Impact

Chapter I " Assessing the Environment

2007. British Prime Minister Gordon Brown said in an interview, "It's the first stage of a financial protectionism that will lead eventually to the kind of trade protectionism that we've seen in the past."7

Time will tell the long-term consequences around the world, but clearly executives and iheir companies have been caught in the grip of a storm that will likely revoiutionize business.

The deep freeze of capitctl markts, the implasion of rt.nancial groups and tl'te resulting rise in Sovernments' s*'cty over the plivate seclor has called into question some of tlte founda- tions of Anglo-Saxon capitalism.s

In an effort to develop consensus about how to revive apatalyzed global economy, the leaders of the world's latgest economies met at the Group of 20 (G20) meeting in London on April 2, 2009. They agreed to bail out developing countries, stimulate world trade, and regulate financial flrms more stringently. Leaders of those countries committed to $1.1 trillion in new funds to be available ro the International Monetary Fund with the goal of a revival in trade, which was expected to coniract in 2009 for the first time in 30 years. But differences of opinion between Continental Europe and the United States ovsr whether to act now or wait to see whether existing spentiing measures took effect resulted in what many considered a shortfall of measures needed to stimulate the world economy. Prime Minister Gordon Brown of Britain concluded the conference saying:

This is the day the vtorkl cune together to rtght against the global recessiott. Our nrcssctge today is clear and certain: we believe that global problems require global solurions.g

As evidenced in the opening profile, managers in the twenty-first century are being challenged to operate in an increasingly complex, interdependent, and dynamic global environment. In a global- ized economy, developments such as those described in the opening prolile can have repercussions alound the world aimost instantaneously. Clearly, those involved in intemational and global business have to adjust their strategies and management styles to those kinds of giobal deveiopments as well as to those regions of the world in which they want to operate, whether directly or through sorne form of alliance.

Typical challenges that managers must face involve poiitics, cultural diff'erences, global competition, terrorism, and technology. In addition, the opportunities and risks of the global marketplace increasingly bring with them the societal obligations of operating in a global com- munity. An example is the dilemma faced by Western drug manufacturers of how to fulfill their responsibilities to stockholders, acquire capital for research, and protect theh pafents while also being good global citizens by responding to the cry for free or low-cost drugs for AIDS in poor countries. Managers in those companies are struggling to find ways to balance their social responsibilities, their images, and their competitive strategies.

To compete aggressively, firms must make considerabie investments overseas-not only capital investment but aiso investment in well-trained managers with the skills essential to working effectively in a multicultural environment. In any fofeign envitonment, managerc need to handle a set of dynamic and fast-changing variables, including the all-pervasive variable of cultul'e that affects every facet of daily management. Added to that "behavioral software" are the challenges ofthe burgeoning use oftechnological software and the borderless Internet, which are rapidly changing the dynamics of competition and operations.

International management, then, is the process of developing strategies, designing and operating systems, and working with people around the worid to ensure sustained competitive advantage. Those management functions are shaped by the prevailing conditions and ongoing developments in the world, as outlined in the ibllowing sections.

TI.IE GLOBAI. BUSIN'EsS ENVIROhIR/IENT

Following is a summary of some of the global situations and trends that managers need to moni- tor and incorporate in their strategic and operational planning.

Globalization

The lVorld Is Flat

THona,qs Fnt pnilr,t N I o

Part I " The Clobal Manager's Environment

The forces and effects of globalization seem to be inescapably evident in our daily lives:

An estintated 2 billion people wituess Live Eanh, ct series af cotrcefts lteld itt I I loccttionsarotutd the vt:orld to raise erntironmental avuareness. chinese nnnufacturer.s clecoratetoys with paint corttctining learl, and childrcn aroLnrcl the ,vorlta hctve to give up tlrcirBatmans and Barbie dolls. Motgagelenders irt the {Jnited statesface a liquidity crunch,and global stocknw*ets go brrir,lk.tl

Business cornpetitiveness has now evolved to a level of sophistication commonly calledglotralization-global competition characterized by networks of internutional linkages thatbind countries' institrrtions, and peopie in an interdependent giobal economy. Economic inte-gration results from the lessening of trade barriers ani the incrJased flow of goods and services,capital, labor, and technology around the world. The invisible hand of global competition isbeing propelled by the phenomenon of an increasingty uoraertess world, by technological advancements, and by the rise of developing economies such as china and India-a processthat Thomas Friedman refers to as '.ieveling the playing fieid,; a*ong countries_or the"flattening of the world.',12

whereas the general concept ofglobalization has been that business expanded from developed to emerging economies., now it is just as likely to refer to business flowing from una un'onf a"*Ioping economies. Sirkin et al. use the term "gtobutity" stating that business these days is all about'tompeting with everyone from everywhere for eueryihing."lfon ;;r" strategic level, Ghemawat

aiEff'd3; ri?frb?,"tfrhf16b^ob'si;ress'wiiirfriit-a srdt6^or"''dem-r-gr6o'ariiarron,.,'ano'wrrT'remarn so rcir decades to come. He bases this conviction on his analysis that "most types of economic activity that can be conducted either within or across borders are still quite localized by country."l4

Globality and Emerging Markets It is clear, however, that globalization-in the broader sense-has led to the narrowing of dilfercnces in regional output growth rates as economic activity increased, driven largely by increases led by China, India, and Russia. In spite of the recent slowdown, world trade continues to grow - it has grown by 133 percent in the last 15 years and is over 954 trillion. Importantly, global trade is increas_ ingly including the developing nations. Exhibit 1-1 shows the resulrs from research by the A.T. Kearney Company of the Foreign Direct Investment GDI) intentions and preferences of the leaders of top companies in 17 industry sectors spanning six continents. The exhibit shows the top 25 countries in which those executives have confidence for their investment opportunities. Their results show that China and India continue to rank at the top of the FDI Confidence Index and that six of the top 10 countries are emerging markets.15 This phenomenon, says Fareed Zakar-ia, is some- thing much broader than the much-ballyhooed rise of China or even Asia. Rather, he says:

It is the rise of the rest-the rest of the world. FeRepp Zararul, THs Posr-AprERrcAN

Wouo, zoo8.16

"The rest," he says, include countries such as Brazil,Mexico, South Korea, Taiwan, India, China, and Russia. He states that, as traditional industries in the United States continue to decline, ,.the rest" are picking up those opportunities. Even so, the United States remains dominant in many "new age" industries such as nanotechnology and biotechnology, and is ranked as the globe's most competitive economy by the World Economic Forum. It is clear, also, that as emerging markets continue to grow their countries' economies, they will provide growth markets for thi products and sensices of developed economies.

Evidence of the growing number of companies from emerging markets can be seen in the Fortune 500 rankings of the world's biggest firms. It now stands at 62, mostly from the so-calied BRIC economies of Brazil, Russia, India and China, up from 31 1n 2003.t7 Further evidence that "globalization" is no longer just another word for'Americanisation," is the increase in the number of emerging-market companies acquiring established iarge businesses and brands from the so-called "developed" countries. For example, in 2008 Budweiser, America's favourite beer, was bought by a Belgian-Brazilian conglomerate, and "several of America's leading financiai institutions avoided bankruptcy only by going cap in hand to the

Chapter I , Assessing the Environmenl gxHlalr 1-1 2007 Foreign Direct tnvestment confidence lndex Top 25 Targets for FDI

I ,)

3

4 5 6 7 B United Arob Emiroles

Chino lndio

United Stotes

United Kingdom Hong Kong

Brozil

Singopore

2.21 2.09

1.86 t.8t

9 10

1',r

12 t1 IJ

14 1q

t6 17

18 .19

20 tl

22 23

24 l)

Russio

Germony Ausholio Vielnom

Frcnce

Conodo Jopon

Molcysio Other Gulf stotes

Souh A{rico Mexico Turkey

lndonesio

Polond

Cenlrcl Asio South Koreo

Czech Republic

1.72 i.70 1.70

1.68 1.67 1.67

1.65 1.63 1.63 t.62

1.59 1.58 1.58 1.57 1.57 L56

Maintained ranking (oll athers V lvloved uo fri Moued down fron

20OS ranking

Low confidence High conlidence

Source'. A. T. Kearney, September 12, 20A8. Copyright A.T. Kearney. lnc., 2007. All rights reserved. Reprinted with permission.

The main types o{ FDI are acquisition o{ a subsidiary or production facility, joint ventures, licensing, investing in new facilities on expansion of facilities.

sovereign-wealth f'unds (state-owned investment funds) of various Arab kingdoms and the Chinese government."l8 Clearly companies in emerging markets are providing many oppor- tunities for investment and alliances around the world, as well as establishing themselves as competitors to leckon with.

However, there are important aspects of globalization other than economic factors, though these aspects are intertwined. Exhibit 1-2 shows the top 20 countries as measured by tbur comprehensive factors- economic integration, technological connectivity, personal con- tact, and political engagement; the details for those categories are given below the charl. As you can see, although the United States leads the world in technology, it falls behind a number of countries on the other three factors.

As we consider the many facets of globalization and how they intertwine, we observe how economic power and shifting opinions and ideals about politics and religion, for example, result in an increasing backlash against globalization and a rekindling of nationalism. Globaliz-ation has been propelled by capitalism and open malkets, most notably by Western companies. Now,

. . . econontic power is shi.fting fast to the enterging nations of the south. China and India arc replacing the U.S. as the engines of *-orld economic growth,

FrNlNCrLL TI*ras, March 3, 2006.te

The rising nationalist tendencies are evident as emerging and developing nations- wielding their econornic power in attempted takeovers and inroads around the world-*encounler protectionism, There is hostility to takeovers such as the Indian company Mittal Steel's bid for Europe's largest steel company, Arcelor. At times Europe seems to be closing its borders; and even the United States reacted to an attempted takeover of the British P&O by Dubai Ports World early in 2006. In particular, as the demand on energy resources burgeons with heightened industrial activity in China, we see increased protectionism of those resources al'ound the world as Russia, Venezuela, and Bolivia have pdvatized their enelgy resources.

Part 1 , The Global Manager's Environment

EXHIBIT 1-2 Measuring Globalization

EGONOflIICINTEGRAIION: PERSONAICONIACT: lncluding inlemotionol trode ond lncluding telephone colls, kovel, foreign direcl inveslmenl ond remittsnces

TECHNOTOGICAT CONNECIIVITY! lncluding number of lnlernel urers, hosls, ond sKUre seruers

The wcrldt most integrcted counkies hore followed very different polhs to globolizolion. . As shown, Singopore hos the high6t relotive composite score ond Sloienio rhe lowsl sco€..lhe totol score comprises lriple weighting on FDI ond double weiqhlinq on kode. lechnologicol voriobles ond politicol vorisbls ore mch collopsed into single {uolindicotore.

POIITICAT EN6AGTi/TENT: lncluding foreign otd, ireqlies, orgonizolions, ond pacekeping

Saurce: Global Retail Development lndex. Copyright A. T. Kearney, 2008. All rights reserved. Reprinted with permission.

Recently, there has been increasing backlash against globalization coming from those who feel that it benefits advanced industrial countries at the expense of many olher countries and people within them who are not sharing in those benefits. Joseph Stiglitz, for example, argues that such an economic system has been pressed upon many developing countries at the expense of their sovereignty, their well-being, and their environment. Critics point to the growing numbers of people around the world living in poverty.2O Recently, globalization has also become increasingly unpopular with rnany in the United States as growth in emerging markets has raised prices for' energy and commodities, as their jobs are being lost overseas, driving down wages, and as the weak dollar makes companies in the United States vulnerable to foreign buyers.2l

While the debate about the effects of globalization continues, it is clear that economic globalization will be advanced by corporations looking to maximize their profits with global efficiencies, by politicians and leaders wishing to advance their countries' economies, and by technological and transportation advances which make theil production and supply networks more efficient. However, presswe by parties against those trends, as well as the resurgence in nationalism and protectionism, may serve to pull back those advances to a more regional scope in some areas, or bilateral pacts. This was made clear by the breakdown in the Doha round of talks; unfortunately,

In pursuit of the pedect--qn internationol trade deal agreetl upott by some I 50 countties with vastly differeilt goals*tregotiators wound up with nothing. The way foruad is like$, to be via bilaterul cwl regional agrcernents. A glohal deal, if one can be rcached, nmy be a package of snnller agteen ents befiveen subsets af the fult bo$,.22

Chaprer 1

In addition, while competition to provide the best and cheapest products to consumers exerts pressure on corporations to maximize elficiencies around the world, there is also incre- asing pressure and publicity tbr them to consider the social responsibility of their activities (discussed f'urther in Chapter 2).

*ffeets cf lnstitutions <ln Global Trade23 Two major groups of institutions (supranational and national) play a differing roie in globali- zation. Supranational institutions such as the World Trade Organization (WTO) and the International Labor Organization (ILO) promote the convergence of how international activities should be conducted. For example, the WTO promotes the lowering of tariffs and a common set of trade rules among its member countries. Similarly, the ILO promotes common standards of how workers should be treated. While many supranational institutions fiequently promote rules or laws lavorable to foreign firms (e.g., requiring intellectual property rights protections in China), others have been criticized for infringing on national sovereignty (e.g., challenges to certain environmental laws in the United States).

National institutions, in contrast, play a role in creating favorable conditions for domestic firms and may make it more difficult for foreign firms to compete in those countries. For exam- ple, the slringent drug testing rules required by the U.S. Food and Drug Administration (FDA) and the anti-dumping ruies enforced by the U.S. Department of Commerce's International Trade Administration act as entry bamiers for foreign firms (see Chapter 6 for a more detailed dis- cussion of these).

Some supranational institutions represent the interests of a smaller group of countries. For example, the European Commission acts in the interest of the 27 EU menrbers as a whole rather than the interest of individual member countries. The European Commission is the executive arm of the EU and is responsible for implernenting the decisions of the European Parliament and the European Councii. Of relevance to international business, the European Commission speaks for the EU at the World Trade Organization, and is responsible for negotiation trade agreements on behalf of the EU.2a

Effects erf Globaliaation on Corporations

In returning to our discussion at the corporate level, we can see tha{ alrnost all firms around the world are aff'ected to some extent by globalization. Firms from any country now compete with your firm both at home and abrcad, and your domestic competitors are competing on price by outsourcing or offshoring resources and serrrices anywhere in the world. Ofien it is di{licult to tell which competing products or services are of domestic or tbreign origin. While Ford, for example, is pushing its Mustang with the slogan "buy American," only about 65 percent of the car content comes from the United States or Canada-the rest is purchased abroad. In contrast, Japan's Toyota Sienna model is far more American, with 90 percent local components being assembled in Indiana.2'5 This didn't happen overnight. Toyota has been investing in North America for 20 years in plants, suppliers, and dealerships, as well as design, testing, and research centers. Toyota became the largest auto-manufacturer in the world in sales in2009.In fact, on June 1, 2009, General Motors (GM) filed for Chapter 1 1 bankruptcy, pushed into a temporary partial nationalization by the U.S. government in order to save the company in a drastically downsized fonn,26

Clearly, conpetition is botderless. with most giobal companies producing ancl selling more of their global brands and services abroa<l than domesticaily. Avon, for example, estimates it employs 5 million sales representatives globally, and believes a large share of tuture revenues will come from China, where it hired an additional 399,000 sales representa- tives in 2006.27 Nesfl6 has 50 percent of its sales outside of its home market, Coca-Cola has 80 percent, and Procter & Gamble has 65 percent. The Tata Group, a conglomerate originat- ing in India, has operations in 85 countries and has made a number of acquisitions of large firms alound the world.

Investment by giobal companies around the world means that this aspect of globalization beneiits developing economies-through the transfer of financial, technological, and manage- rial resources, as well as through the development of local allies that later become self- sufficient and have other operations. Global companies are becoming less tied to specific

" Assessing the Environment

*r1.. t&i.';

10 Part I " The Global Manager's Environment

locations, and their operations and allies are spread around the u orld as they source and coordinate resources and activities in the most suitable areas, ancl as technology facilitates faster and more flexible interactions and greater efficiencies.

It is essential, therefore, tbr managers io look beyond their domestic martet, If they do not, they will be even further behind the majority of managers who have aiready recognized that they must have a global vision fbr their firms, beginning with preparing themselvei with the skills and tools of rnanaging in a global environment. Companies that desire to remain globally competitive and to expand their operations to other countries will have to develop a cadre of top management with experience operating abroad and an understanding of what it takes to do business in other countries and to work with people of other cultures. Many large firrns around the world are getting to the stage of evolution known as the stateless multinational, where work is sourced wherever it is most efficient; the result of this stage of development is that

for business leaders, building a finn that is searnlessly integrated across tirne zones and cultures presents daunting obstacles. Rather than huddling together in a headquarters building in Annonk or Millbank, senior managers v,ill increasingly be spread around the world, which will rcquire thetil to learn some netv tricks.28

Tss Ecoloursr, September 20, 2008.

Small and medium-sized companies (SMEs) are also affected by, and in turn affecr, globalization. They play a vital role in contributing to their national economies-through employment, new job creation, development of new products and services, and international operations, typically exporting. The vast majority (about 98 percent) ofbusinesses in developed economies are small and medium-sized enterprises (SMEs), which are typically referred to as those companies having fewer than 500 employees. Small businesses are rapidly discovering foreign markets. Although many small businesses are affected by globalism only to the extent that they face competing products from abroad, an increasing numbel ofentrepreneurs are being approached by potential offshore customers, thanks to the burgeoning number of trade shows, federal and state expon initiatives, and the grorving use of Web sites, with the ease of makino contact and placing orders online.29

There has never been a better time for SMEs to go global; the Internet is as valid a tool for small companies to hnd customers and suppliers around the world as it is for large companies. By using the Internet, email, and web-conferencing, small companies can inexpensively contact customers and set up their global businesses. One example of a very small global business (two people) is that of Gayle Warwick Fine Linen-a multinational player based in London. Its high- end, handmade bed and table linens are woven in Europe, embroidered in Vietnam, and sold in Britain and the United States. Sales are soaring, and its full-time staff recently doubled-to two: Gayle Warwick and the assistant she recently hired. As she expanded, Ms. Warwick hired a Frcnch freight forwarder, SDV International Logistics, to handle her far-flung business by shipping unfinished and finished fabrics within Europe and to Vietnam, then delivering the embroidered linens to London and the United States. (Freight forwarders can also manage payments,-a potential godsend for small exporters dealing with partners scattered around the globe.)30

Segional Trading Blocs

The dominance af the Uflited States is already over What is emerging is a world economy of blocs represented by the North American Free Trade Agreement (NAFTA), the EU, and the Associatiort of Southeast Asian Nations (ASEAN). There's no one cetter in this +porld econom\,.

(The late) Ps'tBR Dnucran3l

Much of today's world trade takes place within three regional free-trade blocs (Western Europe, Asia, and the Americas) grouped around the three dominant curyencies (the euro, the yen, and the doilar). These trade blocs are continually expanding their borders to include neighboring countries, either directly or with separate agreements.

Chapter i Assessing the Environment 11

MAp 1.1 EU Member States and Candidate Countries

f_l Member Siotes l) Condidote Countries

q$I.

*! tceland I

( E

CY'RUS

So u rce : http://en.wikiped ia. org

THE XURftpEAf{ t.}rui0hJ The European Union (EU) now comprises a 27-nation unified market of over400 million people, as shown in the map (Map 1-1). This "borrlerless" market now includes ten Central and Eastern Europe (CEE) countries-the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia-as well as Malta and Cyprus. They joined the EU in May 2004, having met the EU accession requirements, including privatizing state-run businesses, improving the infrastructure, and revamping their finance antl banking systems.32 Bulgaria and Rornania joined in January 2007. Turke1,, Croatia, and the Republic of Macedonia are oflicial candidates but must meet the requirements befbre 2015.

Since the euro became a legally tradable currency, Europe's business environment has been transformed. The vast majority of legislative measures have been adopted to create an internal mar- ket with free movement of goods and people among the EU counffies. The elimination of internal tarilli and customs, as weil as financial and commercial baniers, has not eliminated national pride. Although most people in Europe are thought of simply as Europeans, they still think of themselves first as British, F-rench, Danish, Italian, etc., and are wary of giving too much power to centralized institutions or of giving up their national culture. The continuing enlargement of the EU to include many less prosperous countries has also promoted divisions among the "older" members.33

Global managers lace two major tasks. One is strategic (dealt with more fully in Chapter 6): How firms outside of Europe can deal with the implications of the EU and of what some have called a "Fortress Europe"-that is, a market giving preference to insiciers. The other task is cultural: How to deal effectively with multipie sets of national cuitures, traditions, and customs within Europe, such as diff'ering attitudes about how much time should be spent on work versus leisure activities.

A5{A It tvould be clifficult to overstate the power of the fundamental drivers of Asian grotvth. First, Asi{trt economies hat,e been. enjoltjllg a retnarkable periatl of "productivitl' cctt{:h-up:' adaptirtg fttodern technologie,r, industrial practices, and wctys of organiz,ittg*ilt softte cases leapfroggirtg western competitors.34

Hnnv,qnn BusrNsss RrvrsW July/August 2009.

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SPAIN C----dl ftc"al Conory

12 Part 1 . The Global Manager's Environrnent

Manufacturing accounted for approximately 30 percent of GDP in Asia's emerging markets in 2009, thus helping to luel the demand for materials and supplies from the developed world and lending hope for a quick globai economic recovery.35 Jupun and the Four Tigers-singapore, Hong Kong, Taiwan, and South Korea, each of which has abundant natural resources and labor-have provided most of the capital and expertise lbr Asia's developing countries. Now the focus is on China's role in driving closer integration in the region through its rapidly growing exports. Japan continues to negotiate trade agreements with its neighbors; China is negotiating with the entire thirteen-member Association of Southeast Asian Nations (ASEAN), while ASEAN is negotiating for earlier development of its own free trade area, Asean Free Trade Area (AFTA).

The Chinese nzarket offers big opportanities for foreign investment, but you mu,st learn to tolerate ambiguity and fittd a godfather to look after your political conttections.

FTN,TNCInL T\urs36

China has enjoyed success as an eKport powerhouse, a status built on its strengths of low costs and a constant flow of capital. Its growth phenomenon is further discussed in the accompanying feature "Comparative Management in Focus-China's Economy Keeps on Chugging."

India: While China is known as the worid's factory, India is becoming known as the world's services supplier, providing highly skilled and educated workers to foreign companies. India is the world's leader for outsourced back-office services, and increasingly for high-tech services, with outsourcing firms like Infosys becoming global giants themselves. India is the lastest-growing fiee market democracy, yet its biggest hindrance to growth, in particular for the manufacturing sector, remains its poor infrastructure, with both locai and foreign companies experiencing traffic gridlocks and power outages. Nevertheless, with growth around 8.5 percent in recent years. second only to China, optimism abounds about the country's prospects.

Trade liberalization started in 1991; India's Foreign Direct Investment (FDI) rules are more

open, and the refining sector is now open to outside investors. While there is talk of reduced tariffs, there is serious political concern for protecting India's small to medium size enteryrises,

comprising 35o/a of exports. But with a middle class growing at 100 million people per year,

improvernents in customs processes, and 30Vo annual growth in tax revenues, trade is looking

steady.a2

After the Indian economy began opening up to the outside world, therc has been a surge

based on strong industry and agriculture and rising Indian and foreign investment. The expanding

middle class of almost 300 million is fuelling demand-led growth. Increasing deregulation is allowing whole sectors to be competitive. Here too there is considerable diversity in markets, incomes and economies; there are fifteen major languages and over 1,600 dialects.

A common comparison between China and India goes that China's economy grows because of its government, while India's economy grows in spite of it. However, with its one bil- lion people, many are still mired in poverty, with per capita GDP below $1,000, although the poverty rate is half that of twenty years ago. While India's large upcoming youth buige, com- pared with China, will bring a wave of workers for the economy, it also brings many more mouths to feed. However, in many areas the economic transfbrmation is startling, with growth

fed by firms like the Tata Group-a global conglomerate producing everything from cars and steel to softwarc and consulting systems. In August, 2008, India ioined a free-trade agreement

with the ten fast-growing countries in the Association of South-East Asian Nations (ASEAN)- making it clear that a regional deal was preferable to a compromise to plotect its farmers by saying "no" to the multilateral trading ,yti"- in the Doha trade talks'a3

in South Asia, an agreement was signed to form the South Asia Association of Regionai

Cooperation (SAARC), a free trade pact among seven South Asian nations: Bangladesh, Bhutan,

India, the Maldives, Nepal, Pakistan, and Sri Lanka, effective January 1, 2006. The agreemen{

will lower tariffs to 25 percent within three to five years and eliminate them within seven years. The member narions comprise 1.5 billion people, with an estimated one-third of them living in poverty. Trade in South Asia is estimated at $14 billion, though the rnajority of that trade will be

Chapter I

:riw'een India and Pakistan, the two largest countries in the region.# Officials in those countries ;,i-;p€ to follow the success of the other Asian regional bloc, the ASEAN.

Australia-while not regarded as part of Southeast Asia, but of the region called Oceania ii!3t includes also New Zealand and neighboring islands in the Pacific Ocean-did sign an ISEAN friendship treaty with Southeast Asia. Australia is one of the richest countries in ,;e rvorld, and over 50 percent of her exports go to East Asia, with more transported through the r:gion to rnarkets around the world.

iliE AMEftICAS Mexico's exports have exploded ander NAF-TA, quintupling to $292 billion in 2008, but Mexico is slill exporting people too, almost half a million each year, seeking opportwities in the United States that they do not have at home.4s

\AFTA: The goal of the North American Free Trade Agreement (NAFIA) between the United States, Canada, and Mexico was to bring faster growth, more jobs, better working conditions, and a cleaner environment for all as a result of increased exports and trade. This trading bloc- ''one America"-has 421 million consumers. Now, many years since the 1993 agreement, the debate continues about the extent to which those goals have been accomplished. That perspec- t.ive varies, of course, among the three NAFTA countries and also varies according to how it has affected individual business tirms and employees in various parts of those countries. The Canada-United States trade is the largest bilateral flow between two countries. In addition, the vast majority-around 84 percent-of both Canadian and Mexican exports goes to the United States. From Mexico's perspective, the country's exports have exploded under NAFTA, quintupling to 5292 billion in 2008, but Mexico is still exporting people too, almost half a million each year, seeking opportunities in the United States that they do not have at home, in particular because MNCs displaced farming. However, Mexico's dependence on the United States for its exports-NAFTA's greatest success-has become a liability, as Mexico feels the full brunt of declining consumption in the United States. The auto industry, for example, which has flourished underNAFTA, ground to a virtual standstill early 2009. Mexican auto expofis fell more than 50 percent in the first two months of 2009 compared with 2008, and production dropped almost 45 percent. In addition, since NAFTA attracted so many multinationals, which, in turn sourced parts from its own suppliers, Mexico's domestic industries were severely cur- tailed. Overall, many feel that attracting MNCs was short-sighted for an overall strategy-in particular because their low wages have perpetuated poverty and therefore also low purchasing power, thus weakening the economy. "Economic growth has averaged about 3 percent a year since NAFIA took et-fect, far below what is needed to create jobs for the miilion young people who enter the work force each year and the millions more who barely scrape by."a6

However, some changes for Mexico in those years are not debatable, whether or not they all are attributable to the NAFTA. Mexican trade policy is among the most open in the world, and Mexico has become an important exporling and importing power. While the Mexican economic cycles are very dependent on American economic behavior, she has signed 12 trade agrcements with 43 nations, putting 90 percent of its trade under fiee trade regulations; the latest agreement was made with Japan in2AA5.a7

The trade agreements have lesulted in an increase in GDP from 9403 billion in 1993 to $893.4 billion in 20O'r,, with exports of $213.4 billion.aB Mexico's 3.3 percent GDP growth in 2007 also included an increase in remittances by migrants-those contributions made by Mexicans living abroad both legally and illegally, mostly in the United States, to their families at home in Mexico; they comprised $18 billion in 2005, up from $2.4 billion in 1994.4e Recent competition from China for offshored jobs liom foreign firms has put downward pressure on opportunities for Mexico, as manufacturing f'acilities and some service facilities migrate fiom Mexico to China in a race for the lowest cost operations.sO

CAFTA: Modeled atier the NAFTA agreement, the goal of the U.S.-Central America Free Trade Agreement (CAF?IA) was to promote trade liberalization between the United States and five Central American countries: Costa Rica, El Salvador, Guatemala, Honduras, and Nicalagua. In2A04, the Dominican Republic joined the negotiations, and the agreement was renamed DR-CAFTA. The treaty must be approved by the U.S. Congress and by National

Assessing the Environment 15

16 Part 1 " The Clobal Manager's Environment

Assemblies in the Central American countries before it becomes iaw. CAFTA is considered to be a stepping-stone to the larger Free Trade Area of the Americas (FTAA) that would encom- pass 34 economies, but which has met with considerable resistance.5i

MERCOSUR is the fourth largest trading bloc after the EU, NAFTA and ASEAN. Established in 1991, it comprises the originai parties-Brazil, Argentina, Paraguay, and Uruguay; Venezuela is an applicant country awaiting ratification, This regional trading bloc comprises 250 million people and accounts for 75 percent of South America's GDP.

OTHER REGIONS lf{ Tl{E WORTD Sweeping political, economic, and social changes around the wodd present new challenges to global managers. The worldwide move away from communism, together with the trend toward privatization, has had an enornous influence on the world economy. Economic freedom is a critical tactor in the relative wealth of nations.

One of the most striking changes today is that almost all nations have suddenly begun to develop decentralized, fi'ee market systems in order to manage a giobal economy of intense competition, the complexity of high-tech industrialization, and an awakening hunger for freedom.

The Russian Federation Foreign investment in Russia, as well as its consumers' climbing confidence and affluence, bode well for the economy. In the first quarter of 2009, for example, FDI into the Russian economy was about $8.4 billion.52 However, co{ruption and government interference persist:

The writittg has been on the wall for years. The Kremlin won't stop antil it has recouped control of all the energj- assets that were sold off at bargain pfices when the Ircn Curtain fell-and it tvill use any ftreQns necessary to achieve that goal.

INIEnr.ia.rroua.L HEna,lD ThtnuNE, Martle 20,2008.s3

Until recently, Russia has been regarded as more politically stable. New land, legal and labor

codes, as well as the now-convertible ruble have encouraged foreign fitms to take advantage of oppofiunities in that immense area, in particular the vast natural resources and the well-educated

population of 145 million. Moscow, in particular, is teeming with new construction sites, high-end cars, and new restaurants. Growth has been steady, but the real GDP growth for Russia is considered

to be controlled by the so-callecl business "oligarchs"-a small group of businesspeople with politi-

cal influence who capitalized on the privatization of Russia's economy and who limit competitive opportunities for small businesses. However, foreign investors became very wary.after the break up

of the Yukos oil group, including jailing its head Mikhail Khodorkovsky with an eight-year sentence; this made foreign investors reluctant to propose new deals that would require political

approval. About two dozen Russian companies have come under the control of the Kremlin in the

tait few years, including newspapers and banks.sa As an example, in September 2008, British

Petroleum had to make deep concessions to its Russian paltner in its TNK-BP oil joint venture in

order to avoid a forced sale of its assets there to a state company. BP had to agree to dismiss the

American chief executive of its joint venture and give up som" board seats to its Russian partners.s5

The Middle East. The United Arab Emirates is the most competitive economy in the Arab world among the countries at the third and most advanced stage of development according to The

Arab World Competitiveness Report 2OA7 by the World Economic Forum. It is followed by Qatar and Kuwait. Among countries at the second stage of development, Tunisia and Oman are the best

performing Arab econornies while Egypt is the regional best performer in the third group of counrries. The Forum predicted there will be prosperity with challenges for the Middle East:

Oit afld gas revenues provide unique irwestment opportunities, but the region's greatest challenges are likely to be in managing expectations, lotvering trcde and

investment barrters and educating the next generation to handle the wealth thqt is

now being produced. Education is the biggest challenge'56

Developing Economies are characterized by change that has come about more slowly as they

struggle with low gross national product (GNP) and low per capita income, as well as the burdens

of large, relatively unskilled populations and high international debt, Their economic situation and

the often-unacceptable level of government intervention discourage the foreign investment they

20 Part I . The Global Manager's Environment

EX$fi&FT t-3 An Open Systems Model

NrEGA ENYlRotygr",

&NC-Hosr-Country /nterdependence

The frl*baE Manager's R$ie

Whatever your level of involvement, it is important to understand the giobal business envi- ronment and its influence on the manager's role. This complex role demancls a contingency approach to dynamic environments, each of which has its own unique requirements. Within the larger context of global trends and competition, the ruies of the game f or the giobai manager are set by each country (see Exhibit 1-3): its political and economic agenda, its technological status and level of development, its regulatory environment, its compar-ative and competitive advantages, and its culturai norms. Thc astute rnanager will analyze fhe new environment, anticipate how it may affect the future of the company, and then clevelop appropriate strategies and operating styles.

YF{E PSLITICAL AruP EE*ruSHEtE ENV'ROIUfUETT Proactive globally-oriented firms maintain an up-to-date profile of the political and economic environment of the countries in which they maintain operations (or have pians tbr future invest- ment). Su|veys of top executives around the world show that Sustainabitity-economic, political, social, and environmental-has become a significant worldwide issue. Executives who recognize that {'act are leading their companies to develop new policies and to invest in sustainability projects with the purpose of benefiting the environrnent as well as profitability.72 Arnong the strategic and operational risks reported by global companies are government regulation, country financial risks and currency risk and politicai and social disturbances. These concerns and other risks, as reported by those companies, are shown in Exhibit I -4.

An important aspect of the political environment is the phenomenon of ethnicity- a driving force behind political instabiiity around the world. In fact, many uprisings ancl conflicts that are thought to be political in nature are actually expressions of diff'erences among ethnic groupings. Often, religious disputes lie at the heart of those difl'erences. Uprisings based on religion operate either in conjunction with ethnic differences (as probalrly was the case in the fbrmer Yugoslavia) or as separate from them (as in Norlhern Ireland). Many terrorisl activities

Chapter I . Assessing the Environment

EXHIBIT 1-4 Greatest Risks affecting FDI Decisions. As Reported by Global Companies

Government regulofion

Country Iinonciol risk

Currency risk

Politicol ond sociol disfurbonces

Absence of rule of low

Disruption of key supplier, customer or portner

Corporote governonce issues

Security threots lo employees or ossels

Terrorist ofocks

Product quolity or sofoiy problems

Thelt of intellectuol properiy

lT disruption

Employee {roud or sobotoge

Noturol disosters

Activist qfiocks on globol or corporotge bronds

Oyo 10% ?07" 307" 40% 50% 6W" 707"8Q7" Source: www.atkearney.com, September 12, 2008. Copyright A. T. Kearney, lnc., 2007. All rights reserved. Reprinted with permission.

are also based on religious differences, as in the Middle East. Managers must understand the ethnic and religious composition of the host country in order to anticipate problems of general instability, as well as those of an operationai nature, such as effects on the workf'orce, on pro- duciion and access to raw materials, and on the market. For example, consider the following:

In Pakistan one must underst{tnd the dffirences betweeft Punjabi and Sindi. In Malaysia it is essential to recogttize the special economic relationship between Chinese and Mala.v. In the Philippines it is impoftant to undenstand the significant and learl financial role played by the Filipino-Chinese.13

Political Risk

As shown in the example below, firms operating in some countdes are exposed to political risks that can drastically affect them with little warning:

Venezuela will take contrcl of cement plants and ffices belonging to Mexico's Cemex as of ntidnight Monday night (August 18, 2008) afier failing to rcach an agreement in nntionalization talks, the govemment said. The exptopiation is paft of a dive by il1s socialist president, Huga Chdvez, ta place key industies under state contrcl.14

WWW.BUSINESSWEEK.COM,

Attgust 19,2008.

In another example, Bolivian President Evo Morales' move to nationalize the national gas indus- try followed that in Venezuela, where Mr. Chavez, in a move against Big Oil, forced major oil companies to accept a minority stake in fields that they had owned, also giving more money for higher taxes and royalties.Ts

The managers of a global firm need to investigate the political risks to which they expose their company in certain countries-and the implications of those risks for the economic success of the firm. Political risks are any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm. The Middle East, as we have seen, has traditionally been an unstable area where political risk heavily influences business decisions.

Nationalization in unstable areas, multinational corporations weigh the risks of national- ization or expropriation, as in Bolivia and Venezuela in the examples previously cited. Nationalization refers to the forced sale of an MNC's assets to local buyers, with some com- pensation to the firm, perhaps leaving a minority ownership with the MNC. As the fallout from the financial meltdown spread around the world in 2009, government moves to take stakes in

21

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zz Part 1 . The Global Manager's Environment

ailing industries was verging on partial or f'ull nationalization-though for the most part not forced. Japan, for example, was taking the cue from the United States in taking majority stakes in major banks, while in Russia, The Kremlin was exploiting the economic crisis to establish more control over industries such as energy that it has long coveted.T6

In Europe, nationalist impulses gathered storm in 2009, with many politicians arguing-as in the United States-thal if the government is going to bail out banks, then taxpayers should get some ownership and some say in how they operate. For instance, few banks expanded more rapidly in Germany over the last decade than Royal Bank of Scotland. "The British financier muscled onto Continental turf with attractive financing packages for German manufacturers. Today, Royal Bank is majority-owned by the British government after losses in 2008 from f,7 billion to f8 billion, or $9.2 billion to $10.5 billion."77

Expropriation occurs when a iocal government seizes and provides inadequate com- pensation for the foreign-owned assets of an MNC; when no compensation is provided, it is confiscation. In countries that have a proven history ofstability and consistency, the political risk to a multinational corporation is relatively low. The risk of expropriation is highest in counh'ies that expefience continuous political upheaval, vioience, and change, as evidenced by actions such as that by Hugo Chavez in his continuing drive to piace key industries under state control, as shown in the previous quote when he took conffol of Mexico's Cemex cement plants in Venezuela.

Although political r'isk is typicaily higher in emerging markets, it is also evident in devel- oped econornies. Dubai Ports World found this when its bid in 2006 to manage six American ports for the British owner, P&O, met with such opposition in the U.S. Congress that it withdrew jlshid. Ihe C.h:^ne-se-Natjcrnal Offshore Oil Compaqv (CNOOC) ran into similar opposition when it tried unsuccessfully to buy Unocal, the American oil company.

An event that affects all foreign firms doing business in a country or region is called a maeropolitical risk event. In the Middle East, Iraq's invasion of Kuwait in 1990 abruptly halted all international business with and within both of those countries and caught businesses wholly unprepared.

In many regions, termrism poses a severe and random political risk to company personnel and assets and can, obviously, interupt the conduct of business. According to Micklous, tenodsm is 'othe use, or tfueat of use, of anxiety-inducing . . . violence for ideological or political putposes."78 The increasing incidence of terrorism around the world concerns MNCs. In particular, the kidnapping of business execuiives has become quite common.

An event that affects one industry or company or only a few companies is called a micropolitical risk event, Such events have become more common than macropolitical risk events. Such micro action is often called "creeping expropriation," indicating a government's gradual and subtle action against foreign firms. This is a situation when you haven't been expro- priated, but it takes ten times longer to do anything. Typically, such continuing problems with an investment present more difficulty tor foreign firms than do major events that are insurable b1 political-risk insurers. The following list describes seven typical political risk events commor today (and possible in the future):

1. Expropriation of corporate assets without prompt and adequate compensation 2. Forced sale ofequity to host-country nationals, usually at or below depreciated book valut 3. Discriminatory treatment against foreign firms in the application of regulations or laws 4. Barriers to repatriation of funds (profits or equity) 5. Loss of technology or other intellectual property (such as patents, trademalks, or trade names 6. Interference in managerial decision making 7. Dishonesty by government officials, including canceling or altering contractual agree

ments, extortion demands, and so forth.79

Politicat Risk Assessment

International companies must conduct some form of political risk assessment to manage thei exposure to risk and to minimize financial losses. Typically, local managers in each countrl assess potentially destabilizing issues and evaluate their future impact on their company, makini

suggestions for dealing with possible problems. Corporate advisers then establish guidelines fo each local manager to follow in handling these problems. Dow Chemical has a program in whicl it uses line managers trained in political and economic analysis, as well as executives in foreig; subsidiaries, to provide risk analyses ofeach country.

Chapter I

Risk assessment by rnultinational corporations usually takes two forms. One uses experts or consultants familiar with the country or region under consideration. Such consultants, advisers, and committees usually monitor important trends that may portend political change, such as the development of opposition or destabilizing political parties. They then assess the likelihood of political change and develop several plausible scenarios to describe possible future political conditions.

A second and increasingly common means of political risk assessment used by MNCs is the development of internal staff and in-house capabilities. This type of assessment may be accomplished by having staff assigned to foreign subsidiaries, by havrng affiliates monitor local political activities, or by hiring people with expertise in the political and economic conditions in regions critical to the firm's operations. Frequently, all means are used. The focus must be on monitoring political issues before they become headlines; the ability to minimize the negative effects on the firm-or to be the first to take advantage of opportunities-is greatly reduced once a major media source, such as CNN, has put out the news.

No matter how sophisticated the methods of political risk assessment become, nothing can replace timely information from people on the fi'ont line. In other words, sophisticated tech- niques and consultations are useful as an addition to, but not as a substitute for, the line managers in fbreign subsidiaries, many of whom are host-country nationals. These managers represent the most important resource for current information on the political environment, and how it might affect their firm, because they are uniqueiy situated at the meeting point of the firm and the irost country. Prudent MNCs, however, weigh the subjectivity of these managers' assessments and also realize that similar events will have different effects from one country to another.

In addition to assessing the political risk facing a firm, alert managers also examine the specific types of impact that such risks may have on the company. For an autonomous inter- national subsidiary, most of the impact from political risks (nationalization, terrorism) will be at the level of the ownership and control of the firm because its acquisition by the host country would provide the stafe with a fully operational business. For giobal firms, the primary risks are likely to be from resirictions (on imports, exports, currency, and so forth), with the impact at the level of the firm's transfers (or exchanges) of money, products, or component pafis.

lkTanaging Fclitieal Rlsk

After assessing the potential political risk of investing or maintaining curent operations in a coun- try, managers face perplexing decisions on how to manage that risk. On one level, they can decide to suspend their frm's dealings with a certain country at a given point----either by the avoidance of investment or by the withdrawal of current investment (by selling or abandoning plants and assets). On another level, if they decide that the risk is relatively low in a particular country or that a high- risk environment is worth the potential returns, they may choose to start (or maintain) operations there and to accommodate that risk through adaptation to tha political regulatory environmenf . That adaptation can take many forms, each designed to respond to the concerns of a particular local area. Some means of adaptation suggested by Taoka and Beeman are as follows:

1. Equity sharing includes the initiation ofjoint ventures with nationals (individuals or those in firms, labor unions, or government) to reduce political risks.

2. Panicipative management requires that the firm actively involve nationals, including those in labclr organizations or government, in the management of the subsidiary.

3. Localization of the operation includes the modif,rcation of the subsidiary's name, mana- gement style, and so forth, to suit local tastes. Localization seeks to transfbrm the subsidiary trom a foreign firm to a national firm.

4. Development assistance includes the firm's active involvement in inliastructure develop- ment (foreign-exchange generation, local sourcing of materials or parts, management training, technology transf'er, securing external debt, and so forth).80

In addition to avoidance and adaptation, two other means of risk reduction available to managers are dependency and hedging. Some means that managers might use to maintain dependency-keeping the subsidialy and the host nation dependeni on the parent corporation- are as follows;

1. Input control means that the firm maintains control over key inputs, such as raw materials, components, technology, and know-how.

Assessing the Environment 23

24 Part I . The Global Manager's Environment

2. Market control requires that the firm keep control of the means of distritrution (fo instance, by only manufacturing components for the parent firm or iegally blocking saie outside the host country).

3. Position controi involves keeping certain key subsidiary management positions in thr hands of expatriate or home-office managers.

4. Staged contribution strategies mean that the firm plans to increase, in each successive year the subsidiary's contributions to the host nation (in the form of tax revenues, jobs, infra structure development, hard-currency generation, and so forth), For this strategy to br most effective, the firm must infom the host nation of fhese projected contributions as ar incentive.Sl

Finally, even if the company cannot diminish or change political risks, it can minimize tht losses associated with these events by hedging. Some means of hedging are as follows:

1. Political risk insurance is offered by most industrialized countries. In the United States, thr Overseas Private Investment Corporation (OPIC) provides coverage for new investment in projects in friendly, less developed countries. Insurance minimizes losses arising fron specific risks-such as the inability to repatriate profits, expropriation, nationalization, o confiscation-and from damage as a result of war, terrodsm, and so forth.s2 The Foreigr Credit Insurance Association (FCIA) also covers political risks caused by war, revolution cun€ncy inconvertibility, and the cancellation of impor"t or export licenses. Howeveq polit ical risk insurance covers only the loss of a firm's assets, not the loss of revenue resultin; from expropriation.S3

2. Local debt financing (money borowed in the host country), where available, helps a firn hedge against being forced out of operation without adequate compensation. In sucl instances, the firm withholds debt repayment in lieu of sufficient compensaiion for it business losses.

Multinational corporations also manage political risk through their global strategil choices. Many large companies diversify their operations both by investing in many counnie and by operating through joint ventures with a local firm or government or through loca licensees. By involving local people, companies, and agencies, firms minimize the risk of nega tive outcomes due to politicai events. (See Chapters 6 and 7 for further discussion of these anr other global strategies.)

Managing Terrorism Risk

No longer is the risk of terrorism for global businesses focused only on certain areas such a South America or the Middle East. That risk now has to be considered in countries such as th United States, which had previously been regarded as safe. Eighty countries lost citizens in th World Trade Center attack on September 11, 2001. Many companies from Asia and Europe ha, office branches in the towers of the Wodd Trade Center; most of those offices, along with th employees from those countries, were destroyed in the attack. Thousands of lives and billions c dollars were lost, not only by those immediately affected by the attack but also by countles small and large businesses impacted by the ripple effect; global airlines and financial market were devastated.

As incidents of terrorism accelerate around the world, many companies are increasingl aware of the need to manage the risk of terorism. In high-risk countries, both IBM and Exxo try to develop a benevolent image through charitable contributions to the local communitl They also try to maintain low profiles and minimize publicity in the host countries by using, fc example, discreet corporate signs at company sites.s4

Some companies have put together teams to monitor the patterns of terrorism around th world. Kidnappings are comrnon in Latin America (as a means of raising money for politicr activities). in the Middle East, airplane hijackings, kidnapping of foreigners, and blackmail (fc the release of political prisoners) are common. In Western Europe, terodsts typicatly aim bomb at U.S.-owned banks and computer companies. Almost all MNCs have stepped up their secudt measures abroad, hiring consultants in countertenorism (to train employees to cope with th tkeat of terrorism) and advising their employees to avoid U.S. aidines when flying overseas. Fc many firms, however, the opportunities outweigh the threats, even in high-risk areas.

Chapter I . Assessing the Environment

marketing, finance, or some other aspect of business. Often, a decision regarding the level of technology transf'er is dominated by the host govemment's regulations or requirements. In some instances, the host country may require that foreign investors import only their most modern machinery and methods so that the local area may benefit from new technology. In other cases, ihe host country rnay insist that foreign companies use only labor-intensive processes, which can help to reduce high unemployment in an area.

When the choice is left to international managers, experts in economic development recommend that managers make informecl choices about appropriate technology. T'he choice of technology may be capital intensive, labor intensive, or intermediate, but the key is that it should suit the level of development in the area and the needs and expectations of the people who rvill use it.

Global E-Business

Without doubt, the Internet has had a considerable impact on how companies buy and sell goods around the world-mostly raw materials and services going to manufacturers. Internet-based electronic trading and data exchange are changing the way companies do business, while breaking down global barriers of time, space, logistics, and culture. HoweveE the Internet is not totally open; governments still make sure that their laws are obeyed in cyberspace. This was evidenced when France f'orced Yahoo! to stop displaying Nazi trinkets for sale where French people couid view them.e2 The reality is that

Dffircnt nstions, and dffirent peoples, nwy htant a dffirent kiild of Interttel-one whose language, content and norms confurm more closell, to their own.

FtN.qNcra,t Tinass,

May 17,20A6.e3

There is no doubt, however, that the Internet has introduced a new level of global com- petition by providing efficiencies through reducing numbers of suppliers and slashing administration costs throughout the value chain. E'business is "the integration of systems, processes, organizations, value chains, and entire markets using Internet-based and related technologies and concepts."94 E-commerce ref'ers directly to the marketing and sales process via the Internet. Firms use e-business to help build new relationships between businesses and customers.95 The Internet and e-business provide a number of uses and advantages in global business, including the following:

1. Convenience in conducting business worldwide; facilitating communicaiion across borders contributes to the shift toward globalization and a global market.

2. An electronic meeting and trading place, which adds efficiency in conducting business sales. 3. A corporate Intranet service, merging internal and external information for enlerprises

worldwide. 4. Power [o consumers as they gain access to limitless options and price differentials. 5. A link and efficiency in distribution.e6

Although lnost early attention was on e-commerce, experts now believe the real oppor- tunities are in business-to-business (B2B) transaetions. In addition, while the scope, complexity, and sheer speed of the B2B phenomenon, including e-marketplaces, have global executives scrambling to assess the impact and their own cotnpetitive roles, esiimates for growth in the e-business marketplace nay have been overzealous because of the global economic slowdown and its resultant dampening of corporate IT spending. While we hear mostly about large companies embracing B2B, it is noteworthy that a large proportion of cun'ent and projected B2B use is by small and medium-sized firms, for thlee common pur- poses: supply chain, procurement, and distribution channel.

A successful Intelnet strategy-especially on a global scale-is, of course, not easy to create. Potential problems abound, as experienced by the European and U.S. companies surveyed by Forrester Research. Such problems include internal obstacles and politics, difficulties in regional coordination and in balancing global versus local e-commerce, and cultural differences. Such a large-scale change in organizing business clearly calls for absolute commitment from the iop, empowered employees witlt a willingness to experiment, and good internal communica- tions.97 Barriers to the adoption ancl progression of e-business arouncl the world include lack of

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30 Part I " The Global Manager's Environment

readiness of partners in the value chain, such as suppliers. If companies want to have an effective marketplace, they usually must invest in increasing their trading pafiners' readiness and their cus-

tomers' capabilities. Other baniers at€ cultural. In Europe, for example, "Europe's e-commerce excursion has been hindered by a laundry list of cultural and regulatory obstacles, like widely varying tax systems, language hurdles, and curency issues."98

In other areas of the world, bariers to creating global e-businesses include differences in physical, information, and payment infiastructure systems. In such countries, innovation is required to use local systems for implementing a Web strategy. In Japan, for example, vety few transactions are conducted using credit cards. Typically, bank transfers and COD are used to pay

for purchases. Also, many Japanese use convenience stores, such as 7-Eleven Japan, to pay for their online purchases by choosing that option online.ge

For these reasons, B2B e-business is likely to expand globally faster than BZC (business- to-consumer) transactions. In addition, consumer e-commelre depends on each country's level of access to computers and the Internet, as well as the relative elficiency of home delivery. Clearly, companies who want to go global through e-commerce must localize to globalize, which means much more than just presenting online content in local languages.

Localizing . . . also lneans recognizing and confornting to tlte naqnces, subtleties and tastes of multiple local cultures, as well as supporting transactians based on each cotuiry's currency, locctl connection speeds, pa1'ment prefetences, laws, taxes and tarffi.lw

In spite of various problems, use of the Internet to facilitate and improve global com- petitiveness continues to be explored and discovered. In the public sector in Europe, for example,

the European Commission advertises tender invitations online in order to transform the way public sector contracts are awarded, using the Internet to build a truly singie market.

It is clear that e-business is not only a new Web site on the Internet but also a soutce of significant strategic advantage. Hoping to caplure this strategic advantage, the European Airbus

venture-a public and private sectol combination-joined a global aerospace B2B exchange for aircraft parts. The exchange illustrates two major trends in global competition: (1) those of cooperative global alliances, even among competitors, to achieve synergies and (2) the use ol

technology to enable those connections and synergies.

corucluStoN A skillful global manager cannot develop a suitable strategic plan or consider an investment abroad without first assessing the environment-political, economic, legal, and technoiogical- in which the company will operate. This assessment should result not so much in a comparison of countries as in a comparison of ( 1 ) the relative risk and (2) the projected rsturn on investmentt

among these countries. Similarly, for ongoing operations, both the subsidiary manager anc headquarters management must continually monitor the environment for potentially unsettlinp

events or undesirable changes that may require the redirection ofcertain subsidiaries or the entire

company. Some of the critical factors affecting the global manager's environment (and therefore

requiring monitoring) are listed in Exhibit 1-5. Environmental risk, as discussed in this chapter, has become the new frontier in globa

business. The skills of companies and the measures taken to manage their exposure to environ' mental risk on a world scale will soon largely replace their ability to develop, produce, ant market global brands as the key element in global competitive advantage.

The pervasive role of cultule in international management will be discussed fully ir Part II, with a focus on how the managerial functions and the daily operations of a firm arr also affected by a subtle, but powerful, environmental factor in the host country-that o societal culture.

Chapter 2 presents some more subtie, but critical, factors in the global environment-thosr

of social responsibility and ethicai behavior. We wiil consider a variety of questions: What is th, role of the firm in the future of other societies and their people? What stakeholders nus managers consider in their strategic and operational decisions in other countries? How do th, expectations of firm behavior vary around the world, and should those expectations influenc, the international manager's decisions? What role does long-term global economic inter dependence play in the firm's actions in other countries?