Economic Globalization and Corporate Governance
According to (Held and McGrew 1999: the word Globalization means. Ka widening, deepening and speeding up of worldwide interconnectedness in all aspects of contemporary social life, from the cultural to the criminal, the financial to the spiritual. Globalization is everywhere. From the economic aspect, the meaning is even hard to define. The main idea about Globalization is about connection. The connection exists between people and also between countries. Economic Globalization has the meaning of enhancing the connection level between different capital, products, people and services.
Globalization introduces different types of effects on the economic system. The first one is about trading business. In the old days, the product is localize and is difficult to move from one place to another. Trading, although it is a traditional business, it is limited by location and capital flow in the old world. The growth in global (GDP) shows that the economic is growing in a tremendous amount. This is one of the signals to show the economic globalization. When we can take a look at our home, it is not a surprise to find the household applications which made in Japan.
For the clothes, as a matter of course, nearly everyone can find one with
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Under globalization, we can see that it is easy for in individual investor to put their investment on different locations. It is a kind of foreign investment. These flow-in capitals are very important for some domestic enterprise. For example, there are huge numbers of small businesses in China. These enterprises are all at the beginning stage. As the market resources within a country are limited, they need other kinds of resources. The foreign investment is one of the major resources for them.
The foreign investment actually changes the ownership behavior in an economic system. The foreign investment in production industry has direct impact over the livelihoods and production in one particular country. In some cases, the foreign investment is not only about capital. It is also about technology transfer and management under foreign control. With the new technology spread over the world, it inspires more people which result in innovation. The foreign control brings out the issue of managing locale people/worker with foreign style.
This is a good practice that both sides are willing to gain experiences. Corporate Governance In general, the word corporate governance defines the relationship of the owners of the company and the mechanisms through which the owners affect the company? ¦s behavior (R Roulier 1997). A corporate governance system is system that focus on the creating the wealth by maximizing the economic efficiency of the corporation. The main party is the shareholder. As a director, the return for shareholders is always the one they concern the most.
If we think deeper, we can see that the idea for corporate governance can be interpreted as the relationship between the internal control mechanism of the enterprise and the society understanding of corporate accountability (Justin O? ¦Brien 2005). It takes more concerns about the interests of employees, creditors, environment and other parties that have connections with the corporation? ¦s performance. It involves the process of operation, monitoring, management and internal control for a corporation.
Evidence (Stephen S Cohen and Gavin Boyd 2000) have shown that there are relationship between the corporate governance and the profit making. A well developed legal system is also an essential backbone for a corporation to operate. Economic Globalization & Corporate Governance In this part, I am going to demonstrate the relationship between Economic Globalization & Corporate Governance. In order to show the relationship and the evolution over years, I choose one special country to study ? V The People Republic of China (PRC), a country that have the highest GDP last year.
There are several reasons for me to choose China. It is the one that affected most by the globalization. This is a country with great potential. This is a country with strong economic background but believe in republicanism. The evolutions of PRC Economy System Under the Economic Globalization, there are great impacts on the PRC economy through out the recent 50 years. Reforms and evolutions are the results. Not just the reforms on economy but also the reform on mind set concerning the concept of managing a corporation in an effective way ? V Study of Corporate Governance.
Let? ¦s start with the history. In 1949, Mr. Mao Zedong announced the formation of People Republic of China. At the same year, all privately-owned enterprises in China were enforced to reform as state-owned enterprises. At that time, there is no corporation inside China. In 1978, the PRC government proposed an economic reform to re-construct their economy system from central-planned economy (The Soviet Model) to market economy. The main reason is: After the 10 year of Cultural Revolution, the China economic is too weak for the citizen to survive.
The PRC Government would like to use the economic reform as a stepping stone to save their economy. It takes about 15 years for the reform to become mature. The most critical task of the reform is the problem of the State Own Enterprises. Most of these Enterprises recorded deficit at that time. The reform involves the process of corporatization of state-owned enterprises and it is a challenging task. The main problem is the cultural and ideological differences between state-own concept in China and the private own concept in the western world.
The PRC government did not want to see any privatization in state-own enterprise which is a consequential result of corporatization. The reason is simple. During the process of corporatization, the state own properties will be transferred to the private owner. This action is against the party constitution of China and may disquiet the public. Leading by the Premier of the State Council, Mr. Zhu Rongji, the reform was finally undergo and success. The ownership for state own enterprise has been shift to the private sector. Nowadays, Over 50% of the State Own Enterprises in China have converted to corporation successfully.
Evolution of Corporate Governance in PRC under the Globalization After the reform in 1978, different parties (Private owners, the government and the foreign investor) start to think of the same question. They realized that the critical part is not the transformation of the enterprise but the action they took afterwards. Evidence shown that most the state own enterprise are in the situation of bankruptcy. With the help of Globalization, the PRC market is not a complete close system anymore. Form the lesson learned from the economy reform, the PRC Government realized that what they need is the one that can get from the western societies.
The PRC government is looking for the experiences and theories in corporate governance to make changes to the enterprise inside PRC. The first thing that the PRC government does is about the legal system for corporation. In 1994, the PRC government promulgated the new Company Law 1 which is greatly influence by the civil law model. Under the new company law, there are two types of companies – the limited companies and joint stock companies. The state own enterprises are classified as limited companies which is established solely by a department / investment institution authorized by the state.
The company law promulgated in 1994 is not just a set legal regulation. We can consider it as a change in the traditional structure of corporate management. We can see that the common problems for state own enterprise is the operation guidelines always come from the government but not the market. In a close system, those enterprises are the monopoly. When it comes to the age of economic globalization, it is not the same story. These enterprises are not comparable with the foreign enterprises. The PRC Government understands the problem – The Lack of practices in corporate governance.
Therefore, the China Securities Regularly Commission (CSRC) was formed. The CSRC provides a strong platform for promoting the concept of corporate governance in PRC. A paper ? §Code of Corporate Governance for Listed Companies in China?? was issued by the CSRC and the State of Economic in 2002. The CSRC emphasis on the protection of the shareholders? ¦ right in the paper. Unfortunately, the control is weak. We can see that inducing the concept Corporate Governance in PRC is a sophisticate topic. The first thing is the Globalization brings in many new ideas and capitals.
These things are so attractive to everyone but it takes time to absorb. One good example is the stock market in PRC. It is a product of globalization. Everyone knows that it is not well developed, but they still putting large investment on it. The second thing is that the state still holding up a large percentage of ownership for most state own enterprise. This problem introduces a lot limitation for the Corporate Governance model used in PRC. The government is the major shareholder in many enterprises. During the shareholder meeting, it is easy for the government to dominate the decisions. Moreover,
it is not easy for the government to strike the balance between being a policy maker or a shareholder. Finally, the legal system, labor market and many other related aspects are still under the evolution and are not mature at this time. There is no way for an outside investor to monitor the PRC enterprise in the same way as they did for the enterprises in other counties. Conclusion After reading many articles from the internet and study the example for China, I have the following ideas about the relationship between economic globalization and corporate governance. At first, economic globalization will continue.
It is the matter of accommodation. Just like the China example I mentioned before. The globalization activities bring in opportunities as well as crisis. People in different nationality have their own characteristics. These characteristics can be shown in different management approaches. On the other hand, corporate governance is focus on building a systematic model to enlarge the economic profit of on corporation. During the process of learning and transform, there will be a lot of obstruction. For my opinion, the optima goal is same. Both the director and the shareholder are looking for the output (wealth).
Although they may have different ideas of how to achieve the goal, the modern corporate governance model provides a good solution for them. The second point is the globalization introduces a wide approach for thinking. In the old days, we can? ¦t image that we can talk with people in different countries at the same time. With the internet, any kinds of information are available. It provides a platform for us to exchange idea with each other. When I review several corporate governance models recently posted, they all relied on a strong and highly effective IT network.
We need to keep this mind set in order to survive in the business world nowadays. Finally, I would like to use the idea from my favor book ? §Good to Great: Why Some Companies Make the Leap… and Others Don? ¦t?? by Jim Collin (2001). This is my favor book because it is a book that opens up my mind of thinking. In this book, he studied over 1400 companies. He found that the major factor that turns a good company into a great one is a good corporate culture but a not smart director. This can be achieved by using a good corporate governance approach. References Held & McGrew (1999) Global Transformations: Politics, Economics and Culture.
Cambridge: Polity. 1-31 R Roulier, ? §Governance Issues and Banking System Soundness?? , Banking Soundness and Monetary Policy, International Monetary Fund (1997) at 450 Justin O? ¦Brien, ? §Governing the Corporation?? , Publisher Weliy 2005, Chapter 2 Stephen S Cohen and Gavin Boyd ? §Corporate Governance and Corporate Performance?? , Corporate Governance and Globalisation: Long Range Planning Issues, Edward Elgar Publishing Ltd (2000) at 59 ? V 94. 1 http://www. gov. cn/ziliao/flfg/2005-10/28/content_85478. htm Jim Collin ? §Good to Great: Why Some Companies Make the Leap… and Others Don? ¦t?? HarperBusiness, 2001.