Organization of the study

            This paper will first present a review of related literature.  History of globalization by discussing early protectionism first will be presented. From this, globalization in a bigger picture will be tackled, i.e., globalization in a political, economic, and other aspects.  In essence, a historical presentation of globalization will be provided.  Studies on regional trade associations will be presented next.  The research chapters will then follow as the researcher of this study will try to expand and define the specific objectives if this study.  This study will culminate in a conclusion about the general aim of this paper. 

Fig. 1. The systems analysis model by Easton as a graphical illustration.

CHAPTER 2

REVIEW OF RELATED LITERATURE

Understanding globalization

MacGillivray, in his book entitled “A Brief History of Globalization:  The Untold story of our incredible shrinking planet,” claims that the term “globalization” has rapidly become one of the most overused words in the field of international relations.  Unfortunately, though, this is also one of the least understood or at least broadly construed concepts in the same field.  It clearly covers connections between and among political, economic, cultural, and even environmental issues or concerns.  And with the recent advance in information technology, we also know that globalization also concerns itself about technology and even war.  MacGillivray described globalization as the interaction and integration between and among people, corporations, and governments across national boundaries.  Such web of interaction and integration is motivated by international trade and investment with the help of technology, particularly, information technology.

Globalization as a process of integration is not new.  For centuries, people – and later on corporations – have been doing trades with other faraway lands.  They have invested in enterprises even outside of their countries.  But a key concept or development in “modern” globalization that should always be considered is the technological revolution that has suddenly caused increases in international investment, trade, and migration.

            The importance of technology in the era of globalization was further elaborated by Friedman.  In his seminal book, “The Lexus and the olive tree: Understanding globalization,” he described his view of globalization: “In the Cold War, the most frequently asked question was ‘How big is your missile?’  In globalization, the most frequently asked question is ‘How fast is your modem?’”  As compared to other writers who believe that globalization is a phase of human evolution, or maybe a trend, Friedman believes that it is more of an international system which existence was significantly felt after the Cold War period.  He argued that the movement of globalization in this contemporary period is just an extension of the previous period which has marked the end of the First World War. He cited in his book:

“…with the invention of the steamship, telegraph, railroad and eventually telephone, it is safe to say that this first era of globalization before World War I shrank the world from a size ‘large’ to a size ‘medium’.  Now, we have the next round of globalization, thanks to the Internet, starting in the early ’90s.  The big difference being the intensity of our current globalization, because vast numbers of people have access to the information and technology to become a player (unlike Globalization I).”

Whereas the Cold War has changed the whole world into a bipolar one, globalization has changed this into a global village with shared or integrated resources in terms of capital, technology, political and market sentiments, and information across national borders.

Friedman’s point is that the end of Berlin Wall in 1989 started a new way of life for the rest of the world.  It will no longer be about the East and the West.  This will not be about the socialists and the capitalists.  His classic example of the “electronic herd” clearly describes and explains how globalization has integrated many aspects of national and international affairs together. In this example, he described how investors and speculators in the equities market, for example, turn the whole world into a unified parliamentary system – every government, from Brazil, to Thailand, to Indonesia, is afraid to have a no-confidence vote.

Friedman has emphasized that this electronic herd has been acting globally and can determine the success and failure of any country or corporation.

Friedman doesn’t see globalization simply as a trend; he believes that this is a cluster of trend and technologies.  And by technologies, he really is referring to the Internet, fiber optics, digitalization, satellite communications, and other technology that increased productivity and multiplied speed of business processes.  This is about the technological revolution.  And for him, globalization has eradicated the differentiation of first, second, and third worlds.  In this era, we only have a fast world and a slow world.

The world is changing fast.  Developing countries are changing not only their political setup, but more so importantly in this era, they are upgrading their technological infrastructure.  The Islam community today is promoting their cause by harnessing the Internet.  Local industries and establishments from low- to medium-income countries are using the Internet for their entrepreneurial activities, and are giving them returns and profits that are not possible if they are not wired.  The Internet is giving everyone the opportunity and resources that the previous period was not able to offer.

Regional trade blocs: Offshoots of globalization?

As soon as globalization took its toll, small groupings have started to pop up in the open market arena.  These are simply the regional trade associations or trade blocs, which are basically groupings of countries that monitor the trade activities of member countries within the region, as well as formulate and implement policies relating to their principles (be it a trade-related policy or not).

Krishna (2005) discussed in his book “Trade blocs: Economics and Politics” how trade blocs, particularly, preferential trade blocs, have become the trend in this period despite the undeniable success achieved by nations through multi-lateral trade (as sponsored by the World Trade Organization).  Many countries now are making their own negotiations and coming up with trade treaties among themselves.  Trade blocs are now subject to much academic and policy debates for moving away from the WTO central principle of nondiscrimination among member countries.

In this book, he discussed the effects and implications of preferential trade areas on the investments being injected by multinational corporations on member and nonmember countries of a trade bloc.  Where there are multinational trading activities, a preferential trade area can divert its investments toward the member countries.  He noted however that if PTA trading activities are strong enough, then, it would be able to enhance even the activities of nonmembers.  He concluded that the natural course or preferential trade areas is toward a more liberal global market.  If the trading activities within the bloc are strong enough, there is no other way for member countries but to extend the trading outside the bloc, or for them to open up the area to nonmember countries.

Frankel, Stein, and Wei made a more detailed analysis of how regional trading blocs have been working on our system.  In their book “Regional Trading Blocs in the World Economic System,” they debated the role of trade blocs in the global market: Are they building blocs, or stumbling blocs?  There are those who suggest that regionalism only undermines the support for a more generalized liberalization.  These are the ones who believe that trade blocs give a negative effect or impact to globalization.  Frankel et al. summed up the “stumbling bloc” argument as follows:

•  “blocs’ market power and incentive to protect its members” – in an arena where there are only a few large trading blocs, the temptation to monopolize market trading activities so as to protect their bloc against another bloc is high.  Also, members might be tempted to raise tariffs as part of its security measures against other blocs. Trading blocs are just protectionism at a higher level, i.e., regional level (p. 210).
• “Manipulation by special interests” – this special interest argument points out that arrangement may be made by member economies to avoid opening up certain sectors of their country if they believe that these sectors would be threatened by an open trade.  There is a classic example in the case of ASEAN where Indonesia exempted almost all important sectors but included and promoted the import liberalization of snow ploughs (p. 212).
• “Scarce negotiator resources” – this point out the fact that it is not a costless effort to create and ratify trade agreements and compensate losers. Otherwise, the whole world would have opened up to free trade (p. 214).
• “Firms’ support for free trade areas, their own trade bloc, may be a political dead end” – if the sequence of decision would matter, multilateral initiatives might be sacrificed over regional ones (p. 214).

On the other side of the debate are those who believe that trade blocs are the ones that would actually undermine protectionism and reinforce or promote liberalization of trade.  A list below summarizes the “building bloc” arguments:

• “Locking in and mobilizing regional solidarity” – leaders may use the advantage of political support of countries within the region to achieve liberalization.  This would be a lot complicated if not politically impossible if pursued unilaterally (p 216).
• “Efficiency of negotiating with larger units” – considering the number of countries that are part of a bloc, negotiating to another larger unit for something may not be as difficult (p. 217).
• “Competitive liberalization” – this simply means building of political momentum for liberalization.

The question now is “How can one get an idea as to which effects in practice dominate, on average” (p. 226)?  The researchers of the book argue that there is more than one possible channel of political causation starting from regionalism moving towards multilateralism – and as presented above, some are positive, but some are negative. To use the jargon of the book: some have building-block attributes and some stumbling-block attributes.  The net effect of removing regional trade barriers can be most likely interpreted as supporting liberalization.  In this study however, it appears that some countries tend to open up their trade barriers to others, but before this happens, they first open up to countries within their own regional group.  As a conclusion, Frankel et al., argue that trading blocs are more of building blocks rather than stumbling blocks. 

Challenges and perspectives

Friedman is one of those scholars who give much emphasis on technology as a driver of globalization.  These are the people who believe that globalization is an unstoppable force. Fisher, in his paper presentation for the American Economic Association entitled “Globalization and its challenges” emphasized that globalization is complex and multi-faceted. He described globalization as “the ongoing process of greater interdependence among countries and their citizens.”  In this presentation, he is questioning the economic aspect of globalization.  His core discussion focused on the attacks received by the system.

Economic globalization is the continuous process where economic interdependence between and among countries increase.  Such interdependence is mirrored in the increasing levels of trans-border trade in different commodities and services, international financial flows, and even increasing flows of labor, directly or indirectly.  Economically, poverty is the biggest challenge of globalization. In Fisher’s paper, five major economic issues in the globalization debate were presented (p. 7):

• “whether poverty and inequality are increasing or decreasing;
• whether integration into the global economy is good for growth;
• whether the international financial system is too crisis prone, and capital flows need to be banned or regulated;
• the unfairness of the global trading system, and the inadequacy of aid flows; and
• The role of the IMF.”

Fischer presented data (other than the usual per capita income which shows continues development/improvement until today) on most social indicators which have shown considerable improvement lately starting post-war period.  This paper showed evidence that conditions in many developing countries have improved significantly.  Fisher, however, emphasized that not every developing country is experiencing this improvement.  Countries of Sub-Saharan Africa have negative per capita growth for almost half a century already, and unfortunately, continue to deteriorate.  Latin America did not do well, either.  He provided data showing increasing disparity among national average incomes (GDPs of nations compared).

Fischer continued to discuss a number of issues but his main thesis is that the greatest challenge of economic globalization is to ensure a consistent and equitable delivery of economic growth to the global system.  This is indeed a long-term plan.  He concluded his paper with a challenge to his fellow economists (p. 33):

• Maintain professional standards.
• Do not be afraid to take on big untidy issues, but to do so objectively, element by element;
• keep trying to find solutions to real world problems;  and
• from time to time – stand up and be counted on the issues.

Another scholar who is even bolder in proposing to immediately embrace globalization is Shahid Yusuf.  He discussed the advantages of embracing globalization in its totality in his study entitled “Globalization and the challenge for developing countries.”  This study argues that globalization is multifaceted and that any gains in the future will be dependent on the degree to which economies across nations will embrace these different faces of globalization.  In Yusuf’s study, there are common variables that all countries, rich or poor, have to face: these are “labor, human capital, capital investment in research and development, technological progress, and the increase in total factor productivity arising from scale economies, the effects of agglomeration, externalities, and institutions that secure rights and minimize transaction costs” (p. 39).   For developing countries specifically, the question of raising their per capita incomes would depend on how they could make policies addressing the above-mentioned variables.

            Yusuf identified the challenges for developing countries.  His observations are listed below.

• If an economy is more technologically advanced and integrated, investment in skills would have a greater return.
• Because of trade, these gains are reinforced further, which, essentially, augments the value of skills.
• Doubling the growth rates of developing countries demands embodying modern technology, a significant amount of capital, and knowledge to put these two to best use.  In terms of capital, the open international market can be a good source of such a capital.
• Market openness is one of the most effective and efficient way for developing, low-income countries to tap modern technology that will help improve its agricultural (their economic center) and manufacturing sectors.

The above points suggest how inefficient it would be if low-income countries would accept globalization on a piecemeal basis and at the same time, keeping in place a number of regulations.  There can be no justification in delaying openness or for sequencing (accepting by piecemeal) the various elements of openness.

For a systematic and more organized way of presenting data and arguments, other research and related literature for this study will be discussed together with the research chapters themselves in the succeeding pages.

CHAPTER 3

DISSECTING THE GLOBAL VILLAGE

            Globalization is a system.  And being a system, it has its key players or elements. From the original players consist of the country and local corporations only, globalization has given birth to a number of new players: the World Trade Organization, regional trade associations (or blocs), and the multinational or transnational corporations.  Some catalysts also emerged that helped the formation of a global economy or village.  But before going into the details of these players, it might be worthwhile to look into the history of how international openness came into being by discussing the Bretton Woods system.

The Bretton Woods system: A bold attempt to international openness 

We, the Delegates of this Conference, Mr President, have been trying to accomplish something very difficult to accomplish. We have not been trying, each one to please himself, and to find the solution most acceptable in our own particular situation. That would have been easy. It has been our task to find a common measure, a common standard, a common rule applicable to each and not irksome to any.

— John Maynard Keynes, Bretton Woods Conference on July 22, 1944 in Moggeridge (1980, p. 101)

In the early 1930s, currency exchange rates even those of the major economies were unstable and many countries as well are protectionists had restrictive trade policies.  In the 1940s, the United States and Great Britain, two major super powers, proposed the creation of new international financial institutions that would help stabilize exchange rates and improve further international trade.  In July 1944, representatives from 44 nations convened at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire.  The representatives met to plan the recovery of post-war Europe as well as to discuss the monetary and economic issues of that time – unstable exchange rates and protectionist trade policies of a number of countries.  For the list of original signatories, please refer to Table 1 below.

Table 1. List of countries who participated in the Bretton Woods meeting.

Source: Articles of Agreement of the International Bank for Reconstruction and Development, July 22, 1944 (The World Bank Website)

This convention gave birth to the Bretton Woods Agreement.  In a nutshell, the agreement aims to establish a post-war international monetary system of convertible currencies, fixed and stable exchange rates, and free trade across geographical regions.  The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (which was later on referred to as the World Bank) were established to facilitate the objectives of the agreement.  One of its objectives is to provide economic aid for post-war Europe.

International Monetary Fund

The three main areas of concern of the IMF are surveillance (i.e., appraisal and advice on the economic policies of member economies), financial assistance for countries experiencing short-term economic difficulties, and technical assistance and training in monetary and fiscal policy.

The Bretton Woods agreement, through the IMF, prevented currency competition and promoted monetary cooperation among member nations.  Under the Bretton Woods system, member nations of the IMF agreed to have a system of exchange rates that could be adjusted within defined parities with the US dollar. Such exchange rate could also be changed to correct a fundamental disequilibrium in the balance of payments as long as approved by the IMF.  This system remained in use until the early part of the 1970s.

            Bretton Woods’s system advocates argued that a stable exchange rate would keep away the “beggar thy neighbour” policies, eventually benefiting several, if not all, economies in the world by promoting and expanding international market and trade.  Over time, the competitiveness of exchange rates decreased due to infrequent changes in parities.  Some also expressed their concerns that a fixed exchange rate system may not allow countries enough independence for them to pursue their own monetary and fiscal policies.

The IMF is using both its surveillance and technical assistance work in developing standards and codes of good practice in all of its areas of responsibility.  This is a part of its ongoing efforts to strengthen international financial system.

The World Bank

The World Bank, officially named International Bank for Reconstruction and Development, is a development organization.  It has a mandate to build the climate for investment, jobs, and sustainable growth; and invest in poor people and empower them to participate in development.  Its poverty reduction efforts can be observed both in national and global levels.

The bank gives much emphasis on extending financial aids to poor and developing countries.  But more than just these loans, World Bank gives policy advice as well as training to countries needing them.  In return for IMF’s and World Bank’s advice or financial support, loan recipients should implement structural adjustment policies that will restructure areas of public spending, particularly on social services delivery systems.  Such policies usually decrease state’s participation in the economy and facilitate private markets.  Currently, the World Bank is the biggest multinational lending agency dealing with least developed to developing countries.

The World Trade Organization

A provision for an International Trade Organization was included in the Bretton Woods Agreement, but such plan lay dormant until the creation of the World Trade Organization in the early 1990s.  The plan of having an International Trade Organization was not realized in the form it was originally envisaged because of the US Congress refusal to endorse it. (The US Congress refusal it primarily because had the International Trade Organization been approved, it would act as a supranational body that has the power to implement sanctions or disciplines to any countries that the ITO may deem violating the principles of the Bretton Woods.)  Instead, an international organization in the form of General Agreement on Tariffs and Trade (GATT) was created. GATT was an international body established in 1947 which has the primary objective of reducing trade barriers through multilateral negotiations.  However, unlike the proposed ITO, GATT does not have the power to affect any policies.

GATT’s original functions were intended to be a part of the broader ITO.  This organization’s charter was negotiated in 1940s, and is supposed to be a large international regulatory body covering trade, employment rules, and business practices.  However, due to the pressure being given by the business community and concerns about the US sovereignty being threatened, US Senate did not push through with ratification of the organization.  And with this, GATT was left to evolve on its own.

The WTO came into existence on January 1, 1995, when it replaced GATT as the international body overseeing the multilateral trading system.  Original signatories of GATT were called “GATT contracting parties,” while those who signed the new WTO agreements (which include the updated GATT) were called “WTO members.” There were 128 countries that had signed GATT by 1994; and as of 2007, there are 151 members already, with 30 countries/economies having observer status. A more detailed historical timeline of GATT and the WTO is provided in the list below:

• 1944: At the Bretton Woods Conference, which created the World Bank and International Monetary Fund (IMF), there is talk of a third body, the International Trade Organization (ITO).
• 1947: As support for another international organization wanes in the U.S. Congress, the General Agreement on Tariffs and Trade (GATT) is created.  The GATT treaty creates a set of rules to govern trade among 23 member countries rather than a formal institution.
• 1950: Formal U.S. withdrawal from the ITO concept as the U.S. administration abandons efforts to seek congressional ratification of the ITO.
• 1951–1986: Periodic negotiating rounds occur, with occasional discussions of reforms of GATT. In the 1980s, serious problems with dispute resolutions arise.
• 1986–1994: The Uruguay Round, a new round of trade negotiations, is launched.  This culminates in a 1994 treaty that establishes the World Trade Organization (WTO).
• 1995: The WTO is created at the end of the Uruguay Round, replacing GATT (Box 1 of Crowley, 2003).

Below is a table providing a brief historical account of WTO/GATT trade rounds including what they have achieved during the rounds of discussions.

Table 2. GATT and WTO trade rounds.

Sources: The GATT years: from Havana to Marrakesh, Timeline: World Trade Organization – A chronology of key events, and Brakman, Garretsen, Van Marrewijk , and Van Witteloostuijn, 2006

Under the WTO, every member country has the right to question or challenge other countries’ local, state, or federal laws if they so believe that such a law or laws impede efficient international trade.  And in such cases, if the WTO finds the law to have violated WTO ideals, it [WTO] may order the federal government to overturn the law or it will be given trade sanctions. (This is exactly the reason why the US Congress did not ratify the treaty needed for the establishment of the WTO.)

Regional trade associations or blocs 

Regional trade blocs are “offshoots” of the globalization phenomenon where associations between governments are formed.  These associations are the ones that manage and promote all the trade activities of the concerned specific regions of the world (UC Atlas of Global Inequality, 2007).

Regional trade blocs in general terms are associations of economies or nations at a governmental level which aims to promote trade within their own region and defend its member-economies or member-countries against a larger global competition.  Protection against global competition is done by establishing tariffs on goods produced by its members, import quotas, government subsidies, onerous bureaucratic import processes, and technical and other non-tariff barriers.  But because trade is not an isolated activity, other areas of relations between and among economies and nations are also affected: economic, political, security, and other issues affecting the region.

A classic example of regional trade blocs affecting other aspects of inter-national affairs is the case of the European Union. This trade bloc is world’s largest trade association. European Union has “harbored political ambitions extending far beyond the free trading arrangements sought by other multistage regional economic organizations” (Gibb and Michalak, 1994, p. 75).  The ideological foundations of the European Union were actually based on ensuring development and maintaining international stability, specifically, encapsulating communist expansion in the post-WWII Europe.  European Union’s plan actually includes possible joint policies with regard to military security and citizenship.

Some analysts believe that trade blocs complement globalized trade. There are others who believe that such regionalism is a threat to free trade due to protectionist policies implemented by these blocs that shield the member-economies or countries from outside forces of global trade.  These debates contain sharp disagreements. In the same paper by Gibb and Michalak (1994, p. 1), they noted, “the multilateral trading system is in decline and regionalism is on the ascendancy.”  He emphasized that regionalism is an alternative form of trade that “attempts to counter more aggressive policies of trade, especially as espoused by the WTO.”

Regional trade blocs differ considerably in scope. In its simplest form, the association provides for the exchange of preferences on identified commodities and products between two or more member economies.  In its more complex and extreme form, such trade associations liberalize trade as well as contain disciplines which cover not only the traditional tariff elimination but also stretch to areas as standards, services, intellectual property, and competition.

There are a hundred of inter-regional agreements globally.  In a report of the World Trade Organization, Committee on Regional Trade Agreements, it has identified 240 agreements globally, of which, almost 70% are in force as of July 2000 (Committee on Regional Trade Agreements, 2000, p. 3).  While some agreements are fully in force or functioning and have resulted in high levels of integration, others were not that successful.

Some of the most successful and largest trade groupings are the European Union, NAFTA, Mercosur, CAFTA, ASEAN, and the APEC.  These regional trade associates have provided a significant effect on how international business is being performed. Below are some details on these major trade blocks in the world. (Members of each trade blocs are provided in Table 3.)

European Union

One of the largest and most successful trade blocks is the European Union or EU. The establishment of the union can be traced back to the Second World War.  As claimed by the European Commission (web portal), “[t]he idea was born because Europeans were determined to prevent such killing and destruction ever happening again.” Previously, the cooperation was primarily about trade and their economy.

EU is a supranational, supra-governmental union composed of 27 member states (with only 6 original members). It has 490 million people, and it now deals with a wide range of national and international concerns and issues of their member economies.  Originally established by the Treaty of Rome in March 1957 as the European Economic Community in 1957, EU has undergone significant changes, most notably in 1992 by the Maastricht Treaty. Its goal is to complete economic integration of the 27 member countries (and candidates).[1]

With a nominal gross domestic product of €11.6 (US$15.7) trillion in 2007 (International Monetary Fund, 2007), EU’s combined economy is the largest globally.  It has a common trade policy, a common agricultural/fisheries policy, and a regional development policy between and among member economies.[2]  Thirteen member economies have adopted a common currency, the Euro. A number of assisting institutions and bodies have been established by EU.  These include the European Commission, the European Parliament, the Council of the European Union, the European Council, the European Court of Justice, and the European Central Bank. Citizens of any EU member are also EU citizens.  And as part of the integration efforts of the union, its citizens directly elect the European Parliament and can freely invest, live, travel, and work in any of the EU member states without bothering to secure a VISA or any other documents usually required of in a companies.  There are still some restrictions on new member states. With regard to customs checks and passport control, these were abolished in the Schengen Agreement (European Commission, 2007).

North American Free Trade Agreement

            The North American Free Trade Agreement (NAFTA) is the result of the integration of the NAFTA itself and its two supplements: the North American Agreement on Environmental Cooperation (NAAEC) and The North American Agreement on Labor Cooperation (NAALC). This trade bloc has three member economies: Canada, Mexico, and the United States.

            NAFTA was an expansion of an earlier agreement between Canada and the United States, Canada–US Free Trade Agreement of 1988. But unlike the case of EU, NAFTA does not establish any institutions or bodies that are above or superior to the national government. It neither legislates law that would supersede national laws.

            In just over a decade, NAFTA was able to eliminate majority of the tariffs between commodities traded by the three member economies of United States, Mexico, and Canada. As part of its effort to integrate its trading markets, NAFTA aims to remove restrictions from many categories or commodities including but not limited to motor vehicles, computers, textiles, and agriculture. In addition to these, the agreement also shielded intellectual property rights (i.e., patents, trademarks, copyrights).  It also aims to remove investment restrictions among the three member economies.  It should be noted that the agreement is trilateral in nature, that is, all the stipulations provided in the agreement (except for agriculture) apply equally to all the concerned economies.  For agriculture and some selected industries, tariff reduction and phase out periods are to be negotiated bilaterally. 

Fig. 2. Map of the European Union (15).

Source: UC Atlas of Global Inequality, 2007.

Since the inception of NAFTA, trading activities have dramatically increased among the three member economies.  Total trade between NAFTA trading partners showed a magnificent increase in the period 1993 to 2004 with the United States having 129.3% increase, Canada 110.1%, and Mexico 100.9% (Hufbauer and Schott, 2005).

The World Bank also showed that the aggregate NAFTA imports’ percentage growth was accompanied by an almost similar increase of non-NAFTA imports, thus suggesting that increase in trade was not diversionary (Schiff and Winters, 2003).

Fig. 3. Map of NAFTA member economies.

Source: UC Atlas of Global Inequality, 2007.

Mercado Comun del Cono Sur – MERCOSUR

MERCOSUR is the abbreviated form of the native term Mercado Comun del Cono Sur, also known as Southern Common Markets (SCCM).  The member economies of this trading bloc are Argentina, Paraguay, Uruguay, and Brazil.  The combined land area of these four economies is even larger than the entire Europe.  Primarily founded on trading principles, MERCOSUR also aims to have a system of open or common market for all its member economies.  The organization also aims to open each country to an unrestricted flow of labor and capital.  Specifically, the organization has the following objectives (International Training Center–International Labour Organization):

• Reduction of common protectionist policies by member states;
• Establishment of a system of trade policy  between member and non-member economies of MERCOSUR;
• Guaranteeing free competition for its member economies by integrating the internal and external policies of member economies with regard to trade, agriculture and other aspects of their economy that the members may agree on; and
• Winning the commitment of all member economies to be flexible and make revisions or amendments to their laws to support the overall integration process of the organization.

The members of the organization established two major supranational agencies: the Common Market Council (CMC) and the Common Market Group (GMC).  Just like the supranational councils of the European Union, these two aim to guide the integration of member economies in as efficient way as possible.  The CMC is acting as a representative of the organization.  Its members compose of the ministers of foreign end economic affairs (or their equivalent), and as such, is the highest policy-making agency of the organization. Assisting the CMC in enforcing its decisions is the GMC.  This body is also responsible for submitting draft resolutions to the CMC.  Other working groups in the MERCOSUR are the Administrative Office, Socioeconomic Advisory Forum, Joint Parliamentary Committee, Trade Commission, and a number of work subgroups (International Training Center–International Labour Organization). 

Fig. 4. Map of MERCOSUR member economies.

Source: UC Atlas of Global Inequality, 2007.

Dominican Republic–Central America Free Trade Agreement

The Central America Free Trade Agreement (DR-CAFTA) is composed of the United States, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.  The agreement became known as DR-CAFTA in 2004 when the Dominican Republic became a member after joining their negotiations.  Just like NAFTA where the United States is a member, DR-CAFTA is considered a treaty internationally, but not in the US where it is just a congressional–executive agreement.

            DR-CAFTA aims to create a free trade zone for the member economies, and a bolder move is seen as the possible start for the new and more ambitious agreement: the Free Trade Area of the Americas (FTAA). With the exception of Cuba and Venezuela, all countries of the South American and Caribbean nations as well as the Central and North Americas will be joining this agreement (FTAA).

            DR-CAFTA was able to immediately eliminate tariffs on approximately 80% of all US trade exports to all member economies, with the promise that the rest of the tariffs will be eliminated in the coming years. Just like any other free trade organization, DR-CAFTA’s aim is to reduce, if not eliminate tariffs on trade. Every nation though retains their right to establish their overall tax levels.

Association of Southeast Asian Nations

The Association of Southeast Asian Nations (ASEAN) is a trade bloc composed originally of 5 maritime countries: the Philippines, Malaysia, Indonesia, Singapore, and Thailand. As of 2006, the membership of ASEAN is 10 countries with one observer (Papua New Guinea) and one candidate (Timor Leste). The trade block is more than just a trade association, but a political one also, aiming to accelerate economic, social, and cultural cooperation and development between and among its member economies. It also aims to promote regional peace. To support these aims, the leadership of ASEAN resolved that an ASEAN community should be established. This community shall be composed of three pillars: ASEAN Security Community, ASEAN Economic Community and ASEAN Socio-Cultural Community (ASEAN Official Website).

ASEAN does not have any supranational or governmental body that can supersede any national laws. However, it has bodies, agencies, and arrangements that encourage inter-national cooperation. Some of these bodies are: ASEAN Agricultural Development Planning Centre, ASEAN-EC Management Centre, ASEAN Centre for Energy, ASEAN Earthquake Information Centre, ASEAN Foundation, ASEAN Poultry Research and Training Centre, ASEAN Regional Centre for Biodiversity Conservation, ASEAN Rural Youth Development Centre, ASEAN Specialized Meteorological Centre, ASEAN Timber Technology Centre, ASEAN Tourism Information Centre, and the ASEAN University Network (Structures and Mechanisms, ASEAN Website, 2007).

ASEAN also have relations with other professional groups having the same principles in the region. They have regular consultations and dialogues with these groups.

In terms of the economic performance of the whole ASEAN group, it has an average GDP growth rate of 4% per year. As of 2006, its GDP is $1,066.4 billion (International Monetary Fund, 2007).

Another major trade bloc is the Asia-Pacific Economic Cooperation or APEC. The APEC is unique compared to the WTO and other regional trade associations because it does not require any treaty obligations from its member economies. It has 21 member economies and as of 2007, its cumulative GDP accounts to more than 50% of the world’s total GDP, and its trade is almost half of the world’s trade. The group was established in 1989 with the aim of enhancing economic growth and prosperity of the Asia-Pacific region.

Fig. 5. Map of ASEAN member economies.

Source: UC Atlas of Global Inequality, 2007.

Asia-Pacific Economic Cooperation

Although there is no obligation requiring the member economies to implement APEC policies, APEC was able to reduce tariffs and other protectionist policies/barriers across the region.  This has resulted to efficient economies and dramatically high trading activities.

Similar to ASEAN, APEC has key pillars that guide member economies on how they should direct their resources to achieve economic efficiency. These pillars are:

• trade and investment liberalization – focuses on further eliminating tariff and non-tariff barriers between economies;
• business facilitation – cost efficiency in business transactions by helping reduce production costs; and
• economic and technical cooperation – focuses on sharing information, technology, and skills to member economies.

APEC aims to have a completely free and open trade within the region by 2020.

            There are still a number of other trade groupings in the world but most of them promote the same principle of encouraging open trades and investment between and among its member.  For a comprehensive list of groupings, please refer to Table 3 below.

Table 3. List of countries by trade grouping.

Source: UNCTAD, 2004.

Multinational or transnational corporations 

            Another player in the global village is the multinational corporations (sometimes called transnational corporations).  Below is how Concise Oxford Dictionary of Politics describes a multinational corporation:

“When clear managerial coordination and control together with some element of ownership link legally distinct businesses operating in several countries, the result is a multinational corporation (MNC).  MNCs became common only from about 1890. Generally headquartered in developed industrial economies, they developed partly in response to market forces and partly in reaction to rising barriers to international trade and levels of state intervention [emphasis from the researcher].  These forced firms, if they were to retain their share of a national market, to manufacture locally where they had formerly exported.”

UNCTAD (2004) has another definition: “A transnational corporation (TNC) is an enterprise that controls assets of other entities in economies other than its home economy, usually by owning a certain equity capital stake….”

MNCs are entities outside the government.  According to the definition above, they are “partly in reaction to rising barriers to international trade and levels of state intervention” (Concise Oxford Dictionary of Politics).  In the book Global reach: The power of the multinational corporations by Barnett (1974), he classified multinational corporations according to the setup of their production facilities:

• Horizontal MNCs – these are the types of MNCs where the production establishments in the different host countries manufacture or produce the actual product or products of such MNCs. An example of this is McDonalds.
• Vertical MNCs – these are the type of MNCs where the production establishments in the different host countries do not manufacture the whole product but only a portion or part of it.  The completion of the product will happen only on one site, usually, the home country of the MNC.  An example of this is Adidas.
• Diversified MNCs – this is the complex type of MNCs, neither horizontal nor vertical type. An example of this would be the Microsoft.

Table 4. World’s top 50 non-financial MNCs.

Source: UNCTAD, 2004.

Most MNCs have the United States, the European Union, or Japan as their headquarters.  Of the top 50 non-financial MNCs worldwide, 11 are in the United States, 8 in Germany, 8 in France, 7 in United Kingdom, and 4 in Japan.  The top 50 lists also contain MNCs that are situated in Switzerland, the Netherlands, and Finland.  This means that large MNCs do not require large home market (UNCTAD, 2004, p. 40).

            Hutchinson Whampoa, Singtel, Cemex, and LG Electronics have qualified in the top 100 list and were among the first MNCs coming from a developing country.

It has been noted above that MNCs are a consequence of tightening protections of individual governments against “foreign” investments. MNCs are “forced”, initially, to create their own production establishments in a host country so as to minimize the barriers that they have to go through.  But recently, MNCs are becoming more of a catalyst for globalization. From a status of being forced to create local production establishments in a host country, they are now playing an important role in globalization!  Prospective countries, or sometimes regions within countries, have to compete to become the prospective location of an MNC. MNC locating in a certain region brings the immediate advantage of decent tax for the government.  This is followed by the promise of increased employment rate and significant economic activity.  Instead of MNCs trying to win over a government for their approval, the reverse is happening.  Countries and regional districts compete with each other by offering incentives to potential MNCs – they would offer tax breaks, promote their local manpower, promise improved infrastructure and assistance from the government.  There are even reports of governments offering “less strict” environmental laws and labor standards.

Multinational corporations have shown a great influence or impact on policies of government, usually by giving threat of withdrawing from the market.  An example given by Barnett (1974) in his study is given below:

“For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price.  When faced with that threat, multinational pharmaceuticals firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs.  In those cases, governments have been forced to back down from their efforts.”

In some cases, technology is the MNC’s advantage over other local competitors.  If a government is trying to win this technology over so that local corporations would benefit, the MNCs do not usually give in.  They would rather withdraw (or at least give the threat to withdraw) from the market instead of losing their competitive advantage.  This threat almost always causes the government to withdraw and instead, change their offensive stance.

Technological revolution and the Internet

            The last but definitely not the least of the players of this global village is the catalyst technological revolution, particularly, the Internet.  It is this intertwined system of information, communication, and technology (ICT) that has redesigned our countries’ markets.  The Internet has successfully breached the geographical, socio-cultural, and political barriers of any nation or economy.  No one can deny how easy it is for someone with a personal computer and an Internet connection to sell an item from halfway around the world, in as easy way as selling the same item just across the street.  Internet is the system that made the world shrink!

            Internet users have significantly increased during the early 21^st century.  As of 2003 alone, International Telecommunication Union (ITU, 2004) estimated nearly 676 million users accessing the World Wide Web.  This comprise more than one-tenth of the world’s population.  The year 2004 showed a slow increase in number of users because those who want to be connected in the developed world, and those who can afford it in developing countries are already connected (refer to Fig. 6).  But the steady increase in number of users in the web is still predicted due to a large potential demand in the developing countries (ITU, 2004). Table 5a and b lists the rate of increase in number of Internet users for the year 2002 and 2003.

Table 5a. Internet users worldwide (thousands), 2000–2003.

Source: ITU (2004).

Table 5b. Internet users by region (thousands), 2000–2003.

Source: ITU (2004) data and UNCTAD calculations.

Fig. 6. Internet users in developed and developing countries, 2000 and 2003.

Source: ITU, 2004

Dunlap (2000) writes in his online globalization: Swim or sink, “The conclusion is that there is no way to avoid plugging in to the new online world order, as long as a business (or individual) wants to grow and be successful.  And there is no sense in resisting tendencies this massive.” And he is correct.  Going against this massive force is suicidal in nature.  No one could ever justify fighting the Internet or globalization.  It’s coming as sure as the coming of sunrise.  What needs to be done is take advantage of these catalysts of growth.  The wave of globalization is being pushed with great force through more open markets and free trade, more electronic commerce, and improved ICT.

            There are other Internet-related technologies that are riding the trends of globalization.  UNCTAD (United Nations Conference on Trade and Development) identifies some of these in their Information Economy Report (2006): broadband, e-commerce, mobile phones, and computer and information services exports.

With the help of these technologies, ultimately, the whole world will be connected 24 hours a day, and the global markets will be integrated and open to everyone across the 24 time zones.

CHAPTER 4

SYSTEMS ANALYSIS OF GLOBALIZATION

The previous chapter provided and discussed the players and “waves” in a global village – the Bretton Woods bodies (International Monetary Fund, World Bank, and World Trade Organization), regional trade associations or blocs (with individual discussions on European Union, NAFTA, Mercosur, CAFTA, ASEAN, and the APEC), multinational or transnational corporations (MNCs/TNCs), and the technological revolution, particularly, the Internet and ICT or information and communication technology.  Each player cannot and will not exist on its own.  This study will be utilizing the systems analysis to further understand the phenomenon globalization, its impact to business transactions, and other related aspects.

Re-designing the model 

The four major elements of the system are the INPUT, OUTPUT, SYSTEM, and ENVIRONMENT.  For this chapter, we will be labeling these generic terms with what we have already discussed.  The INPUT in our system are the key players, i.e., the International Monetary Fund or IMF, the World Bank, the World Trade Organization, regional trade blocs or organization, and the multinational or transnational corporations.  Governments and local industries are clearly input in the system and will be considered as such in the discussion.  The black hole will be the globalization, the SYSTEM. The surrounding ENVIRONMENT would be the Internet and technological revolution, protectionist policies of either regional group or country, and political, economic, and socio-cultural factors.  The OUTPUT and FEEDBACK is what we are interested to find out.  This is what our systems analysis will be dealing with. Fig. 1 was modified to incorporate these data in the model of systems analysis as originally presented in Chapter 1. Please refer to Fig. 7 below.

Fig. 7. The systems analysis applied to globalization as a system. 

Effect of the key players to the global economy

            The first thing that needs to be discussed here as how the global picture/portrait of the economy is doing right now compared to the previous years.  The World Bank has a comprehensive data bank of development indicators affecting the overall economy: shares of individual country to global gross domestic product, economic growth, and inflation.

            The 2007 World Development Indicators published by the World Bank (2007) presented some clear indication of development in the recent years.  In terms of GDP share of countries to the global GDP, developing countries have shown a dramatic increase in its share for the last decade.  The world’s total GDP in 2005 was about $61 trillion. 2005 GDP exhibited an increase of 45% from 1995’s $42.3 trillion GDP.  What is notable here is how the share of developing countries increased significantly compared to the shares of the developed and high-income countries. Fig. 8 shows the shares of group of countries to the overall GDP.

Fig. 8. Total world GDP and shares of different country groupings.

Source: 2007 World Development Indicators, p. 185.

The increase in share versus total of East Asia and Pacific to the world is very dramatic.  The overall increase in share by developing countries is from 39% in 1995 to 46% in 2005 – an increase of 7%!  This is even made more dramatic by the almost-doubled increase by the East Asia and Pacific cluster from 13% in 1995 to 19% in 2005. Other developing countries did not increase that much but were able to retain their percent contribution for 10 years without declining.

The report also showed that over the last decade, low- to medium-income countries accelerated faster than the high-income countries in terms of economic growth.  It is expected that developing countries should have grown faster than the developed ones.  The ready access to new technology, the support and assistance being provided by different developmental organizations, and the surplus in labor plus higher returns on human capital are some of the reasons why developing countries are expected to have accelerated faster, and eventually, close the gap between developing countries and the richer ones, than developed ones. It is not a surprise though that this does not usually happen.  Only a very few developing countries have sustained economic growth.  Some of the identified reasons why this does not happen are country’s exclusion from global markets, poverty traps, and the possibility of government and market failures.

            The years 1995 to 2005 has brought a significant change in the global setup.  The developing countries (those that have low to medium income) have surpassed the richer countries in terms of average growth rate (Fig. 9), and there were 13 of these developing countries that were re-classified from World Bank’s classification of low- to middle-income economies — Antigua and Barbuda, Bahrain, Greece, Guam, Isle of Man, Republic of Korea, Malta, New Caledonia, Northern Mariana Islands, Puerto Rico, Saudi Arabia, San Marino, and Slovenia (2007 World Development Indicators, p. 186).

Fig. 9. Developing countries exceeded richer, developed countries in terms of average growth rate for the year 1995–2005.

Source: 2007 World Development Indicators, p. 186.

The success that the developing countries have experienced can be attributed to the expanding open market, and hence, expanding trading activities and more attractive investment climate. India’s and China’s fast industrialization benefited other countries that export precious metals and primary commodities like agricultural products, oil, and minerals (p. 187).

The bigger picture shows promising development. Whether these are all directly related to the globalization and/or regional trade blocs is yet to be established.

Regional trade organizations or blocs: stumbling blocks or building blocks?

Some researchers posed the question: “Does regional integration [regional trade organizations and/or trade blocs] encourage evolution toward globally free trade, or does it place obstacles in its way, and perhaps even increase the likelihood of trade wars between competing blocs?” (World Bank, 2000).

            Frankel et al. (1997), in their book Regional trading blocs in the world economic system, presented the arguments for both sides of this discussion.  Note that a number of the arguments sound a bit theoretical in nature, but are valid nonetheless.  Below are the negative implications on regional trade organizations for globalization or multilateral liberalization:

• “blocs market power and incentive to protect” – in an arena where there are only a few large trading blocs, the temptation to monopolize market trading activities so as to protect their bloc against another bloc is higher.  Also, members might be tempted to raise tariffs as part of its security measures against other blocs (p. 210).
• “Manipulation by special interests” – this special interest argument points out that arrangement may be made by member economies to avoid opening up certain sectors of their country if they believe that these sectors would be threatened by an open trade.  In a classic example in the case of ASEAN where Indonesia exempted almost all important sectors but included and promoted the import liberalization of snow ploughs (p. 212).
• “Scarce negotiator resources” – this points out the fact that it is not a costless effort to create and ratify trade agreements and compensate losers.  Otherwise, the whole world would have opened up to free trade (p. 214).
• “Firms support for FTAs may be a political dead end” – if the sequence of decision would matter, multilateral initiatives might be sacrificed over regional ones (p. 214).

The positive implications, on the other hand, of regionalism for multilateral liberalization, are the following:

• “locking in and mobilizing regional solidarity” – leaders may use the advantage of political support of countries within the region to achieve liberalization.  This would be a lot complicated if not politically impossible if pursued unilaterally (p 216).
• “Efficiency of negotiating with larger units” – considering the number of countries that are part of the bloc, negotiating to another larger unit for something may not be as difficult at first (p. 217).
• “Competitive liberalization” – this simply means building of political momentum for liberalization.

The above arguments are mostly theoretical; but are all valid in a sense.  But one thing is sure: Globalization is a system that digests all inputs coming into it.  With the aid of technological revolution, the Internet, ICT development, and other factors, globalization has altered the way people do business.  It has transformed the business setup in such a way that new businesses are even born.

In the previous chapters, the discussion on globalization is mostly on how it has affected the trading activities of the different countries.  Globalization in a macro level was discussed – from global GDP, to percent share of a country to overall GDP.  In the succeeding sections, globalization in the micro level will be discussed.  How did it affect the existing business that we have?  How did it bring about a new breed of business processes and needs?

Effect of globalization on business transactions

The Internet and e-commerce era

            It was discussed in the previous chapter how much the technological revolution has affected our society.  More than one-tenth of the world’s population has access to the Internet. Relating this to the business transactions wherein this paper is more interested in, it should be noted that in the United States alone, business-to-business (B2B) transactions accounted for more than 15% of all business transactions between companies as of end of the year 2002. Business-to-consumer (B2C) e-commerce, on the other hand, accounted for almost 2% of the total retail sales. This percentage is nearly double as the rate recorded the year before (Overview, E-commerce and development report, 2004). Refer to Table 6 for details from 2000 to 2003.

Table 6. B2C sales in the United States, 2000-2003 (millions of US dollars).

Source: US Census Bureau (2004). Retail 1Q, 2004 E-Commerce Report. 21 May 2004. Available at www.census.gov/eos/www/ebusiness614.htm.

In 2002, Eurostat and the National Statistical Institutes conducted a business survey on ICT usage of EU enterprises. Following are some of the highlights of the study:

• 87 percent of EU enterprises had internet connection by 2003, a 7% increase since a year before that.
• As of 2002, Internet is being used by enterprises primarily for marketing purposes; e-commerce transactions are still small in proportion of overall sales.
• E-commerce transactions (sales, particularly) are mostly at a domestic level, prominent in services (financial, business, and wholesale trade services) than manufacturing sector.
• In terms of overall share in e-commerce, total B2C transactions are still small, but clearly are growing.
• While there appears to be positive and direct correlation between internet access and the size of companies, it also appears that nature of business affects ICT usage. Some sectors (business services, finance, insurance, and wholesale trade) believe that ICT may be more appropriate to them than others.
• Identified problems to Internet access: slow or unstable communications, legal uncertainties (concerning payments, contracts and deliveries), and network security.

Information and communication technology (ICT) has penetrated the commercial setting significantly over the past few years.  Corporations utilize ICTs for a number of purposes: automation of their production processes, supply and customer relations management, and even for the automation of their distribution and management networks (E-commerce and development report, 2004).  Any firm can tap the Internet as a commercial tool even as simple as making website as a marketing tool for their company, or utilizing e-mail for communications.  More complex way of making use of the Internet is integrating all business functions together.  This one is a major step for some small and medium enterprises in developing countries because on top of the technical and management skills needed for this attempt, there is a need for major investment which may not be that affordable for these enterprises.

E-commerce has received much attention during the late 1990s.  The total amount of global B2B e-commerce is estimated to reach almost $12 trillion (UNCTAD, 2004).  It should be noted though that the best way to utilize the Internet and ICT is not only through e-commerce, not just through making orders by selling and buying online.  Firms should be giving more attention into “where” they should be using these technologies.  ICT and the Internet should be incorporated with the firm’s regular activities.  Box 1 from E-commerce and development report (2003) provides areas in a firm’s regular activities where ICT might be of help.

Box 1. Some functions, processes, internal tasks, and systems that companies may integrate/automate.

Source: E-commerce and development report, 2007, pp. 26–27.

A survey conducted in the United Kingdom revealed a possible correlation between the size of the firm or establishment and ICT usage.  The survey showed that almost 50% of the firms surveyed are using ICT or any e-commerce related system, more than 20% for medium-sized enterprises (50 to 249 employees), and almost 10% of the small-sized enterprises (10 to 49 employees).  An interesting finding from the survey is the fact that as soon as a firm started to integrate one business process, they would continue integrating other business process.  For example, a firm may start with integrated production or service operating system.  The survey conducted revealed that other processes like invoicing or payment and logistics or delivery were also integrated thereafter (Goodridge and Clayton, 2004).

A group of researchers conducted a similar survey from 13 OECD (Organization for Economic Cooperation and Development) countries (OECD, 2003. ICT and economic growth.  Evidence from OECD countries, industries and firms. Paris, OECD, and OECD, 2004. The Economic Impact of ICT. Measurement, evidence and implications. Paris, OECD, as reported in United Nations Conference on Trade and Development, 2004b, pp. 28–29). The survey confirmed and provided the same result as the one done in the United Kingdom as reported by Goodridge and Clayton.  A positive correlation was found in the way ICT usage relates with the size of the enterprise.  In addition to this, the researchers found a positive impact on the growth of productivity of the sectors surveyed (although much impact was noticed in the services sector).

Both surveys resulted in similar and related conclusion.  They both revealed that ICT usage positively affected the business performance of the establishments surveyed as long as the company would complement and support these strategies with other investments.  This means that ICT usage does not necessarily translate to improved performance if skills and innovation are not present in these companies.  It is important to note that ICT’s impact would be limited if there will be no other changes or investments implemented.

E-commerce and the case of SMEs

            It would be helpful to look into the details of the studies mentioned above as they provide how globalization through e-commerce/e-business has affected business transactions.

            The relation between company or firm size to its usage of ICT and Internet is prevalent in the OECD countries surveyed, i.e., as the company increase in size, so is its usage in ICT.  For instance, 79% of all large companies surveyed in Europe had an intranet; while only a small percentage (25%) of small enterprises have this (Fig. 10, United Nations Conference on Trade and Development, 2004b).  Most of the small firms who have ICT use the technology mainly for marketing purposes and communication, specifically, email communications and putting up web sites.  Contrary to traditional way of marketing on tri-media (print, television, and radio), these firms put up their websites and market their services and commodities online.  They also use the Internet to search for information on potential suppliers and even information on their competitors.  An interesting finding by researchers of the study is that small enterprises utilize e-banking more than large enterprises.)

            Online orders and confirmation have a big share in SMEs’ ICT usage.  In the case of European SMEs, almost a third of them receive online orders.  And of much significance here is the way SMEs being more intensive in engaging to e-commerce more than their larger counterparts. ICT usage continues to increase over time, and firms have a tendency include other processes in this integration.  This finding holds true for establishments and firms of all sizes and sectors (Fig. 11, United Nations Conference on Trade and Development, 2004b).

Fig. 10. Internet usage by size of enterprise, 2003.

Source: United Nations Conference on Trade and Development, 2004b, p. 29.

Fig. 11. SMEs in Europe: Commercial activities using the Internet, 2001 (percentages).

Source: United Nations Conference on Trade and Development, 2004b, p. 30.

            In Canada, it was reported that around 2000 SMEs were able to augment their revenue by about 7%. These companies also decreased by around 9.5% and 7.5% their costs in costs of goods sold and sales/administrative costs, respectively.  Although they are lagging behind (overall) in terms of Internet usage, they have proved that they have the greatest potential to have better business performance by taking advantage of e-commerce facilities.  The study concluded that other companies may actually be losing opportunity costs for business growth if they would not engage in e-commerce facilities (Canadian e-Business Initiative, November 2002. Net Impact Study Canada: The SME Experience. A preliminary report, as reported in United Nations Conference on Trade and Development, 2004b).

Challenges for SMEs  in the use of ICT

            While the potential profit for taking advantage of ICTs is really big, not all SMEs immediately grab this opportunity.  Compared to large enterprises, SMEs have lower capacity to absorb new ICTs.  This is primarily due to financial and legal constraints, training the manpower with the necessary skill and know-how, and international exposure.  Larger companies have enough “margin,” so to speak, to make investments on these new initiatives, financially and legally.

            In terms of financial constraints, SMEs usually would hesitate to enter or engage into something if there is no promise or more so, proof, of returns and profitability.  This is true especially if SMEs do not have enough funds to explore other “un-tried, un-tested” procedures.  There has to be a clear incentive before they engage in such activities.  Legally, there is also the presence of uncertainties to cross-border e-commerce transactions, and SMEs have to be updated with the latest legislations related to e-commerce.  This is additional burden for SMEs as a number of them do not even have their own legal departments (United Nations Conference on Trade and Development, 2004b, p. 31–32).

            SMEs also have a challenge in establishing itself in the international markets.  Large companies already have established brand names.  Establishing SMEs’ own trusted name in the market is very crucial as clients and customers would definitely rely only on establishments that they trust, usually, the well-known brands instead of buying or availing the services of unknown companies.  This would even make it hard for the SME if they will be eyeing the international market.  To setup a website for marketing purposes may not be too expensive for SMEs, but it would require heavy investments to establish their names and promote them effectively (United Nations Conference on Trade and Development, 2004b, p. 31–32).

Many studies concluded that ICTs use by SMEs, particularly but not limited to developing countries, is not because of the potential profit or return that it promises.  This is largely because of the market-driven global competition.  SMEs targeting the export market, particularly, buyers from foreign developed economies, are expected to participate in the buyer’s global supply chain (refer to the case of Indonesia, for example, as provided in Box 2). In similar cases, most clients or buyers prefer to have a closer relationship with its supplier in order for them to have more influence and control in their quality, design, and most importantly, delivery.  Such setup will encourage the SMEs to increase they use if ICT.

Box 2. Evidence of ICT usage in other countries.

Source: www.asiafoundation.org/ICT/surveys.html as reported in E-Commerce and Development Report, 2007, pp. 33–34.

Future of e-commerce

            Evidence from several studies show that a large number of SMEs from both developed and developing countries are connected to the Internet.  Hence, it shows that connection to the Internet (regardless of he speed, at least for now) is not the challenge for SMEs for them to utilize the full potential that the Internet and ICTs can offer.  The challenge lies in the effort to fully integrate other business processes that will complement this existing infrastructure that the establishments already have.  If the development of ICT integration of SMEs from developing countries will be compared to large establishments from both developed and developing countries, there is a certain pattern that they will be traversing.  The S-curve pattern as illustrated in Fig. 12 below shows a graphical presentation of how ICT integration will develop: SMEs would start wit the “basic package” of email communication and web page construction, and from there next processes have to continue until the establishment has fully integrated all of its processes (E-commerce and development report, 2007, p. 52).

SMEs are lacking a concrete business strategy, and this is causing them not being able to maximize their returns from ICT uptake.  As mentioned above, connecting to the Internet, using email, and creating websites for their companies are easily adopted by SMEs because there is a quick return on these investments – communication within and outside the establishments, instant access to information about potential clients, products, and competitors, and lesser cost to marketing (may not be effective enough though).  Integrating other processes does not only require simple technical know-how, but more than and more important than that, is a strategic cost-and-benefit analysis of the investment (E-commerce and development report, 2007, p. 53) 

Fig. 12. E-commerce development which uses an S-curve to illustrate the pattern of ICT developments of SMEs.

Source: E-Commerce and Development Report, 2007, p. 52.

Defying boundaries: case in point

            Globalization and the Internet have really made the global market a smaller place.  It has revolutionized the market in many ways.  Traditional establishments are re-calibrating their strategies to adapt to this revolution.  The tourism industry, for example, has been very dynamic and competitive nowadays.  Tourism industries in developing countries take advantage of foreign service providers who, for a fee, would handle their marketing abroad and also conduct most their transactions where they will take percentage of the profits.  Some establishments invest on making user-friendly automated tools that would handle tasks previously done manually, e.g., online reservation, booking, and payment systems.  Following are some specific establishments that have defied economic, political, socio-cultural, and most importantly, geographical boundaries.

E-commerce at work: the case of PayPal.com, eBay.com, and Amazon.com

One of the most successful online and international establishments is the PayPal.com. In the 20^th century, long distance payment or sending/receiving of money is commonly done through money grams and wire transfers.  To date, over 99 million Internet users use the system of PayPal.com to send and receive money.  As an online middleman and financial transaction broker, this firm has a system that will allow peer-to-peer transactions through their email addresses, and there will be no time that any of the two or more parties would be able to see the others’ financial information account that were submitted to PayPal.

            PayPal has its own set of policies and practices as well as business integrity that has earned the trust of participating customers.  Instead of two parties giving the credit card and financial information to each other, they would entrust these information to PayPal, which in turn, would keep these confidential information until one of the parties instruct it to make a certain transaction (e.g., [email protected] will send X amount of money to [email protected]).  PayPal, upon receiving this instruction, would execute it so that both parties would “blindly” conduct financial transactions real time regardless of other factors (distance, security issues, etc.) that usually is a problem without this service.

            PayPal was able to make this even without any additional requirement needed for its customers – no need for a business license, no need for any specialized software.  All transactions will be executed as long as the parties involved have a valid email address and an existing credit card or bank account.  An example of transaction interface is shown in Fig. 13 below.  The user is a Filipino person with a credit card who can buy any thing from across the world as long as the account is funded (Gil, 2007a).

Fig. 13. An example of PayPal transaction interface.

eBay.com is another establishment that was able to transcend geographical boundaries.  eBay is an auction-based online firm which started out as “Auctionweb.”  This is an online site where traders submit their items to be auctioned to other traders who joined the electronic site. eBay is a host for people who wish to buy or sell simple products, like old Monopoly game and used Elvis records, to bigger items like wholesale electronics and digital cameras (Gil, 2007b).

            One may think that the system is complicated, but eBay’s business model is very simple. Gil (2007b) summarized the model in two simple sentences:

“Provide a safe and motivating online marketplace where anyone can gather to trade products with confidence.  Charge people a small fee to sell their wares, and enforce safety and trust for everyone.”

eBay is simply like a flea market.  At its basic level, transactions could be as simple as follows:

• Sellers on eBay will be charged so that they can market their products.
• Buyers, on the other hand, can visit and roam the site without any charges.
• Users who abuse the system will be disciplined.

But looking at the system at a higher level, eBay is more than just a simple flea market.

• The system can be accessed anywhere, anytime. eBay crosses not just boundaries, but languages and currencies as well.
• It is a global market where the number of choices is virtually limited only by the speed of one’s Internet connection.
• Buyers and sellers execute financial transactions even without seeing each other and being completely stranger to one another.
• There are third party online escrow services facilitating the financial transactions to ensure the safe execution of payments.

Just like PayPal, eBay can be accessed by anyone who has Internet connection regardless of wherever that person is. The only requirement here is that a person should have an online escrow account (PayPal.com, BidPay.com, and Escrow.com) for payment and receiving of payment.

Fig. 14. A screenshot of items for sale in eBay.com.

            Amazon.com is another establishment that, like PayPal and eBay, was able to transcend geographical limits.  Starting out with books, Amazon was able to add more products in its services.  Amazon is basically a virtual market where one places an order, pays the item, and let Amazon deliver the item to the person wherever he or she is.  Every transaction is being done electronically.

The rise of business process outsourcing

Nag (2005) defines outsourcing as “an arrangement in which one company provides services for another company that could also be or usually have been provided in-house” (p. 59).  This process is not really something new.  Manufacturing companies have been doing this before.  But the globalization and technological revolution have made the scope of outsourcing rather a complex one.  IT-enabled services (ITES) made outsourcing of other processes possible – and more efficient at that. From simple outsourcing of hiring law firms, for example, to represent a company or FedEx for logistics and transport control, outsourcing has lead to hiring third-party establishments for their payroll processing, medical transcription, or even customer relations management (voice as well as non-voice contact centers).  The most prominent countries in the BPO industry are the Philippines, India, Israel, Romania, Brazil, Dominica, the Russian Federation, and China. Outsourcing has created many employment opportunities to developing countries.

The market for outsourcing has been very competitive ever since.  Large establishments have started outsourcing their non-core IT processes to other companies in their own country, i.e., locally.  These BPO clients preferred having these services (non-core IT functions) reliably and securely provided to them (client) instead of building up in-house expertise.  Some of the established BPO and IT service intermediaries on developed countries include Accenture, Computer Sciences Corporation, Cap Gemini Ernst & Young, Deloitte Consulting, Electronic Data Systems Corp., IBM Global Services, Keane and PricewaterhouseCoopers (E-commerce and Development Report, 2003, p. 134).

There are two classifications of business process outsourcing: back office outsourcing and front office outsourcing.  Process or services under the back office outsourcing classification include internal business functions (such as billing or purchasing), while front office outsourcing is on services that mostly involve customer relation or interaction (such as marketing or technology support).  Outsourcing can either be onshore or offshore.  The latter (offshore outsourcing) is the one that is of relevance to this paper because it is the one that involves cross-country outsourcing.

Off-shore outsourcing started in the early 1990s when an enterprise in India was commissioned by the United States to handle the conversion of custom-made software programs.   US companies realized that the tasks can easily be performed by Indian software engineers/programmers with the necessary skill, speed and attention to detail.  As soon as other enterprises in the US found out that it can be done by Indian programmers successfully and at a lesser cost, a wave of outsourcing tasks started to go to the direction of India.  This time, the series of tasks involved were applications management, applications development, and help desk support (E-commerce and Development Report, 2003, p. 136).

Outsourcing is becoming more and more common in most IT and financial industries. Box 3 below shows some of the processes/services that are being outsourced more and more lately, while Fig. 15 shows the hierarchy of services that can be offered by a BPO company.

The most basic services that a service provider offers to a client are back-office functions that require basic skills which can be accomplished offsite without any potential harm to the client.  These tasks consist primarily of data entry/transfer/conversion, moving data from one document source to another format, or billing services.  These tasks are relatively simple, well-defined, and can easily be measured if performed successfully or appropriately (E-commerce and Development Report, 2003, p. 140).

Box 3. Elements of business process outsourcing.

Source: Nag, 2005, p. 61.

Fig. 15. Hierarchy of services in a BPO industry.

Source: E-commerce and Development Report, 2003, p. 140.

There are BPO providers who can offer more advanced services like advanced data and accounting functions where the vendor performs some administrative functions.  This happens when a BPO provider has established itself to be a reputable vendor and is now ready to handle other services that appear higher in the hierarchy of services as provided in Fig. 15.  In such a case, the BPO provider has to invest not just on infrastructure and technology but this time, on the knowledge and expertise of its operators/employees.

This improvement will continue until the BPO provider is ready to handle the most complex service in the hierarchy: all the basic processes plus knowing the outsourced industry itself.

BPO clients are now outsourcing even more complex processes and are expecting that they would achieve a certain degree of business process transformation through effective outsourcing (E-commerce and Development Report, 2003, p. 142).  And with an increasing number of vendors from developed and developing countries alike, BPO vendors need to improve and upgrade their skills to offer higher level of services.

Business opportunities for developing countries versus issues in developed countries:

            In a study conducted by UNCTAD, the improvements in IT infrastructure and a continued decrease in telecommunications and IT equipment costs have given both developed and developing countries the opportunity to develop BPO services.  But more opportunities for developing countries have been made available due to cost-saving measures of enterprises in developed countries.  Outsourcing in developing countries has been proven to result to almost 60% of an enterprise’s operational costs due to relatively lower cost of skills in developing countries.  This setup has made the internationalization of the industry move rapidly, hence, giving developing countries the opportunity to take advantage of these higher value niches (Nag, 2005, p. 65).

            Apart from the significant increase in job opportunities (which is a direct result of outsourcing), developing countries could benefit from outsourcing through infrastructure development and transfer of technologies and ideas.  This would especially apply to “provision of information on marketing and prices, helping business-to-business communications and e-commerce applications, and even the processing of some services of domestic companies” (Nag, 2005, p. 65).

            Enterprises in developed countries have been saving a lot in doing outsourcing. Mattoo and Wunsch (2004) reported more than $17 billion gain in 2003 by US firms in their outsourcing initiatives.  The gain was a result of lower operational costs and increase productivity of the BPO client.  The banking industry of the United States alone reported a savings of more than $8 billion for the last four years (2000 to 2004).  An average of 30% to 60% savings for most company was estimated.  It also appears that for every dollar outsourced by the United States, the economy, in return, gains as much as $1.14! (Baily and Farrell, “Exploding the Myths of off Shoring”, The McKinsey Quarterly, July 2004, as reported in Nag, 2005).

            But while outsourcing provides positive growth for developing countries (more jobs, infrastructure development, etc) and even more so for developed countries (savings in operational coasts and gain in productivity of employees), the issue of losing “white collar” jobs is now becoming a concern to hosts of BPO clients, specifically, developed countries who do the outsourcing.

Box 4. An article published in the New York Times (2003) showing concerns on the outsourcing.

Source: United Nations Conference on Trade and Development, 2003.

            Kirkegaard (2004, “Outsourcing: stains on the white collar?”, published by the Institute for International Economics, available at <http://www.iie.com/publications/papers/kirkegaard0204.pdf>, 20 April 2004, as reported in Nag, 2005, p. 70) reported that the most threatened sector in the United States from 2000–2002 are manufacturing jobs.  These jobs are paid less than the average wage in the United States.  He also reported that low-skilled IT occupations are prone to be outsourced.

            Clearly, adjustment pressures, despite the obvious benefits of offshore outsourcing, might provoke developed countries to make protectionist policies.  Outsourcing is still expected to grow in the coming years not only because of the benefits that it provides to developing countries, but more so, to the benefits it provide to developed countries due to savings and productivity gains of their enterprises.  It has become a means for developing countries to benefit by exploiting that competitive advantage (United Nations Conference on Trade and Development, 2003, p. 145).

The industry has to face challenges, the biggest of which is to commoditize the service as currently, the competition is mostly based on cost.  More than just supplying basic services, establishments in the BPO industry should also improve their efficiency, utilize management talent, and improve the capacity to bring integrity between technology and consulting culture together (United Nations Conference on Trade and Development, 2003, p. 146).

CHAPTER 5

CONCLUSION

Globalization is not a simple wave of events that has a starting point, a peak, and an end.  As many scholars would argue, globalization is a system.  It has come into “existence” when its effects were felt by a greater number of people or groups.  But just like any system, political, social, or even physical system, it has its own way of reacting to any development [or lack of it] surrounding it.

This system has made the world smaller by opening up international markets for developed and developing countries to take advantage of.  Developed countries expect to have an expanded market; and developing countries are expecting to have more opportunities to improve and close the economic gap between the developing countries and the developed ones.  Developed and developing countries should not only compete in the market but more importantly, cooperate.  One country’s gain doesn’t have to be another country’s loss.  The outsourcing industry model has proven that both countries could benefit (and significantly at that!) from each other’s transactions: employment to the developing country, and more than enough savings on operational costs and productivity gains for the client country.  The potential drawback to the client country (loss of jobs for its workers) remains nothing but a “potential.”  No one can put the report of Baily and Farrell any better:

An average of 30% to 60% savings for most company was estimated. It also appears that for every dollar outsourced by the United States, the economy, in return, gains as much as $1.14!

Nothing in the history of mankind has achieved this kind of win–win formula to achieving economic growth.  Globalization made this possible.  At a basic level of observation, what may be obvious is the intertwined system between one process and another, between one enterprise and another, between one country and another.  What may be obvious is the availability of any services half-way across the world anytime of the day, and anytime of the night. But in a deeper level, this connectivity, integration, and ever-expanding resources limited only by imagination, is the key to achieving economic growth distributed equitably among countries of all shapes and of all colors.

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[1] Three countries are still under observation: Croatia, Former Yugoslav Republic of Macedonia, and Turkey. In addition to these three, Albania, Bosnia and Herzegovina, and Montenegro and Serbia are officially recognized as potential candidates. The EU at a Glance. Europe (web portal). http://europa.eu/abc/european_countries/candidate_countries/index_en.htm. Date accessed: September 13, 2007.

[2] Ibid.