Contextualizing Globalization and its impact on Jobs
The world is indeed a stage and globalization is the backdrop against which the dramatic, the tragic, the thrilling, and even the comical play out. The story of economies across the world, much like theatrical plays, is segmented into acts. It so happens that these acts are experienced by different nations at different times over history. Just as characters of a play develop and their interlaced stories unfold, the inter-dependency of lives across the globalized world inevitably reveals itself.
When Patricia introduces herself to her community college classmates by stating her name and sharing that her job was outsourced to India, I know she is confronted with her questions and emotions. I cringe at the thought of the negative associations she might form about such emerging nations. At the same time I am encouraged and proud of the fact that she is pursuing continuing education to address her situation. However I do wonder if she and others in similar situations across developed but stagnant nations like the U.S.A realize how events played out to result in their current unemployment or underemployment.
A ‘healthy global perspective’ does little to correct one’s situation in any practical or immediate fashion but contextual understanding is relevant if people hope to write their own story in this ever-evolving global script. Unfortunately there are politicians and business consultants who often shock audiences with factoids about the ‘dreaded outsourcing of jobs’. They revel in stirring up people and do so without providing clear insight to how economies function. So to fill this gap that’s often left unaddressed it is important to first contextualize how economies work (locally and globally) and how peoples’ jobs are affected. It is also necessary to realize the opposing concepts of free trade and isolationism are not the only options. And in doing so we need to acknowledge the role corporate strategy plays in sustaining an economy and its people.
The visual below will help illustrate the key economic drivers and the symmetry required between each pair.
Globalization and its impact on jobs can be contextualized best across the five components I’ve outlined below.
1. Transaction at the Core
Two markets are essential to an economy, the product market and the labor market. Both of these markets have some very basic and some very complex transactions at their core.
In a simpler time entrepreneurs identified the demand for products, found ways to supply the local consumers, and in doing so offered employment to the locals. However, profit margins were narrow with people buying only what they needed and staying within their means.
In an effort to increase profit entrepreneurs aimed to gain more market share and grow the size of the market. One rudimentary yet very effective way to grow market share is to influence culture through outlets available (e.g. advertisement). Also the advent of credit was a way to help grow market size by increasing the spending power of those who previously could not afford.
Regardless of the cultural and financial implications of media and credit, it is easy to acknowledge these tools helped grow local markets sufficiently for years. In time competition increased, local markets saturated, and profit margins started to decline as salary expectations grew to match the advertised or aspired lifestyles. That’s when local entrepreneurs began looking for new markets, first domestic and then global.
Product Market is defined as the marketplace in which a final good or service is bought and sold. A product market focuses on finished goods purchased by consumers, businesses, the public sector and foreign buyers. [www.businessdictionary.com]
Labor Market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. It is a major component of any economy, and is intricately tied in with markets for capital, goods and services. [www.investopedia.com]
2. Adapting to change and capitalizing on it
Economies tend to evolve best when based on market opportunities available or threats prevalent.
For instance global markets developed considerably with advancements in transportation. Even more opportunities presented themselves when countries with previously closed markets began opening their economies to foreign investment and trade. China and India, the two most populous nations (with 37% of the world population when combined) were obvious draws. And as access to global markets improved, certain countries were better positioned to be product markets and others as labor markets. It is revealing to note that in the past international trade with some of these economies was practically impossible and still for decades the western nations attempted to coax them out of isolation.
Successful entrepreneurs with products displaying global appeal were quick to enter the untapped markets through exports. Depending on the company’s level of success and degree of ambition, the strategy soon expanded to these new foreign markets permanently. These businesses had to work hard to adapt to foreign cultures and conditions but saw promise in their overseas ventures even through initial challenges.
Further it was apparent that some foreign markets doubled as a significant pool of inexpensive labor. Businesses capitalized on the cost advantage by embracing this young and eager workforce.
Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade & investment, and aided by information technology. [www.globalization101.org]
Capitalism is an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decisions, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market. [www.Merriam-Webster.com]
Companies entering new foreign markets must establish if the consumers can afford what’s being offered.
There is an inherent need to have a large middle class in any economy for it to be an appealing market. It is this middle class core of people with stable jobs who can afford and are interested in choosing from the innumerable goods/services available. This is precisely why too few rich and too many poor is not the formula for overall economic success. For the very same reason exports have a limited scope because manufacturers from developed nations soon learn their currency is valued too high hence making their products too expensive for emerging markets to afford.
Companies realize that they cannot expect the middle class core to grow without employing people in these new and previously untapped markets. Depending on the size of the market in question this could take decades or more. Ambitious businesses transform to ‘Multi-National Companies’ and shift jobs to these new markets to utilize the available labor cost advantage. These cheaply produced goods/services are in turn sold to developed nations though often the cost benefits are not shifted to those consumers. And in time a new layer of society with a healthier purchasing power is slowly built in the new target markets through increased employment.
This strategy grants access to an inexpensive labor force and lower material costs while infusing vitality in the product life cycle (Recession > Trough > Recovery > Peak) of an otherwise stagnating home product market.
Maximizing shareholder value at the expense of other stakeholder interests is a tactic often adopted.
There is a reason why shareholder interest (appreciation of capital) often appears to take precedence over the interest of stakeholders such as labor. And the reason lies in the simple fact that capital concentrates easily with few while labor is contributed by the masses.
Touting shareholder value as a priority achieved through dividends and/or stock price increase is a long standing rally cry used to justify corporate strategies and tactics. However it is simply the payment for capital borrowed to run operations. As important as this is it ought not to come at the expense of other internal and external stakeholders such as employees, customers, suppliers, and the community.
Companies operating in stagnant markets of developed nations use outsourcing as a way to improve their cost of labor to revenue ratio. It is much like the tactics employed in the past, such as automation or performance improvement. Moreover employing labor in large foreign markets is very effective since it puts companies in a position to benefit from the prospects of a growing customer base.
The strategy that serves companies the best is the one that grows these new and untapped economies through large job creation. Products are manufactured cheaply and in bulk, so in turn can be sold at an affordable price for these newly created and ever growing middle class populations. Companies are so committed to this strategy that they invest heavily in building the infrastructure of those countries to support further trade.
Shareholders are stakeholders in a corporation, but stakeholders are not always shareholders. A shareholder owns part of a company through stock ownership, while a Stakeholder is interested in the performance of a company for reasons other than just stock appreciations. [www.investopedia.com]
5. Corporate Responsibility
Companies have a responsibility to the people of the community that form their customer base.
Small businesses and major corporations alike have embraced their role in the community. And several have made concerted efforts to learn how to best harness their influence and resources to support communities. However, in an increasingly global economy with companies potentially operating across multiple nations, which community does one commit to the most?
Depending on the scale of operations, the company’s resources could stretch across varying affiliations of the owners, the workforce, and the customer base. The lure of new markets and corporate expansion has shifted the community involvement focus to developing or underdeveloped countries. This of course has benefited and will continue to benefit parts of the world which have previously been exploited or have lagged in terms of industrialization for different reasons. And it is this level of involvement through employment and infrastructure investment that has a far reaching and lasting effect that welfare and aide could never parallel.
Corporate responsibility needs to be redefined and the ways in which companies engage the community ought to be reassessed. Under the circumstance, we ought to re-calibrate corporate responsibility for job creation to be proportionate to its customer base in each country. This form of positive disruption is scalable both at a regional and global level.
No country should expect to endlessly reap the economic progress that comes from being the manufacturer for the world’s consumers; not the U.S.A of the past and not the China of today. Business conditions are bound to change and trade policies, though often lagging, are almost as likely to adjust accordingly. Nonetheless one can assume an economy’s potential aggregate consumption demand remains proportionate to its population. And thus that same population ought to form the aggregate labor supply available to employ and/or develop. This neither advocates protectionism nor isolationism policies. Instead it argues for global economic symmetry by discouraging arbitrage that currently exists in employing low cost labor in one place and selling goods/services at high profit margins elsewhere.
Renowned political economist Louis O. Kelso stated — “The first principle of economic symmetry is building the economic power to consume simultaneously with the industrial power to produce.” He succinctly and clearly emphasized how foundational it is to keep consumption and production in balance. However I surmise that overly capitalistic motives have taken a growing domestic economic asymmetry between who is consuming and who is producing to a global scale; with globalization just being a means misused to an avarice end.
In absence of controls to ensure proportionate product market access and labor investment, it is important to understand how other realities come into play. For instance it is important that taxes are levied effectively and governments efficiently put that internal revenue to proper use to better the nation (i.e. no tax loop holes and offshore tax havens). An equally important and hard pill to swallow would be to readjust the salary/wage expectations to match a relatively modest standard of living and in turn entice jobs back as labor cost competitiveness levels out.
Immigration also plays an interesting role in countries with small or aging populations. Steady growth in population and a subsequent generational baby boom could offer an alternative to the current expensive workforce. In the future, as the population grows and the internal job market gets competitive, cost of labor will come down. Plus this growing population will once again form an attractive and sizable product market.
It comes down to this: A company that accesses a product market needs to support that community through job creation and workforce development. In turn the people must learn to recognize the signs of this fundamental equation going out of balance so that they can retool their skills and redirect their collective spend accordingly.
Vivan J. Thomas
Workforce Strategy & Analytics leader focused on demystifying human capital complexities and addressing related challenges faced across organizations and communities.
Medium.com publication: Demystifying Human Capital