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Chapter Learning Goals

Understand the global business environment and how it affects the strategic and operational decisions which managers must make.

Critically assess the developments, advantages, and disadvantages of globalization.

Discuss the complexities of the international manager’s job.

Develop an appreciation for the ways in which political, economic, legal, and technological factors and changes impact the opportunities that companies face.

Review the role of technology in international business.

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Opening Profile: The Globalization of Risk

Top two risks:
Severe income disparity
Chronic fiscal imbalances
Other issues: natural disasters such as 2011 earthquake in Japan, flood in Thailand, political uncertainty in China and Middle East
Globalization has compounded the types and level of business risks

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Opening Profile: Typical Challenges that Managers Face in the 21st Century

Political and cultural differences
Global competition
Terrorism
Technology
Finding ways to balance their social responsibilities, their images, and their competitive strategies

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Understand the global business environment and how it affects the strategic and operational decisions which managers must make.

Chapter Learning Goals

What is International Management?

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The process of developing strategies, designing and operating systems, and working with people around the world to ensure sustained competitive advantage

What is Globalization?

Global competition characterized by networks of international linkages that bind countries, institutions, and people in an interdependent global

economy

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Globalization has also been described as the emergence of a level playing field due to decreasing differences in regional output growth rates, increased economic activity, and other non-economic factors.

Examples of international linkages:

Only 65% of the Ford Mustang’s content comes from the US or Canada
90% of the Toyota Sienna is made with US components, and it is assembled in Indiana

Example of the level playing field:

China’s recent growth (9.9% in 2005)

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Global Trends

Five key global trends:
Changing balance of growth towards emerging markets
Need for increased productivity and consumption in developed countries
Increasing global interconnectivity
Increasing gap between supply and demand of natural resources
Challenge for governments to develop policies for economic growth and financial stability

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Critically assess the developments, advantages, and disadvantages of globalization.

Chapter Learning Goals

Challenges to Globalism

Backlash against capitalism and rekindling of nationalism

Increased protectionism of high-demand resources

Need to develop top managers with international understanding and experience

Increasing pressure and publicity for companies to consider the social responsibility of their actions

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Examples of (a) the backlash against capitalism/rekindling of nationalism and (b) increased protectionism of high-demand resources:

US hostility toward an attempted takeover of the British P&O by Dubai Ports in 2006
Nationalization of energy resources in Venezuela

Examples of the need to develop top managers with international understanding and experience:

Coca-Cola has 80% of its sales outside of its home market
65% of Procter and Gamble’s sales are outside of its home market
Avon hired 114,000 sales associates in China in 2006

Effects of Globalization on Corporations

Global companies are becoming less tied to specific locations

Companies that desire to remain competitive will have to develop a cadre of experienced international managers

Small companies are also affected by and in turn affect globalism

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Greater international investment by global companies means greater transfer of financial, technological, and managerial resources around the world. In turn, the latter leads to the growth of developing economies, which opens up potential markets and locations for operations for global companies. As they are no longer tied to specific locations and can locate their activities in the most suitable areas, the companies have opportunities for flexibility and efficiency.

SMEs (which are companies with fewer than 500 employees) also benefit. In particular, technological developments (e.g., the Internet) make international trade and activities easier for smaller companies.

Regional Trading Blocs

Much of today’s world trade takes place within these three regional free-trade blocs:
Western Europe, Asia, and the Americas
Much of today’s world trade is grouped around three dominant currencies:
euro, yen, and the dollar
These trade blocs are continually expanding their borders to include neighboring countries

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The three regional free-trade blocs are known as “The Triad,” and they are grouped around three main currencies: the Euro, the Yen, and the Dollar.

The European Union
“EU”

A unified market over 500 million people living in 27 nations
Stability of the euro is in question and the ability of the “EU” to deal with the debt crisis of some members
EU poses two challenges for global managers:

“Fortress” Europe

Dealing with multiple cultures within this unified market

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The EU internal market is characterized by free movement of goods and people among EU countries and the elimination of internal tariffs and customs, financial and commercial barriers.

The EU gives preference to insiders, creating challenges for firms outside of the EU who wish to do business there.

Despite the unification associated with the EU, Europeans still identify with their national cultures, and businesses operating across the EU must take national culture into consideration.

Asia

China
India
ASEAN
South Asia Association of Regional Cooperation (SAARC)
Japan
Asian Tigers:
Hong Kong
Singapore
South Korea
Taiwan

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Japan and the Four Tigers (Singapore, Hong Kong, Taiwan, and South Korea) have abundant natural resources and labor. They have provided most of the capital and expertise for Asia’s developing countries. Japan is the world’s second largest economy.

China, which recently joined the World Trade Organization, is Japan’s biggest trading partner and has the fastest growth rate in the world. It is negotiating with ASEAN (the Association of Southeast Asian Nations, which is also negotiating to create the ASEAN Free Trade Area [AFTA]). China offers a large population of low-wage workers and a large consumer market, which has helped it attract manufacturing companies from around the world. China is known as the world’s factory.

India is the fastest growing free-market democracy, and it is known as the world’s services supplier. It is the world’s leader in outsourced back-office and high-tech services.

The South Asia Association of Regional Cooperation (SAARC) is a free trade agreement between seven South Asian nations that will lower tariffs to 25% within three to five years and eliminate them within seven years. Member countries comprise 1.5 billion people, with an estimated one-third of them living in poverty.

The Americas

North American Free Trade Agreement (NAFTA)
Brazil
MERCOSUR
Central America Free Trade Agreement (CAFTA)

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NAFTA is a free trading bloc between the US, Mexico, and Canada comprised of 421 million consumers. The goal of NAFTA is to increase exports and trade among members. Although NAFTA was controversial, many positive changes have occurred in Mexico since its ratification. Mexico’s trade with the US and Canada has tripled, and it has signed trade agreements with 43 nations. Today, Mexico is experiencing competition from China for offshore jobs.

DR-CAFTA, which is modeled after NAFTA, liberalizes trade between the US and five Central American countries. It is a stepping stone to the FTAA, which would encompass 34 economies.

Other Regions in the World

The Russian Federation
Middle East
The African Union—AU
South Africa
Less developed countries—LDCs
Low Gross National Product (GNP)
Low Gross Domestic Product (GDP)
Large, relatively unskilled workforce
High international debt

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The Russian Federation is characterized by economic growth, a large supply of natural resources, and a large, well-educated population—but it also is affected by corruption and government interference. For example, business “oligarchs” are a small group of businesspeople with political influence who capitalize on the privatization of Russia’s economy and who limit competitive opportunities for small businesses. Despite the increasing strength of Russia’s economy, foreign investors remain somewhat wary of corruption and interference.

Many countries in Central and South America, the Middle East, and Africa are considered LDCs. Though such countries often hope to attract foreign investment, their economic situation and often high levels of government intervention discourages the foreign investment they need to stimulate their economies. Despite these political risks, LDCs can offer considerable opportunities for international businesses.

Comparative Management in Focus:
China helps prop up the Global Economy

The fastest growing GDP rate (over 9 % per/year) for 30 years
In March 2012 Chinese Premier Wen Jiabao announced only 7.5% growth for 2012
China is still a developing country with considerable differences between rural and urban areas
State firms play a significant or dominant role

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However:
Weakening demand for Chinese exports—due to global recession government is targeting only 7.5% growth in 2012
Chinese labor costs increasing, energy and shipping cost rising; appreciating Yuan
The political, legal, and social environments create unpredictability for businesses

Comparative Management in Focus:
China helps prop up the Global Economy

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Management Focus:
Tips for doing business in China

Connections are important
Negotiations will be different from the U.S. and difficult
Communication must be clear, honest, and fully prepared for
Culture matters!

Management Focus:
Intel Brings Changes to Vietnam’s Economy and Culture

United States opened trade relations with Vietnam in 2000.
Vietnam’s rapid growth can be contributed to those aspects of globalization that attracts corporations such as Intel.
Intel is taking advantage of new markets and lower costs of production.
Intel’s success started with awareness of the tight control of the Vietnamese government.

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Globalization of Information Technology

The speed and accuracy of information transmission are changing the nature of international manager’s jobs
Cultural barriers are being lowered gradually
Technology gets dispersed around the world by MNEs
Explosive growth of information technology is both a cause and effect of globalism

Globalization of Human Capital

Increasing trend in the offshoring of manufacturing jobs and outsourcing of white-collar jobs
The Indian ITES sector has 700,000 jobs worldwide and comprises 35% of BPO market
For global firms, winning the war for talent is a pressing issue

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The world’s human capital is becoming increasingly mobile as jobs easily move around the globe.

Further examples:

IBM’s India staff increased from 9,000 to 43,000 between 2004 and 2006
In 2006, Dell announced plans to double the size of its Indian workforce to 20,000

India is an attractive location for outsourcing white collar jobs because of its many well-educated, English-speaking workers and its lower wage rates. A programmer in India might earn about $20,000 a year, compared to $80,000 in the US.

China also is increasingly a choice for back-office support outsourcing.

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Discuss the complexities of the international manager’s job.

Chapter Learning Goals

The Global Manager’s Role

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Develop an appreciation for the ways in which political, economic, legal, and technological factors and changes impact the opportunities that companies face.

Chapter Learning Goals

The Political and Economic Environment

Sustainability—economic, political, social, and environmental—has become a significant worldwide issue

Ethnicity—a driving force behind political instability around the world

Religion—religious disputes lie at the heart of regional instabilities, for example, former Yugoslavia, Northern Island, the Middle East…

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Political Risk

Examples:

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Any governmental action or politically motivated event that could adversely affect the long-term profitability or value of a firm

Argentina announced plans to nationalize Repsol YPF, the Spanish oil co., taking 51%.

In Russia, the Kremlin exploited the financial crisis to take control of energy companies.

The Political Risk Cont.

Typical Political Risks

Political Risk Assessment

Expropriation and confiscation
Nationalization
Terrorism
Discriminatory treatment
Barriers to repatriation of funds
Interference in managerial decision making
Dishonesty by government officials

Helps companies manage exposure to risk and minimize financial loss

Two forms:
Consultation with experts
Development of internal staff capabilities – increasingly common

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Expropriation occurs when a local government seizes and provides inadequate compensation for the foreign-owned assets of a firm. When no compensation is provided, it is confiscation.

Nationalization is the forced sale of equity to host-country nations, often at or below value.

These risk events can be macro or micro. Macropolitical risk events affect all foreign firms doing business in a country or region. An example is Iraq’s invasion of Kuwait in 1990, which halted all international business with and within both of these countries. Micropolitical risk affects one industry or company or only a few companies. These types of political risk events have become more common than macropolitical risk events. An example of micropolitical risk is “creeping expropriation”—a government’s gradual and subtle action against foreign firms.

The goal of risk assessment is to monitor political issues before they become problems, evaluate their potential impact on the company, and make suggestions for dealing with them.

The experts consulted may include consultants, advisers, and committees. Internal staff capabilities can be developed by assigning staff to foreign subsidiaries, using affiliates to monitor local political activities, and/or hiring staff with expertise in critical regions.

Managing Political Risk

Avoidance and Adaptation

Dependency and Hedging

Equity sharing

Participating management

Localization of the operation

Development assistance

Input control
Market control
Position control
Staged contribution

Political risk insurance (OPIC and FCIA)
Local debt financing

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American Can uses the Primary Risk Investment Screening Matrix (PRISM), which synthesizes information from managers and consultants on 200 variables into an index of economic desirability and of political and economic stability. Those countries with the most favorable PRISM ratings are considered for investment.

Ranking entails quantifying variables into ranking systems for countries. Staff or outside consultants consider factors such as the political and economic environment, domestic economic conditions, and external economic relations. One drawback of such systems is that they rely primarily on information from past events.

Early warning systems use lead indicators to predict possible political dangers, such as signs of violence or riots, developing pressure on the MNC to hire more local workers, or pending import-export restrictions.

Avoidance refers to avoiding investment or withdrawing investment from a risky location.

Adaptation is accommodating the risk. Use adaptation when the risk in a given country is relatively low or when a high-risk environment is worth the potential returns. There are four primary forms of adaptation. Equity sharing is sharing equity with a local partner, such as through a joint venture. Participative management means actively involving nationals. Localization is transforming the subsidiary into a national firm. Development assistance refers to involvement in host country infrastructure development.

Dependency is keeping the subsidiary and host nation dependent on the parent firm. There are four approaches to dependency. Input control involves keeping control of raw materials, technology, and know how. Market control is keeping control of the means of distribution. Position control is keeping control of key management positions. Staged contribution involves successively increasing contributions to the host nation.

Hedging is minimizing losses, such as through the use of political risk insurance and/or local debt financing. Local debt financing is borrowing money from the host nation.

Managing Terrorism Risk

Develop a benevolent image (IBM and Exxon).

Maintain a low profile and minimize publicity.

Using teams to monitor terrorist activities

Hiring counterterrorism consultants

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IBM and Exxon try to develop benevolent images and maintain low profiles in high-risk countries.

Some companies have teams for monitoring terrorist activities, such as kidnappings, hijackings, and blackmail.

Many MNCs hire counterterrorism consultants to train employees in coping with the threat of terrorism.

Economic Risk

Closely related to political risk
Determined by a country’s ability or intention to meet its financial obligations
Historically, most industrialized nations have posed little risk of economic instability, however the level of economic risk in the EU is of great concern

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Categories of Economic Risk

Loss of profitability due to abrupt changes in monetary and fiscal policies

Loss of profitability due to changes in foreign investment policies

Risk of currency exchange rate

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Examples of loss of profitability due to changes in foreign investment policies include inability to repatriate earnings, interest rate volatility, and currency translation exposure.

Currency translation exposure occurs when the value of one country’s currency changes relative to that of another. When the balance sheet of the entire corporation is consolidated, currency translation exposure may cause a negative cash flow from the foreign subsidiary.

An example of currency translation exposure is the devaluation of the Mexican Peso in the late 1990s. When this happened, a US company’s assets in Mexico were worth less when translated into dollars, but the company’s liabilities in Mexico were less as well.

Managing the Economic Risk

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The quantitative approach is statistically measuring a country’s ability to honor its debt. A quantitative measure is arrived at by weighting economic variables to create an index of a country’s creditworthiness over time and to make comparisons with other countries. A drawback of this approach is that it does not take into account different stages of country development.

The qualitative method is a subjective assessment of a country’s leaders and their likely policies.

The checklist approach is relying on easily measurable and timely indicators of creditworthiness.

Because no single approach can provide a comprehensive economic risk profile of a country, most companies use a combination of approaches.

The Legal Environment

Consists of the local laws and legal systems of those countries in which an international company operates, and of international law, which governs relationships between sovereign countries

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An example of a relevant international laws is the United Nations Convention on Contracts for the International Sale of Goods (CISG). The CISG spells out the rights and obligations of buyers and sellers when goods are sold between countries adopting the convention.

The Legal Environment

Types of Legal Systems

Approaches to Contract Law

Common law

Civil law

Islamic law

Common law: details must be written in the contract to be enforced

Civil law: assumes promises will be enforced without specifying the details

In Asia the contract may be in the relationship, not on the paper

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Common law uses past court decisions as precedents. It is used in the US and 26 other countries of English origin or influence.

Civil law represents a comprehensive set of laws organized into code. It is used in about 70 countries, including Japan and many in Europe.

Islamic law is based on religious beliefs and combines common, civil, and indigenous laws to varying degrees.

Islamic law is used in Islamic countries, such as Saudi Arabia.

A contract is an agreement to establish the rules to govern a business transaction.

Contract law plays a major role in international business transactions because of the complexities arising from different legal systems and because the host government in developing and communist countries often is a third party in the contract.

Other Regulatory Issues

Protectionist policies, such as tariffs or quotas

The attractiveness of the tax system

The level of government involvement in the economic and regulatory environment

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Protectionist policies give preference to a country’s own products and industries. Japan is often criticized for its policies that limit imports of foreign goods.

Foreign tax credits, holidays, exemptions, depreciation allowances, and taxation of corporate profits affect the relative level of profitability for a MNC in a given location.

Canada provides a good example of government involvement in the economic and regulatory environment. The Canadian government has wholly and partly owned enterprises in many industries (e.g., transportation, petrochemicals, fishing, steel, textiles, building materials). The government’s role, therefore, is one of both control and competition. There is a high number of unionized workers in Canada (30%). In Quebec official bilingualism requires managers to be fluent in French and English.

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Review the role of technology in international business.

Chapter Learning Goals

The Technological Environment

The appropriability of technology
The International Convention for the Protection of Industrial Property (the Paris Union)
Inappropriate use of technology by JVs, franchisees, licensees, and employees
Appropriateness of technology for the local environment

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Appropriability of technology refers to the ability of the innovating firm to profit from its own technology by protecting it from competitors. Common methods of protection include patents, trademarks, trade names, copyrights, and trade secrets.

In developing countries, firms generally face few restrictions on the creation and dissemination of technology. In developing countries, however, restrictions on licensing agreements, royalties, and patent protection often exist. For example, Egypt will only patent production processes, and it will do so only for 15 years. LDCs often use their investment laws to acquire needed technology, increase exports, and train local people.

The Paris Union protects patents, but only in 80 signatory countries.

MNCs also may be exposed to risk from the inappropriate use of technology by joint venture partners, licensees, and employees.

The introduction of technology may have cultural consequences, especially in LDCs. The choice of technology may be capital-intensive, labor-intensive, or intermediate, but it should suit the level of development in the area and the needs and expectations of the people who will use it. Sometimes, the local government regulates the choice of technology to suit their own needs.

The Impact of the Information Technology

Making Geographic barriers less relevant
Both cause and effect of globalization
Lowering cultural barriers
Encouraging convergence of consumers’ tastes and preferences
However, China still monitors and limits electronic information

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The growth of information technology is a cause and effect of globalism.

Though technology makes more information freely available to managers, consumers, and other decision-makers, some information is subject to export controls by the EU.

Global E-Business

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E-business refers to the integration of systems, processes, organizations, value chains, and entire markets using internet-based and related technologies and concepts.

E-commerce refers to the marketing and sales process via the internet.

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