How Does Globalization of Business Benefit Shareholders of an Organization?
Despite the recent economic downturns, global trade is still predicted to grow by 1% in 2023. Should you venture into the global market? And if so, how does globalization of business benefit shareholders of an organization?
Let’s find out!
Read the article to learn:
Pro tip: Before going global, make sure to localize your products or services to better cater to new customers. To this end, use a professional localization platform — Centus. Learn more.
What is Globalization in Business?
Business globalization refers to manufacturing, trade, and investment outside of a home country.
In other words, businesses globalize when they expand their operations across national borders. As such, there are two types of globalization in business:
Globalization of markets where companies enter global markets to reach more consumers.
Globalization of production where goods and services are produced by outsourcing abroad.
Whatever globalization avenue you decide to pursue, shareholder value is likely to increase.
5 Real-Life Examples of Globalization in Business
Globalization offers vast resources for your company to tap into. To better understand its potential, let’s consider real-life examples of globalization in business.
A Korean fashion brand offers worldwide shipping to reach an international audience.
A corporation sets up factories overseas to lower its production costs while expanding its global reach.
A tech company hires freelance marketers in a country where it wants to build a stronger presence.
Mexico gradually eliminating tariffs to incentivize foreign businesses to bring competitively priced products.
World Trade Organization and International Monetary Fund removing trade barriers.
Now, let’s consider the benefits of globalization for business shareholders.
How Does Globalization Benefit Business Shareholders?
Globalization of business increases shareholder value by boosting company revenue, operating margin, and capital efficiency while lowering its risk.
Here’s how it works:
Higher revenue: Globalization opens global markets for businesses allowing them to increase sales.
Higher operating margin: Increased globalization allows outsourcing production to lower its cost and increase the operating margin.
Higher capital efficiency: As businesses have access to more resources, they can maximize their efficiency.
Lower risk: Shareholder investment risk lowers when a company isn’t solely reliant on one region for its success.
And if you still doubt that globalization is beneficial for business shareholders, consider the statistics below:
65% of Fortune 500 companies operate globally
The top 10 largest companies by market capitalization operate globally
The top 10 companies with the highest operating margin have a global presence
Make no mistake, all companies are affected by globalization whether they’re internationalized or not. Let’s look at the advantages of globalization for businesses.
5 Advantages of Globalization for Businesses
Globalization provides businesses with access to talent, resources, and markets. The confluence of these factors can bring the following five advantages for your company:
Improve cost efficiency
Businesses can minimize expenses by producing goods or services in foreign countries with lower costs of production. Other examples of improving cost efficiency through globalization are listed below:
Companies outsourcing business functions to overseas freelancers.
Companies taking advantage of currency fluctuations to reduce the cost of raw materials.
Companies leveraging international tax benefits to minimize business expenses.
Reach a wider audience
Globalization removes geographical barriers allowing businesses to explore a virtually limitless growth potential. A perfect example of a business reaching a global audience is Gymshark.
Despite not having a physical store up until late 2022, Gymshark still grew and became an industry-leading company. One of the reasons behind the company’s success was its influencer marketing on a global scale. Globalization enabled them to collaborate with influencers and brands as well as leverage user-generated content in other countries.
Tap into a blue ocean market
A blue ocean strategy is the creation of demand by being the first to satisfy an unmet need in the market.
Globalization enables you to develop a blue ocean strategy by getting fresh insights into consumer interests and pain points. How? By collaborating with stakeholders from other countries and regions.
Looking at the overseas market demand from multiple angles feeds businesses with more ideas for taking an innovative approach. Using those ideas, they can create a new product or develop new product features.
Globalization has led to higher cross-cultural competence in business settings.
Cross-cultural competence is the ability to effectively communicate with people from other cultures. This presupposes a deep understanding of people's cultural backgrounds, attitudes, and behaviors.
A business with cross-cultural competence can forge stronger relationships with partners, employees, and prospects. Conversely, the lack of cross-cultural competence can undermine the company’s relationships and result in missed opportunities.
Workplace diversity and inclusion
Global companies with an effective HR and recruitment strategy are gaining competitive advantage by building a diverse and inclusive workplace.
Workplace diversity is about working with people with different life experiences. An inclusive culture is about being comfortable enough to voice one’s opinions freely at work.
Workplace diversity and inclusion are conducive to employee satisfaction, which helps businesses attract more candidates and build a diverse talent pool. Diversity and inclusion also drive creativity, thereby promoting business growth.
3 Drawbacks of Globalization for Businesses
Despite its numerous advantages, globalization also comes with notable downsides.
Competitive business environment
Globalization inevitably leads to heightened competition. On top of local organizations, you’re up against international companies with more resources at their disposal.
Even if you’re the first business in your niche to go global, it won’t be long before a rival company decides to vie for a market share with you. Therefore, it’s essential to improve your competitive position by differentiating your products and services.
International businesses have more sources of revenue since they have access to multiple economies. Unfortunately, they are subject to economic downturns that might have a ripple effect on a global scale.
During economic downturns, market demand decreases, making investors more cautious. Other effects of a global recession are mass layoffs, lower capital expenditures, and higher inflation rates.
Needless to say, none of these effects are welcomed by shareholders who experience a precipitous decline in stock market value.
Global businesses might struggle with overcoming cultural barriers. Failing to recognize and address cultural differences leads to missed opportunities, lower return on investment, reputational damage, and even legal issues.
Here are a few examples of cultural risks:
Not localizing your brand to fit the preferences of locals might result in lower customer satisfaction
Lack of cross-cultural competence might lead to higher employee turnover
Maintaining quality and consistency in a global supply chain might be challenging due to varying work practices and conflicting values between trade partners
Language barriers can impede cooperation with partners
Ineffective international marketing campaigns due to the lack of cultural awareness
To overcome cultural risks, global companies need to create a culturally-aware workplace, promote open communication, and conduct regular diversity training.
Pro tip: To minimize cultural risks and remove the language barrier, localize your products or services. This can be done effectively by using a professional localization platform — Centus. Learn more.
Globalization is beneficial for business stakeholders because it:
Access new markets and new customers
Lowers the cost of production
Provides access to new talent
Improves organizational diversity
Stimulates the companies to stay competitive
On the other hand, there are disadvantages including:
Global economic volatility
The businesses that overcome these challenges can reap the benefits of globalization.
Why is globalization important for shareholders?
Globalization allows shareholders to diversify their risks by accessing foreign markets. Other benefits for shareholders are improved profitability, higher operating margin, and increased capital efficiency.
Who benefits from globalization in business?
All business stakeholders benefit from globalization. Shareholders get a higher return on capital, suppliers get more trade opportunities, and potential employees benefit from job opportunities. Consumers benefit the most because they get access to more products and services at lower prices.
How does globalization affect the stock market?
Globalization allows more people to invest in foreign companies, which makes it easier to raise capital. However, the stock market is exposed to volatility due to economic downturns, policy changes, and currency fluctuations.
How to assess the value of business tycoons in globalization?
To assess the value of business tycoons in globalization, consider their business mission, priorities, and personal values. Besides financial success, evaluate whether they’ve made a positive impact on the global economy including how well they adhere to ethical practices and legal standards.