Impacts of Nature Disasters and Political Conflicts on International Business in Global Economic Environment

Khaustova Svetlana

Impacts of Nature Disasters and Political Conflicts on International Business in Global Economic Environment

Over the past few years the global economy has experienced the major change, internationalization of economic activity, which has resulted in the creation of a world market. Information technologies, transport and communication facilities developed at the end of World War II have become increasingly important to the growth in labour productivity, to the improvement and control of the rate of return on investment, particularly for mass production, and to the rapid development and implementation of new technologies, reducing the product life cycle. The same technologies made the distribution of information much easier and faster, primarily due to the advent of the Internet. Internal trade has subsequently become the international trade, where the whole world turned into the global market. Nowadays one might use a computer made in China, which is consist of Japanese chips and an American operational system. Another one might drink Brazilian coffee in the morning, Indian tea in the afternoon and French vine in the evening. One might drive a German car, wear Italian clothes and speak on a Finish mobile phone. All the above-mentioned realities have become possible due to globalization, the highest stage of economic internationalization.

Globalization is the increasing interdependence and interaction of various spheres of public life and activities in terms of international relations. It means that opening up to wider contacts with each other, countries promote a worldwide spreading of capital, technologies, people, goods and services, thus affecting almost all spheres of social life, such as politics, economics, ideology, culture, ecology, security and life style of each individual.

Economic globalization may be seen as trade integration among countries, as a process of territorial trade expansion of international economic activity, as an increasing integration of a particular country in the global economy, or as growing economic interdependence of nations worldwide. It also can be seen as a process of increase in volume and diversity of international transactions in goods and services, international capital flows, distribution of new information technologies and telecommunications, and creation of a new environment for a business within the Internet space.

Globalization is intended to form basic solving strategies for human problems in order to provide a universal wellbeing. The positive impact of globalization includes intensification of division of labour and growth in labour productivity, which leads to effective resource management and to an increase in the average standard of living. The use of economies of scale potentially decreases average cost of production and price per unit and leads to a sustainable economic development. The possibility of free trade brings mutual gains to vendors from trade of goods and services. Strengthen competition stimulates the further development of technologies and its spread across countries. Mobilization of financial resources helps investors to identify potential sources of funds in the world market. Foreign direct investment (FDI) has become a major factor of national development strategies contributing to capital flows and know-how. Environmental problem solving becomes a global issue due to joint efforts by international community. At the same time globalization can encourage both prosperity within a society, and its total destruction, thus in order to sustain a fair play in world markets an international business must be operated according to international rules and laws issued by the International Institutions, such as the World Trade Organization (WTO), the World Bank, the International Monetary Fund, etc.

Defining globalization as a process of universal political, economic and cultural integration and unification subsequently brings certain risks to the global economic environment. There is no doubt that globalization leads to a devastation of national cultures. The desire of developing countries to achieve the level of developed ones automatically imports the culture of developed countries, associated with higher living standards. In terms of the global environment this process gradually forms a single global community with a single culture. But while it is still an ongoing process, other serious concerns arise, one of which is the distribution of globalization’s benefits.

Globalization strengthens positions of developed countries in the world market and inhibits economic growth of developing countries, turning them into objects rather than subjects of globalization. Export-oriented companies and companies benefiting from foreign trade have a greater capital flow and skilled labour force, compared with a number of industries, which lose its competitive advantage because of the increased market openness. These industries are forced to adapt to unfavorable economic conditions, observing capital outflow and job cuts. Unemployment forces people to find new work, which may require them job retraining or changing their permanent residence. On the global character of mass migration, it becomes a key source of aggravation of the international situation, because of such destabilizing factors as new forms of employment (individual employment agreements, temporary contracts) and the globalization of the labour market. Inflows of cheap labour from the outside worsen a competition on the labour market of the developed countries, which has led to interethnic conflicts and the rise of nationalism. Hence, almost all countries were forced to impose certain forms of control over the free movement of labour.

Unfortunately, this fact didn’t save from the increasing practice of terrorism, violent acts usually done by a politically motivated group, which are believed to appear within the globalization process. Due to the development of the international trade, terrorists got an easy access to modern weapons. The development of modern financial system allowed them to quickly receive money from their abettors in other countries and continents. The Internet allowed terrorists to exchange information, recruit new members and receive such specific information as design of weapons of mass destruction. Modern societies are highly vulnerable to terrorist strikes. The attack on the Twin Towers of the World Trade Center in New York almost lead to the collapse of the tourism industry worldwide. Terrorists tend to use the power of the modern society to maximally damage it. So it is obvious that such an inequitable distribution of globalization’s benefits causes political conflicts at regional, national and international levels.

The internal market is influenced by political events and decisions within a particular country, and the same political factors affect international business transactions due to the globalization process. Social tensions can disrupt production processes and restrict sales, thereby affecting the condition of global economies and its GDP.

Today the most striking example is the case of Libyan revolution against its political regime under the firm leadership of Colonel Qaddafi. The situation in the Middle East not only hit the tourism sector, but also greatly affected the world oil production and its prices. The very oil is the main reason of an increased interest from Western states in the Libyan revolution. Experts from the International Energy Agency (IEA) predict a load growth on European oil-processing industries, since Libya has been the main exporter of crude oil to the European countries. While oil prices are still increasing, there is a chance of another financial crisis development, which can seriously hit the global economies just recovering from the recent subprime mortgage crisis and the amount of investment decisions and portfolio investments, because of the arise uncertainty.

Actually, the economy is all about uncertainty, but as everyone tends to be a risk-averse person working on gaining profit, one will agree that the higher the level of uncertainty is, the less investments will be made in this economic activity.

The Russian economy is still based on export of raw materials, which provides a basis for economic growth and the state budget development. In order to increase the total share of export of goods and services competitive in the global market, it is necessary to regulate its production according to the international standards. However, the depreciation of the main fixed production assets, inadequate infrastructure, outdated equipment and technology, low productivity, lack of qualified labour and high material and energy costs for industrial production make it more difficult to achieve. It is clearly seen that Russia needs foreign investments and trade flows in knowledge absorption and innovativeness. The main reason why there is no such a big inflow of investments is the high level of uncertainty on return on investment and unstable socio-economic position of the country.

I’m originally from Stavropol, the town situated in the southern part of Russia. It is a unique region, which combines together mineral spas and recreation resorts, warm Black Sea beach resorts and exotic cultural and mountainous destinations of the North Caucasus. It is not only a wonderful place to explore and to spend one’s vocations, but also it is a perfect place to invest in. Unfortunately the southern part of Russia is generally known as a dangerous region, due to sensitive political situation and ongoing conflicts. High levels of corruption, particularly from roadblocks existing just to extort bribes, violent crime and kidnapping cases, all these make the region unfavorable to foreign investments and prevent it from the further development.

Therefore, in the global economic environment political factors should be assessed prior to capital investments or any marketing commitments, which at the same time must be immediately adjusted to any new information received or circumstances changed in order to eliminate risk and uncertainty. In case, if desired product can be obtained from a single source and there is no way for diversification, a company has to stay in a foreign market, controlling the level of risk and using specific methods to reduce it.

Both for international and domestic businesses uncertainty and risk coming from the political issues can be somehow predicted or calculated, relying on short-term and long-term socio-economic forecasts. Nevertheless, there are some events, which can be hardly foreseen, and which play not least role in the global economic environment. Discussions on natural and ecological disasters become more and more topical today, because the effect of a natural hazard leads to human, financial and environmental losses. Losses caused to poor countries severely limit their promotion to sustainable development, absorbing domestic savings and eroding international assistance development. Large losses can cause both individual and governmental debts. Lately there have been a plenty of natural disasters, which have affected all countries around the world.

Eruption of the Icelandic volcano, which has resulted in cancellation and suspension of a great number of flights in the North and West Europe, financially hit passengers and airlines, but also indirectly affected trade, investment, tourism, and production. Consequences of the volcano crisis were primary perceptible by those companies and industries, which were depended on goods and services, exported or imported by means of air transportation, and which were depended on volumes of production and productivity.

In summer 2010 severe drought in the European Russia caused direct losses and a significant decrease of major crop yields. Being one the world’s biggest exporter of wheat, the government had to stop its exports, which resulted in per tonne price increase all over the world and consequently in the price growth of agricultural products and the inflation growth in Russia.

The recent Japan’s natural disaster is clearly one the most biggest and destructive event in a generation. Primary, the earthquake took lives of many people, destroyed homes and left survived with nothing behind. Being a third economy in the world (after USA and China), Japan suffered an enormous loss, which has had an impact on the state budget and finance. Here the situation was complicated with the already exciting huge state debt. Today the government will have to borrow extra sums of money, which will likely lead to negative growth rates in the Japanese debt market, repatriation of Japanese capital and yen appreciation. Japanese insurance companies will sell assets outside the country in order to pay premiums. Besides economic and financial problems, the earthquake has resulted in Japanese nuclear accidents, which negatively affected environment by toxic pollution. Even if the disaster occurred only on the territory of Japan, it hasn’t left other countries behind. Numerous countries and International Institutions have sent rescue teams to help victims of the natural disaster. Here we see the major benefit of globalization.

To sum it up, it is possible to distinguish two major trends in today's global economy. The first one is strengthening the integrity of the global economy and its globalization, which is caused by the development of economic relations between countries, trade liberalization, the establishment of modern communication means and information, international technical standards and regulations. The second one is economic convergence and interaction of the countries at the regional level and the formation of large regional integration structures, developing towards the creation of relatively independent centers of the world economy.

Globalization is the process that brings not only benefits to the international business; such as strengthen competition, economies of scale, productivity growth through mass production at the global scale, distribution of advanced technologies and competitive pressure for continuous innovation, but also it can bring negative consequences or potential problems. As all countries and multinational companies become more and more integrated with each other, there is always a connection among them, so that if one is hurt, the other ones will be hurt too. It demonstrates that everything what happens in the economic global environment, either natural disasters or political conflicts, has its particular impact on the international business, and only the benefits of the globalization process can help us to solve the major human problems and to promote a universal wellbeing.