International dimensions of organizational behavior.

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Chapter 1: Assessing the Environment

Political, Economic, Legal, Technological

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: 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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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

Challenges to Globalism

Backlash against capitalism and rekindling of nationalism

Increased protectionism of high-demand resources

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

Need to develop top managers with international understanding and experience

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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 28 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:

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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.

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.

The Global Manager’s Role

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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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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.

E-Business—the integration of systems, processes, organizations, value chains, and entire markets using Internet-based and related technologies and concepts

E-Commerce—marketing and sales process via the internet

B2B—Business to Business (Example: Alibaba in China, large proportion is SMEs)

B2C—Business to Customer (Example: Amazon.com)

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