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INTERNATIONAL BUSINESS – FINAL NOTES
Name: Benjamin D Eyison Date:18th July 2013
Ch.3 – The Political and Legal Environments Facing Business
Lecture 6: October 28th
, 2010
KEY CONCEPTS:
Defition of Legal System: The mechanism for creating, interpreting, and enforcing the laws
in a specified jurisdiction.
Modern legal systems exhibit elements of constitutional law, criminal law, and civil and
commercial laws. Constitutional Law: sets the framework for the system of government
and defines the authority and procedure of political bodies to establish laws and regulations.
Criminal Law: safeguards society by specifying what conduct is criminal and prescribing
punishment to those who breach these standards. Civil and Commercial Laws: ensures
fairness and efficiency in business transactions.
For example, the US & UK have a common law system
Includes institutions and procedures to:
o ensure law & order
o Resolve disputes
o Protect property (including intellectual property)
o Tax economic output
Types:
o Common law: is a legal system of jurisprudence based on judicial precedents. Also,
it is based on tradition, judge-made precedent, and usage.
o Civil law: is a legal system of jurisprudence based on statutory laws. Also, it is based
on the systematic codification of laws and codes.
o Theocratic law: is a legal system of jurisprudence based on religious teachings. It
relies on religious doctrine, precepts, and beliefs to define the legal environment.
o Customary law: is based on norms of behavior practiced over a long period. Also, it
is anchored in the wisdom of daily experience.
o Mixed systems: emerges when a nation uses two or more of the preceding legal
systems.
• Rule of Man - ultimate power resides in a person.
• Rule of Law - institutes a just political and social environment, guarantees the enforceability
of commercial contracts and business transactions, and safeguards personal property and
individual freedom. The rule of law holds that no individual is above laws that are clearly
specified, commonly understood, and fairly enforced.
o Level playing field for all
o Predictable and consistent application of laws
o Transparency
o Generally respected by public
Extraterritoriality: the extension of national laws beyond the home country
1. Means that companies from that country must abide certain rules no matter where they
operate
Example: US nationals and Iran
Example: proposed Canadian legislation on mining companies
2. Depending on the law, may even catch those who have no connection to home country
Example: Helms-Burton Act in US and effect on Sherritt International
Example: US Alien Tort Claims Act
Corruption:
Illegal in all countries, but may not be enforced
Numerous international agreements and laws
Can harm business in numerous ways
Example: Siemens
Example: BAE and Saudi Arabia
-----------------------------------------------------------
Lecture 7: November 04th
, 2010
POLITICS:
Political system – structural dimensions & power dynamics of prevailing government. The
fundamental goal of a political system is to integrate different groups into a functioning, self-
sustaining, and self-governing society. The test of a political system: uniting a society in the
face of divisive viewpoints. Success supports peace and prosperity. Failure leads to
instability, insurrection, and, ultimately, national disintegration.
Individualism – rights, self-expression, and freedom – tied to democracy. Individualism
refers to the primacy of the rights and role of the individual. The principle that all men have
―certain unalienable Rights that among these are Life, Liberty, and the pursuit of Happiness.‖
The business implications of individualism hold that each person commands the right to
make economic decisions largely free of rules and regulations. Countries with an
individualistic orientation shape their marketplace with the idea of laissez-faire meaning
―leave things alone‖!
Collectivism refers to the primacy of the rights and role of the group. This doctrine
emphasizes the primacy of the collective – whether it is a group, party, class, society, nation,
race, etc. – over the interest of the individual. Collectivism in the business world holds that
the ownership of assets, the structure of industries, the conduct of companies, and the actions
of managers must improve the welfare of society.
Totalitarianism – single agent monopolizes political power. A totalitarian system
subordinates the individual to the interests of the collective. A single agent in whatever form
– such as an individual, an assembly, a committee, a junta, or a party – monopolizes political
power. Types of totalitarian systems include: Authoritarianism: the regime tolerates no
deviation from state ideology, Fascism: the control of people‘s minds, souls, and daily
existence and a social and political ideology with the primary guiding principle that the state
or nation is the highest priority, rather than personal or individual freedoms., Secular
totalitarianism: a single political party forms a government in which only party members
hold office, elections are controlled through unfair laws, dissent is tolerated as long as it does
not challenge the state, and organized religions, Theocratic totalitarianism: Under this
system, government is an expression of the preferred deity, with leaders often claiming to
represent the deity‘s interests on earth. Example, Taliban and Iran clergy.
POLITICAL RISK: Political Risk – is defined as as the potential loss arising from a
change in government policy. More precisely, political risk is the likelihood that political
decisions, events, or conditions will affect a country‘s business environment in ways that will
cost investors some or all of the value of their investment or force them to accept lower rates
of return. The global economic crisis had increase political risk in the world. The primary
types of political risk, from least to most disruptive, are: Systematic, Procedural, Distributive,
and Catastrophic. Distributive – Distributive political risk is creeping expropriation,
increased taxes on profits, elimination of foreign companies‘ local property rights.
Catastrophic – Catastrophic political risk can devastate companies and countries. It disrupts
the business environment in a way that affects every firm in the country. If such disruptions
spiral out of control, they devastate companies and countries.
OPERATIONAL CONCERNS:
The Rules of the Game -
Getting Started: Starting a business involves many legal activities: registering its
name, choosing the appropriate tax structure, getting licenses and permits, arranging
credit, and securing insurance. For example, starting a business is a straightforward
process in Australia, requiring one registration procedure that encompasses tax, labor,
and administrative declaration. Whereas in Africa, 75 days in Chad.
Making and Enforcing Contracts: Once up and running, managers turn to entering
and enforcing contracts with buyers and sellers. A contract is a binding legal
agreement that formally exchanges promises, the breach of which triggers legal
proceedings.
Hiring and Firing: No matter where you are operating, you will have to hire and,
when necessary, fire workers. Many countries have flexible firing rules; however
some have very robust rules. Necessary terminations are extremely difficult to
execute and often involve extensive negotiations and settlements. Companies think
twice, 10 times, before they hire new people (Hero Group)!
Bankruptcy / Closing Business: Finally, some countries make the task of closing a
business difficult.
General Relations (table 3.4): Singapore, New Zealand, Hong Kong, U.S. UK are
rated among the top 5 best place to conduct international business. They‘re all
democratic political system, a common or civil-law legal system, and a doctrine of
the rule of law. In contrast, the majority of bottom-ranked countries have a totalitarian
political system, a mixed legal system, and a doctrine of the rule of man.
STRATEGIC CONCERNS: Operating concerns focus managers‘ attention on day-to-day
operations. Strategic concerns shift managers‘ attention to long-term issues.
Marketplace Behavior (antitrust) – National laws determine permissible practices in all
forms of business activities, including sourcing, distributing, advertising, and pricing
products. Hence, countries permit and prohibit activities that then spur companies to
adjust their manufacturing configuration, their supply chain coordination, and their
marketing strategy. In France, the legal system regulates when transport trucks can use
motorways (non on Sundays) or when shops can hold sales (twice a year, on dates set by
government officials).
Country of Origin: National laws affect the flow of products across borders. To
determine charges for the right to import a product, host governments devise laws that
consider the product‘s country of origin, namely the country of manufacture, production,
or growth where a product comes from. The global credit crisis and its implications to
jobs have made issues of country of origin and local content regulation increasingly
provocative themes of political debate.
Product Safety and Liability: International companies often customize products to
comply with local standards. Often, these standards differ due to cultural values or social
norms; companies then adapt the product to boost its appeal to local consumers.
Legal Jurisdiction: Countries stipulate laws that set the criteria for litigation when
agents – whether legal residents of the same or of different countries – are unable to
resolve a dispute.
Arbitration: Increasingly, companies choose to resolve disputes by means of arbitration,
whereby both parties agree on an impartial third party to settle the matter.
INTELLECTUAL PROPERTY RIGHTS:
Intellectual property rights refer to the right to control and derive the benefits from writing
(copyright), inventions (patents), processes (trade secrets), and identifiers (trademarks).
Creative ideas, innovative expertise, intangible insights that give individual, company or
country a competitive edge
IP Rights – registered owner of copyright has legal right to decide who may copy or use the
IP for another purpose
- Legally enforceable monopoly granted by country to innovator
- Confers no protection in foreign country
- Incentive to innovate in developed countries
Contra collectivist orientation
Inflates price
May result in people needing the product unable to afford it
Ch.8 – Cross-National Cooperation and Agreements
Lecture 6: October 28th
, 2010
International Trade – Institutions:
• GATT & WTO
o Governments often actively cooperate with each other to remove trade barriers. World
Trade Organization (WTO): A voluntary organization through which groups of
countries negotiate trading agreements and which has authority to oversee trade disputes
among countries. The World Trade Organization (WTO) deals with the rules of trade
between nations at a global or near-global level. But there is more to it than that. General
Agreement on Tariffs and Trade: A multilateral arrangement aimed at reducing
barriers to trade, both tariff and nontariff ones; at the signing of the Uruguay round, the
GATT was designated to become the World Trade Organization (WTO).
o ―Global trading regime‖
o Rules-based system
o 1948 – 1995: General Agreement on Tariffs and Trade (GATT). GATT was formed in
1947 and was replaced by WTO in 1995.
‗provisional‘ agreement – failed attempt to create an ―International Trade
Organization‖ in 1948
o 1995-Present: World Trade Organization (WTO)
o Currently 153 members
INTERNATIONAL TRADE - PRINCIPLES:
Key Principles
The trading system should be:
Without discrimination: The fundamental principle of GATT was that each member
nation must open its markets equally to every other member nation; any sort of
discrimination was prohibited. The principle of ―trade without discrimination‖ was
embodied in GATT‘s most-favoured nation (MFN) nation below.
Freer
Predictable
More competitive
More beneficial for less developed countries
Transparency
International Trade – Principles:
Without Discrimination
Most-Favoured Nation (MFN) Treatment:
- Under the WTO agreements, countries cannot normally discriminate between their trading
partners. Grant someone a special favour (such as a lower customs duty rate for one of their
products) and you have to do the same for all other WTO members.
- any special treatment or concessions granted to one trading partner must be extended to all
WTO members
- Ensures a uniform application of rules to all trading partners
National Treatment:
- Imported and locally-produced goods should be treated equally (once foreign goods have
entered the market)
- Extends the same treatment for foreign goods, services, etc. as for domestically-produced
goods, services, etc.
- Therefore, charging customs duty on an import is not a violation of national treatment
even if locally-produced products are not charged an equivalent tax.
- Principles are found in all three main WTO agreements (GATT, GATS, TRIPS)
Special and Differential Treatment
- The WTO Agreements contain provisions which give developing countries special rights,
called Special and Differential Treatment. The WTO Agreements contain special
provisions which give developing countries special rights and which give developed
countries the possibility to treat developing countries more favorably than other WTO
Members. These special provisions include, for example, longer time periods for
implementing Agreements and commitments or measures to increase trading
opportunities for developing countries.
- Not expected to liberalize to same extent as developed countries
- Often also not as fast
- Now a recognized principle in international law that is applied elsewhere (e.g. Kyoto
Protocol)
International Trade – Institutions:
European Union (EU):
- 27 member states
- Economic and political union
- European common or ―single‖ market for goods, people, services and capital
- Common currency in 16 member states
- Created its own institutions: European Commission, EU Central Bank, Council of
Europe, European Parliament
European Union (EU):
Council of Europe – heads of each EU state
Main decision-making body and led by permanent president (composed of the
heads of state of each member country)
European Commission – main executive body
Most EU countries get a commissioner and led by a permanent president. It
provides political leadership, drafts laws, and runs the various daily programs of
the EU.
European Parliament – directly elected. Three major responsibilities of the European
Parliament are legislative power, control over the budget, and supervision of executive
decisions.
Greek crisis reflects how EU project successful, but not necessarily complete. Greece
needs to pay off about €20-30 Billion in maturing debt between April and May. They
don‘t have it. Spain needs a similar amount in July. Portugal and some others will also
need to sell bonds over the coming months. No one wants to pay for Greece and other
PIIGS [Portugal, Ireland, Italy, Greece, Spain] mismanagement, corruption, tax dodging,
lack of economic dynamism. THEREFORE, the EU and PIIGS leaders best serve their
own interests by pretending but failing to achieve a rescue package for Greece, (using the
unstated but clear threat of a global economic crash to extract as much cash from the rest
of the world as possible). After months of prideful declarations that the EU could solve
its own problems, the sudden admission this past week by Germany that the IMF should
help save Greece (and by implication, the other PIIGS). The IMF is funded
internationally, the US being the biggest contributor by far. While EU leaders may not be
able to get away with short term painless money printing, the US sure can.
Sequence: Citizens, interest groups, experts: discuss, consult Commission: makes
formal proposal Parliament and Council of Ministers: decide jointly National or
local authorities: implement Commission and Court of Justice: monitor
implementation
International Trade – Institutions:
North American Free Trade Agreement (NAFTA)
- The NAFTA: includes Canada, the United States, and Mexico. Entered into force January
1, 1994. Involves free trade in goods, services, and investment. Is a large trading bloc but
includes countries of different sizes and wealth.
- NAFTA rationale: U.S.-Canadian trade is the largest bilateral trade in the world & the
United States is Mexico‘s and Canada‘s largest trading partner.
- NAFTA calls for the elimination of tariff and nontariff barriers, the harmonization of
trade rules, the liberalization of restrictions on services and foreign investment, the
enforcement of intellectual property rights, and a dispute settlement process.
- Supersedes Canada-US Free Trade Agreement
- First to include both developed and developing countries
- First agreement to have supplemental agreements on labour and environment
- Robust dispute settlement
- Labour mobility provisions
North American Free Trade Agreement (NAFTA)
Ch. 19 sets out dispute settlement provisions for binational panel review of anti-dumping
and countervailing duty cases
Ch. 20 sets out dispute settlement between countries over interpretation and
implementation of NAFTA
Ch. 11 sets out provisions for investors to sue governments over expropriation and other
adverse effects on investment
Numerous regional trade agreements
ASEAN: The Association of Southeast Asian Nation organized in 1967, is a
preferential trade agreement that comprises Brunei Darussalam, Cambodia, China,
Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and
Vietnam. Third largest and promotes cooperation in many areas, including industry and
trade.
MERCOSUR: The major trade group in South America. Established in 1991 by Brazil,
Argentina, Paraguay, and Uruguay. Its major goal is to become a customs union with
free trade within the bloc and a common external tariff. It generates 75% of South
America‘s GDP and 4th
largest trading bloc in the world after: EU, NAFTA, ASEAN.
CARICOM: Caribbean Community is working hard to establish an EU-style form of
collaboration, complete with full movement of goods and services, the right of
establishment, a common external tariff, free movement of capital, a common trade
policy, free movement of labour, and so on. The problem is the Caribbean rely heavily
on countries outside of the region for trade. For example, United States.
APEC: the Asia Pacific Economic Cooperation was formed in November 1989 to
promote multilateral economic cooperation in trade and investment in the Pacific Rim.
Composed of 21 countries; progress toward free trade is hampered by size and
geographic distance between member countries and the lack of a treaty.
Hundreds of bilateral agreements
International Trade – Controversies:
GATT and other trade agreements subject to much criticism and controversy
Softwood lumber and NAFTA: The dispute has had its biggest effect on British
Columbia, the major Canadian exporter of softwood lumber to the United States. The
heart of the dispute is the claim that the Canadian lumber industry is unfairly
subsidized by the federal and provincial governments. Specifically, most timber in
Canada is owned by provincial governments. The price charged to harvest the timber
(the "stumpage fee") is set administratively rather than through a competitive auction,
as is often the practice in the United States. The United States claims that the
provision of government timber at below market prices constitutes an unfair subsidy.
Under U.S. trade remedy laws, foreign goods benefiting from subsidies can be subject
to a countervailing duty tariff to offset the subsidy and bring the price of the product
back up to market rates. In April 2006, The United States and Canada announced that
they had reached a tentative settlement to end the current dispute. Under the
preliminary terms, the United States would lift duties provided lumber prices continue
to stay above a certain range.
HIV drugs in Africa
Cultural protections in Canada: Canada's copyright law stimulates cultural
production by ensuring that Canada's cultural creators and producers are compensated
for their work. While the Copyright Act protects the rights of cultural producers
within Canada, the Act is not enforceable outside Canada's borders. International
copyright conventions and treaties expand the rights of Canadian creators to the
territories of other member countries and include enforceable penalties for copyright
infringement.
Investor – state dispute settlement: provisions in international trade treaties grant
investors covered by provisions with a right to initiate dispute settlement proceedings
against foreign governments in their own right under international law. Under Ch. 11
of NAFTA Apotex Inc., a Canadian pharmaceuticals corporation, has alleged that
U.S. courts committed errors in interpreting federal law, and that such errors were in
violation of NAFTA. Apotex also alleged that the challenged U.S. court decision in
favour of the Pfizer drug company expropriated Apotex‘s investments in generic
versions of the antidepressant Zoloft under NAFTA Article 1110 as was manifestly
unjust.
Environmental concerns (dolphin-free tuna, turtles): This case still attracts a lot of
attention because of its implications for environmental disputes. It was handled under
the old GATT dispute settlement procedure. Key questions are: 1) Can one country
tell another what its environmental regulations should be? And 2) Do trade rules
permit action to be taken against the method used to produce goods (rather than the
quality of the goods themselves)? Conclusion: that the US could not embargo (ban)
imports of tuna products from Mexico simply because Mexican regulations on the
way tuna was produced did not satisfy US regulations. (But the US could apply its
regulations on the quality or content of the tuna imported.) This has become known as
a ―product‖ versus ―process‖ issue. Secondly, that GATT rules did not allow one
country to take trade action for the purpose of attempting to enforce its own domestic
laws in another country — even to protect animal health or exhaustible natural
resources. The term used here is ―extra-territoriality‖.
Agriculture in developing countries
Potash: The federal government rejected BHP Billiton Ltd.‘s proposed $40-billion
hostile takeover of Potash Corp. of Saskatchewan, Industry Minister Tony Clement
said on Wednesday, arguing the deal as constructed did not represent a ―net benefit‖
for Canada. BHP Billiton is the world's largest mining company, while Potash
Corporation controls more than 25% of the world's supply of potash fertiliser. BHP
said it had been unable to convince the government of the deal's merits despite
"unparalleled" pledges on jobs and investment The BBC's Lee Carter in Toronto said
that decision was taken for political reasons."The deal was completely opposed by
Potash Corp's home province of Saskatchewan, it was opposed by the majority of the
people of Saskatchewan and so given those odds, once the government here had
rejected the offer, no-one really expected it to go through."
Newer Issues:
Focus has moved from trade in goods to other issues
Trade in services – 4 ―modes‖: Trade in services statistics are economic statistics
which detail international trade in services. They received a great deal of focus at the
advent of services negotiations which took place under the Uruguay Round, which
became part of the General Agreement on Trade in Services, one of the four principal
pillars of the WTO trade treaty, also called the "WTO Agreement".
The GATS Four Modes of Supply comprises:
Mode 1 Cross border trade, which is defined as delivery of a service from
the territory of one country into the territory of other country;
Mode 2 Consumption abroad - this mode covers supply of a service of one
country to the service consumer of any other country;
Mode 3 Commercial presence - which covers services provided by a
service supplier of one country in the territory of any other country, i.e.
foreign direct investment undertaken by a service provider;
Mode 4 Presence of natural persons - which covers services provided by a
service supplier of one country through the presence of natural persons in
the territory another economy.
Investment
Government procurement: Government procurement, also called public
tendering or public procurement, is the procurement of goods and services on
behalf of a public authority, such as a government agency. With 10 to 15% of GDP in
developed countries, and up to 20% in developing countries, government
procurement accounts for a substantial part of the global economy.
Technical standards: Under WTO, Technical regulations and product standards may
vary from country to country. Having many different regulations and standards makes
life difficult for producers and exporters. If regulations are set arbitrarily, they could
be used as an excuse for protectionism. The Agreement on Technical Barriers to
Trade tries to ensure that regulations, standards, testing and certification procedures
do not create unnecessary obstacles.
Intellectual property: The WTO‘s Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS), negotiated in the 1986-94 Uruguay Round,
introduced intellectual property rules into the multilateral trading system for the first
time.
“Trade” and agenda
Trade facilitation: After several years of exploratory work, WTO Members formally
agreed to launch negotiations on trade facilitation in July 2004, on the basis of
modalities contained in Annex D of the so-called ―July package‖. Under this
mandate, Members are directed to clarify and improve GATT Article V (Freedom of
Transit), Article VIII (Fees and Formalities connected with Importation and
Exportation), and Article X (Publication and Administration of Trade Regulations).
The negotiations also aim to enhance technical assistance and capacity building in
this area and to improve effective cooperation between customs and other appropriate
authorities on trade facilitation and customs compliance issues.
Labour mobility
EMERGING ISSUES:
Currency/exchange rates
Government procurement
Seeking greater access
Protectionism
―Buy America‖
Climate change
Carbon tariffs: The West‘s next weapon in the fight against global warming may be a
carbon tariff on imports from the developing world, a strategy that could have a
profound impact on the global economy, a new report argues. Not only will new
charges for carbon emissions trim growth in developed countries, but carbon tariffs
could boost inflation and reverse the march toward offshoring as manufacturers who
have relocated to countries like China move to more energy-efficient environments
back home, CIBC World Markets said in a report released yesterday. You can‘t have
the OECD making a long-term commitment to decarbonize their economy and have
the developing world...rapidly carbonize their economies,‖
Privacy
Google and China
2000: A Chinese-language interface is developed for the google.com website
2006: Launch of China-based google.cn search page with censored results
Mar-Jun 2009: China blocks access to Google's YouTube site; access to other Google
online services is denied to users
Jan 2010: Jan 2010 Google announces it is no longer willing to censor searches in China
and may pull out of the country
Feb 2010: Hacking attacks on Google are traced to mainland China
March 2010: Google says it will re-route searches to its Hong Kong-based site
Impact of sub-national governments
Canada-US agreement on government procurement: On February 16, 2010 the
Agreement Between the Government of Canada and The Government of the United
States of America on Government Procurement (the Agreement) came into force. The
Agreement will allow Canadian companies greater access to procurement by
individual States and the U.S. Federal government. It will also provide them a waiver
from the ―Buy American‖ provision of the American Recovery and Reinvestment
Act of 2009 (ARRA) for procurements over minimum thresholds.
Ch.2 – The Cultural Environments Facing Business
Lecture 7: November 04
th, 2010
Culture:
Learned norms based on values, attitudes and beliefs of a group of people – is an integral part
of a nation‘s operating environment.
Factors:
Age
Gender
Ethnicity
Religion
Language
Need to understand, appreciate and incorporate culture to be successful in marketing,
projects, implementing new ideas, etc.
CULTURE DEFINITION:
Nation – people sharing certain attributes, e.g. values, language, race. The nation is a useful
definition of society because: similarity among people is a cause and an effect of national
boundaries & laws apply primarily along national lines. Managers find country-by-country
analysis difficult because: subcultures exist within nations and similarities link groups from
different countries.
Cultural value systems are set early in life but may change through: choice or imposition and
contact with other cultures. Change by choice may occur as a reaction to social and economic
situations that present people with new alternatives. Cultural Imperialism – imposed
introduction into a culture of certain elements of an alien culture, such as the forced change
in law by an occupying country, which over time, becomes part of the subject culture. As a
rule, contact among countries brings change – a process known as Cultural Diffusion. When
this change results in mixing cultural elements, the process is known as creolization.
Every culture values some people more highly than others, and such distinctions – or Social
Stratification – dictate a person‘s class within that culture. In business, this practice may
entail valuing members of managerial groups more highly than members of production
groups. Your ranking is determined by two sets of factors:
Those pertaining to you as an individual
Those pertaining to your affiliation or membership in certain groups
Commerce easier between countries with same language and culture
DIFFERENT SOCIETIES:
• ISSUES IN SOCIAL STRATIFICATION: Open (egalitarian) vs. Closed: The more
egalitarian, or ―open,‖ a society, the less the importance of ascribed group membership
(include those based on gender, family, age, caste, and ethnic, racial, or national origin) in
determining rewards. In less open societies, however, laws may be designed either to
reinforce or to undermine rigid stratification based on ascribed group membership (include
those based on religion, political affiliation, and professional other associations).
• WORK MOTIVATION: Materialism or Leisure as motivation - The desire for material
wealth is: a primary motivation to work; positive for economic development. Some cultures
place less value on leisure time than others. As a result, people in such cultures work longer
hours, take fewer holidays and vacations, and, in general, spend less time and money on
leisure activities. Among 30 OECD countries, France has the longest mandated vacation,
30days, and U.S. there is no mandated vacation. Performance and Achievement:
Masculinity – Femininity Index – compares the attitudes of employees in 50 countries
toward work and achievement. Employees with a high ―masculinity score‖ admired
successful work achievers, harbored little sympathy for the unfortunate, and preferred to be
between than other rather than on a par with them. Such attitudinal differences explain why
an international company may encounter managers abroad who behave differently from what
it expects or prefers. Let‘s say a company in a high-masculinity country, such as Austria, sets
up operations in a high-femininity country such as Sweden. The typical purchasing manager
in Sweden probably has a high need for smooth social relationships and prefers amiable and
continuing relationships with suppliers, to say, immediate lower costs or faster delivery.
• RELATIONSHIP PREFERENCES: Power Distance – refers to the general relationship
between superiors and subordinates. Where power distance is high, people prefer little
consultation between superiors and subordinates. Employee usually prefers one of two
management styles: autocratic (ruling with unlimited authority) or paternalistic (regulating
conduct by supplying needs). Where power distance is low, they prefer ―consultative‖ styles.
Individualism vs. Collectivism – Individualism is characterized by a preference for
fulfilling leisure time and improving skills outside the organization. It also implies a low
preference for receiving compensation in the form of benefits and a high preference for
personal decision making on-the-job challenges. Collectivism encourages dependence on the
organization and a preference for thorough training, satisfactory workplace conditions, and
good benefits. For example, Levi Strauss, which once introduced team-based production into
several U.S. plants because of high productivity overseas. However, in U.S. it proved to be a
failure.
• RISK-TAKING BEHAVIOUR: Nationalities differ in: ease of handling uncertainties,
degree of trust among people, future orientation, and attitudes of self-determination and
fatalism. Uncertainty Avoidance – In countries where uncertainty avoidance is high, most
employees prefer following set rules even if breaking them may be in the company‘s best
interests. They also plan to stay with current employers for a long time, preferring the
certainty of present positions over the uncertainty of potential advancement elsewhere. Be
highly precise in direction to subordinates. Not early adopters. Trust – where trust is higher,
cost of doing business is lower, because managers don‘t spend much time fussing over every
possible contingency and monitoring every action for compliance with certain business
principles. Instead, they can spend time producing, selling, and innovating. Fatalism (belief
every event in life is inevitable – less motivation to work) vs. Self-determination – willing to
work to achieve goals. If people believe strongly in self-determination, they may be willing
to work hard to achieve goals and take responsibility for performance. But, if they‘re
fatalistic – if they believe every event in life is inevitable – they‘re likely to accept the basic
cause-and-effect relationship between work and reward.
• INFORMATION AND TASK PROCESSING: Obtaining Information – Low Context
vs. High Context Culture – Researchers classify United States and most of northern Europe
as low-context cultures: cultures in which people generally regard as relevant only firsthand
information that bears directly on the subject at hand. In high-context cultures, people tend to
regard seemingly peripheral information as pertinent and to infer meanings from things said
either indirectly or casually. Information Processing: Monochronic vs. Polychronic
Cultures: Cultural differences also affect the degree of multitasking with which people are
comfortable. Monochronic – northern Europe people prefer to work sequentially, such as
finishing transactions with one customer before dealing with another. Polychronic –
southern European are more comfortable when working simultaneously on a variety of tasks,
such as dealing immediately with multiple customers who need service. Idealism versus
Pragmatism: Some cultures tend to focus first on the whole and then on the parts, others do
the opposite. Idealism – trying to determine principles before settling small issues.
Pragmatism – settling small issues before deciding on principles. In a culture of
pragmatism (as in the U.S.), for example, labor negotiations tend to focus on well-defined
issues – say, hourly pay increases for a specific bargaining unit. In the idealist culture like
that of Argentina, labor disputes tend to blur the focus on specific demands as workers tend
to rely first on mass action – such as general strikes or political activities – to publicize basic
principles.
• COMMUNICATIONS: Spoken & Written Communication – same phrase, expression,
symbol can have different meanings in different cultures
COMPANY AND MANAGEMENT ORIENTATIONS: Whether and how much a company
and its managers adapt to a foreign culture depends not only on the host-country culture but also
on their own attitudes. Polycentrism – A polycentric organization or individual tends to believe
that business units in different countries should act like local companies. Geocentrisim –
integrates company‘s practices, home country‘s practices & possibly new practices (adaptable).
Ethnocentrism – conviction that one‘s own culture is superior to that of other countries. In
international business, the term is usually applied to a company strongly committed to the
principle that what works at home will work abroad – so strongly committed that its overseas
practices tend to ignore differences in cultures and markets. Ethnocentrist management overlooks
national differences and: ignores important factors, believes home-country objectives should
prevail, and thinks change is easy. Can lead to failure (3 ways): Overlook important cultural
differences; Focus on home country objectives vs. foreign country‘s; and Firm underestimates
complexity of introducing new management methods, products, etc.
STRATEGIES FOR INSTITUTING CHANGE:
Value Systems: The more something contradicts our value system, the more difficulty
we have accepting it. In Eritrea, people eat a small amount of seafood compared with
people in a lot of other countries, and pursuing them to eat more seafood angers the
crowd and there is a religious taboo against eating fish without scales.
Cost-Benefit Analysis of Change: On each December 12, for example, U.S.-based
Cummins Engine shuts down its Mexican plant so workers may observe a religious
holiday. Moreover, Cummins hosts a celebration for employees and families that includes
a priest to offer the appropriate prayers. In this case, the cost to the employer is well
worth the resulting renewal of employee commitment.
Resistance to Too Much Change: When the German magazine publisher Gruner + Jahr
bought U.S.-based McCall‘s, it immediately overhauled the magazine‘s format resulting
in morale declines led to increased employee turnover and revenues also fell. It would
have been better if they obtained more employees and advertiser acceptance had it phased
in its plans for change a little more gradually.
Participation – discuss with stakeholders: One way to avoid problem like those
encountered by G+J is to discuss proposed changes with stakeholders (employees,
suppliers, customers, and the like) in advance.
Reward Sharing: Production workers, for example, may have little incentive to try new
work practices unless they see some more or less immediate benefit for themselves. What
can an employer do? It might develop bonus or profit-sharing programs based on the new
approach.
Opinion Leadership: For example, Ford wanted to instill U.S. production methods in a
Mexican plant, managers relied on Mexican production workers, rather than on either
Mexican or U.S. supervisors, to observe operations at U.S. Plant. What was the
advantage of this approach? The Mexican workers had more credibility than supervisors
with the Mexican employees who would have to implement the new methods.
Timing (when introduced): A proposed laborsaving production methods, for example,
might under many circumstances make employees nervous about losing their jobs no
matter how much management tries to reassure them. If however, the proposal is made
during a period of labor shortage, the firm is likely to encounter less fear and resistance.
Learning Abroad (using what learned elsewhere): Finally, as companies gain more
experience in overseas operations, they may learn as well as impart valuable knowledge –
knowledge that proves just as useful in the home country as in a host country.
Ch.11 – The Strategy of International Business
Lecture 8: November 11, 2010
COMPETITION AND INNOVATION:
Competition: when 2 or more entities (companies, countries, etc.) vie for limited
resources or markets
Competition drives innovation
Innovation drives competition
Impact of globalization on competition
Competition:
Some sources:
◦ Public and private sector
◦ Domestic and international competitors
◦ New entrants and established companies
◦ Developed and emerging competitors
Factors affecting degree of competition:
◦ Barriers to entry
◦ Barriers to exit
◦ Product life-cycle forces
Innovation & Technology:
Innovation: something new or different introduced
◦ Can be a product, a process or management
◦ Technology: application of practical sciences to industry or commerce
◦ Not necessarily about invention or gadgetry
◦ Productivity: the level of output from a given level of resources
◦ Innovation leads to improved productivity
Competition, Technology & Innovation:
Role of Intellectual Property
◦ Importance of strong legal protections
Driven by R&D
◦ Buy or develop technology?
◦ Innovations can be game changers or simple improvements
◦ Containerization
◦ Internet
◦ Zara (clothing)
◦ Apple (technology)
◦ E-reader
“If I’d asked my customers what they wanted, they’d have said a faster horse” - Henry Ford
- Innovate or perish!
◦ Nokia
◦ Microsoft
◦ Car industry
◦ Energy producers?
◦ Kodak
◦ Energy industry
Product life-cycles becoming shorter
Change today is rapid and constant
Reasons for Opposition:
Creates winners and losers
◦ Increasing polarization
Changes nature of jobs and work
◦ More high-tech, less factory work
◦ Increasing importance of education
Need for continual investment in capital improvements and infrastructure
◦ Company and country (regulatory environment, public goods)
Bottom line: Change creates unknown outcomes. People fear the unknown.
Global Structure & Strategy:
Strategies are how managers achieve the company‘s goals and objectives
How company decides to conduct business dependent on numerous factors
◦ Industry structure
◦ Political factors
◦ Economic factors
◦ What rivals are doing – likely biggest factor
Going international is one way to conduct business and achieve company‘s goals
Critical that companies/managers plan their international moves and consider pros &
cons
WHAT IS THE VALUE CHAIN?
The set of linked value-creating activities the company performs to design, produce, market,
distribute and support a product. In practice, the value chain is a straightforward framework
that lets managers deconstruct the general idea of ―create value‖ into a step-by-step system.
Value-chain analysis helps managers understand the behaviour of costs and existing and
potential sources of differentiation.
Entails all aspects of company‘s operations
CONFIGURATION: Configuration is the way in which managers arrange the activities of
the value chain. Configuration affected by many factors:
Micro cost factors: Differences in wage rates, worker productivity, inflation rates,
and government regulations – among the host of factors that shape macroeconomics –
mean costs of conducting activities vary from country to country. Manufacturing
costs vary from country to country because of above mentioned reasons.
Cluster effects: A peculiarity of value creation is the so-called cluster effect, in
which a particular industry gradually clusters more and more related value creation
activities in a specific location. Clustering related businesses and organizations in
common locations creates systems of interdependent microeconomic capabilities that
support collaboration as well as intensify competition.
Logistics: Logistics entails how companies obtain, produce, and exchange material
and services in the proper place and in proper quantities for the proper value activity.
For example, consider the production of lithium ion batteries. First, companies must
mine lithium and move it from Bolivia to a manufacturing plant in Guangzhou, which
ships lithium ion batteries to a distributor in France, who then supplies market
channels in the European Union. Each transaction, whether physical or informational,
involves an exchange between different activities of the value chain.
Digitization: The process of digitization involves converting an analog product into a
string of zeros and ones. Increasingly, products like software, music or service like
call centres or financial consolidation can be digitized and hence locate virtually
anywhere.
Economies of scale: The concept of economies of scale refers to a situation wherein
a firm doubles its cumulative output yet total cost less than doubles due to efficiency
gains.
Business environment:
Each component contributes to value and success of company‘s operations
Value chain and organizational structure should be co-ordinated and consistent to achieve
success
Global Structure & Strategy:
Co-ordinating and integrating value chain activities across borders can provide competitive
advantage
3 things to consider for global structure and strategy:
◦ Where to source raw materials, parts and components
◦ Where to manufacture and assemble parts and components
◦ Where to sell product or service
Industry structure
◦ Number of firms
◦ Number of buyers and sellers
◦ Barriers to entry
◦ Barriers to exit
◦ Product differentiation
◦ Product diversification
◦ Vertical integration: occurs when the company owns the entire supplier network or at
least a significant part of it.
5 forces model of industry structure
◦ Potential new entrants: Competitive pressures stemming from the threat of enetry
of new rivals
◦ Buyers: Competitive pressures stemming from buyers bargaining power and
seller-buyer collaboration
◦ Suppliers of inputs: Competitive pressures stemming from buyer-supplier
bargaining and supplier-seller collaboration
◦ Product substitution: Competitive pressures stemming from the attempts of
companies outside the industry to win buyers over to their products.
◦ Rivalry: Competitive pressures created by jockeying for better market position,
increased sales and market share, and competitive advantage.
Industry Change: A global industry is one in which a firm‘s competitive position in one
country is significantly affected by its position in other countries.
Factors creating industry change
◦ Changes in long-term industry growth rate
◦ New technologies
◦ New consumer preferences
◦ Innovation
◦ Technology and expertise transfer between countries
◦ Government policies
◦ Entry or exit of firms
◦ Competitor moves (mergers, new products, etc.)
◦ Destabilizing economic factors
◦ And so on...
Value Creation: Creating value spurs the firm to develop a compelling value proposition (why a
consumer should buy its goods or use its services) that specifies its targeted customer markets
(those consumer for whom a firm creates goods or services). Value is what remains after costs
have been deducted from the revenues of a firm.
2 primary ways
◦ Cost leadership
Emphasizes high production volumes, low costs, and low prices
Low-cost producer for given level of quality
Requires selling at industry average (with lower production costs) or below
industry average
Valuable in highly competitive industries
◦ Differentiation
Spurs the company to provide a unique product that customer‘s value and that
rivals find hard, if not impossible, to match or copy.
Create market share and profit by offering branded product innovations to
distinguish from competitors
Products must offer greater value to customer and customer perception of
superior product
Can charge premium price due to perception
Usually requires much R&D spending
Global Strategy:
Key consideration – global integration or local responsiveness?
Global integration: is the process of combining differentiated parts into a standardized
whole.
◦ Driven by globalization of markets and efficiency gains from standardization
Local responsiveness: is the process of disaggregating a standardized whole into
differentiated parts.
◦ Driven by consumer divergence and host-government policies
MNE Strategies:
Characteristics of MNEs: more competitive, pay higher wages, spend more on R&D, more
likely to export
4 principal strategies
◦ International strategy: Companies adopt an international strategy when they aim to
leverage their core competencies by expanding into foreign markets. International
strategy works well when a firm has a core competence that foreign rivals lack and
industry conditions do not demand high degrees of global integration or local
responsiveness.
◦ Multi-domestic strategy: Holds that unique and metaphysical features differentiate
national markets. These boundaries prevent the home office from effectively
supervising foreign operations. Instead, the company concedes that local managers
command an intuitively better understanding of their local market.
◦ Global strategy: emphasizes improving worldwide performance through the sales
and marketing of common goods and services with minimum product variation. Firms
that choose the global strategy face strong pressure for cost reductions but weak
pressure for local responsiveness.
◦ Transnational strategy: holds that today‘s environment of interconnected
consumers, industries, and markets requires an MNE to configure a value chain that
can exploit location economies as well as coordinate value activities to leverage core
competencies while simultaneously responding to local pressures. A transnational
strategy makes the exchange of ideas across value activities a key element of
competitive advantage. The company implementing a transnational strategy aims not
to work harder or work smarter than competitors but rather work differently based on
diffusing the lessons it has learned and the knowledge it has earned throughout its
worldwide operations.
International Strategy:
Global integration: low,
Local responsiveness: low
Limited local customization
Local subsidiaries; value chain set by headquarters
Transfer of core competencies and unique products to foreign markets creates value
Multi-domestic Strategy:
Global integration: low
Local responsiveness: high
Tailor product to local tastes
Local managers have freedom
Tend to make each country‘s operations fairly independent
Tends to be more fragmented (and potential duplication): dispersed operations and decision-
making
Strength: can minimize risk
Global Strategy:
Global integration: high
Local responsiveness: low
Consistent across all countries (common marketing, minimal product variation)
Look to turn global efficiency into price competitiveness
Much power and strategy concentrated at headquarters
Transnational Strategy:
Global integration: high
Local responsiveness: high
Encourages ―global learning‖ – innovation can come from anywhere and implemented
everywhere
Rise of technology makes this strategy more feasible
Very difficult to do well
Ch.12 – Country Evaluation and Selection
Lecture 9: November 18, 2010
Dynamics of Going International:
Country
Attractiveness
High Maximize
commitment, such
as wholly-owned
operations
Collaborations
and/or joint ventures
to dominate
Medium Individualized
strategies
Low Individualized
strategies
Minimize
commitment, such as
through non-equity
arrangement
High Medium Low
Competitive Strength
Country Evaluation & Selection:
When choosing a country to expand to, factors to consider include:
Income per capita
Population
Demographics (i.e. Age ranges, ethnicities, etc.)
Cultural factors and local tastes
Legal system
Cost and skill-level of labour
Infrastructure
Proximity to clients and customers
Where do you go to get this information? How reliable is it?
Liability of foreignness: phenomenon that foreign companies have lower survival rates than
domestic companies. However, those foreign companies that learn about their new
environments and manage to overcome their early problems have survival rates comparable
to those of local companies in later years. This concept helps explain why, for instance, U.S.
companies put earlier and greater emphasizes on Canada and the U.K than would be
indicated by the opportunity and variables we‘ve discussed thus far. In short, managers feel
more comfortable doing business in a similar language, culture and legal system. These
similarities may also keep operating costs and risks low because obf easier communications.
Finally economic similarity is important.
To overcome this, companies may expand by:
Alternative gradual commitments: companies may reduce risks from the liability of
foreignness by: going first to countries with characteristics similar to those of their
home countries; having experienced intermediaries handle operations for them;
operating in formats requiring commitment of fewer resources abroad; and moving
initially to one or a few, rather than many, foreign countries.
Geographic diversification/geographic concentration: Ultimately, a company may
gain a sizable presence and commitment in most countries; however, there are
different paths to that position.
Diversification: rapidly expand into numerous markets; gradually increase
commitments in each
Concentration: move to only one or two countries and no further until develop
strong presence
Harvesting/re-investment
Harvesting: Companies commonly reduce commitments in some countries
because those countries have poorer performance than do others – a process known
as harvesting or divesting. Divesting asset – may mean closure of facilities or sale.
Companies must decide how to get out of operations if: they no longer fit the
overall strategy; and there are better alternative opportunities.
Re-investment: may be necessary to gain more from market.
Ch.13 – Export and Import Strategies
Lecture 9: November 18, 2010
EXPORTING AND IMPORTING:
Importing: the purchase of products by a company based in one country from sellers that reside
in another.
Exporting: refers to the sale of goods or services produced by a company based in one country
to customers that reside in a different country.
ADVANTAGES TO CONSIDER:
• Ownership advantages: are the firm‘s specific assets, international experience, and the
ability to develop either low-cost or differentiated products within a value chain. For
instance, Grieve capitalizes on its ownership advantage through the development of
sophisticated ovens and furnaces; doing the same is difficult for a new entrant to a market.
• Location advantages: of a particular market are a combination of sales opportunity and
investment risk. High-potential markets provide optimal targets for aspiring experienced
traders. Grieve, for example, saw events and trends in the ASEAN bloc providing favourable
locations.
• Internalization advantages: advantages derived by continuing to do something internally,
rather than outsourcing it. Are the benefits of retaining a core competency within the
company and threading it through the value chain rather than opting to license, outsource, or
sell it. Again, Grieve could have opted to license its oven and furnace technology to local
manufacturers in Asia. Instead, management preferred to control its core competencies and
serve Asia through exports from its U.S. plant.
TWO VIEWS OF EXPORT DEVELOPMENT: Two perspectives guide interpretation of the
process that moderates firms‘ decision to export.
o Incremental internationalization: holds that as a company gains experience,
resources, and confidence, it progressively exports to increasingly distant and
dissimilar countries.
o Born global companies: A company that adopts a global orientation from inception.
PITFALLS OF EXPORTING: Companies often see exporting as different – and far more
difficult – from selling in their home market. First-time exporters often become discouraged or
frustrated with the exporting process, given the inevitably of external barriers and internal
shortfalls.
o Difficulties in exporting
o Assistance from government
People Paperwork
Customs Brokers Invoice
Customs Agents Bill of lading
Freight Forwarders Certificate of origin
Logistics companies Export packing list
Etc. Etc.
Ch. 14 – Direct Investment and Collaborative Strategies
Lecture 9: November 18, 2010
Complexities of Exporting:
Transportation
Payment
Export documents
Distribution channels
Product preparation
Use of intermediaries
Product promotion in foreign market
Customs
After service/warranty
Etc.
Export or Produce Abroad:
Producing abroad is more advantageous when:
Production costs in foreign market cheaper than home market
High transportation costs negate profits
No domestic capacity
Substantial alteration needed for local market
Government restrictions
Local bias
YOU DECIDE TO GO INTERNATIONAL, BUT DON‘T WANT TO EXPORT.
TWO QUESTIONS:
1) EQUITY ARRANGEMENTS OR NON-EQUITY ARRANGEMENTS?
2) COLLABORATIVE OR NON-COLLABORATIVE?
Production Ownership Production in Home Country Production in Foreign Country
Equity arrangements Exporting 1) Wholly owned operations
2) Partially owned with
remainder widely held
3) Joint ventures
4) Equity alliances
Non-equity arrangements 1) Licensing
2) Franchising
3) Management contracts
4) Turnkey operations
A firm may choose to operate globally either through equity arrangements (e.g., joint venture) or
through nonequity arrangements (e.g., licensing). Exporting operating are conducted in the home
country, while all other modes entail production in foreign locations. The modes listed in the
green boxes are collaborative arrangements. Note that, in any given location, a firm can conduct
operations in multiple modes.
Why Collaborate:
4 types of alliance: Scale: aim at providing efficiency through the pooling of similar
assets so that partners can carry out business activities in which they already have
experience, Link: use complementary resources so that participating companies can
expand into new business areas, In terms of its value chain, Coke‘s typical franchising
arrangement with bottlers calls for a type of Vertical alliance: because each partner
functions on a different level of the value chain, and Horizontal: it extends Coca-Cola‘s
operations on the same level of the value chain.
Spread and reduce costs: Sometimes it‘s cheaper to get another company to handle
work, especially: at small volume, and when the other company has excess capacity.
Specialize in a competency: The resource-based view of the firm holds that each
company has a unique combination of competencies. A company may seek to improve its
performance by concentrating on those activities that best fit its competencies, depending
on other firms to supply it with products, services, or support activities for which it has
lesser competency.
Avoid or counter competition: Sometimes markets are not large enough to hold many
competitors. Companies may then band together so as not to compete.
Secure vertical or horizontal links: There are potential cost savings and supply
assurances from vertical integration. However, both small and large companies may lack
the competence or resources necessary to own and manage the full value chain of
activities.
Gain knowledge: Many companies pursue collaborative arrangements to learn about a
partner‘s technology, operating methods, or home market so that their own competencies
will broaden or deepen, making them more competitive in the future.
(international) Gain location-specific assets: Cultural, political, competitive, and
economic differences among countries create barriers for companies abroad. When they
feel ill equipped to handle these differences, they may seek collaboration with local
companies who will help them.
(international) Overcome government restrictions: Virtually all countries limit foreign
ownership in some sectors. India and Russia are examples of countries that are
particularly restrictive in that they set maximum foreign percentage ownership in an array
of industries.
(international) Diversify geographically: For a company wishing to pursue a
geographic diversification strategy, collaborative arrangements offer a faster initial means
of entering multiple markets because other companies contributes resources.
(international) Minimize exposure in risky environments: Companies worry that
political or economic changes will affect the safety of assets and their earnings in their
foreign operations. One way to protect it is to minimize the base of assets located abroad
– or share them.
Collaboration Considerations:
Finding a partner can be difficult
Issues of values, culture, priorities
Issue of control:
Collaboration necessitates compromise. The more a company depends on
collaboration, the more likely it is to lose decision-making control, such as on
quality, new-product directions, and how much to expand. This is because each
partner favours its own performances. Also, loss of control over flexibility,
revenues, and competition is an importation consideration.
Previous foreign expansion experience: When a company already has operations in
place in a foreign country, some of the advantages of collaboration are no longer as
importation. The company knows how to operate within the foreign country and may
have excess plant or human resource capacity it can use for new production or sales.
Collaboration implies revenue and knowledge sharing
Collaborative Arrangements:
Joint Ventures: a type of ownership sharing popular among international companies is
the joint venture, in which more than one organization owns a company.
Any arrangement where more than one organization owns a company
When more than 2 partners, often called a ―consortium‖
Shared ownership, risks, control, technology and knowledge
Usually formed to achieve particular objectives
Can help to gain valuable local partner
Mixed venture: a joint venture where one party is a government
How manage disputes? Different objectives? Cultures?
Equity Alliance: is a collaborative arrangement in which at least one of the collaborating
companies takes an ownership position (almost always minority) in the other(s).
At least one collaborating company takes an ownership position in another
Cross-alliance: companies take ownership stakes in each other
Usually done to solidify (harden) collaborating contract, so that it is difficult to
break
Greater collaboration, so more difficult to unwind
Collaborative Non-Equity Arrangements:
Licensing: Under a licensing agreement, a company (the licensor) grants intangible
property rights to another company (the licensee) to use in a specified geographic area for
a specified period.
Rights and obligations set out in licensing agreement
Licensor grants intangible property rights to licensee to use in specified
geographic area for specified time period, in exchange for royalties
License can be exclusive or non-exclusive
Licensor retains ownership of IP, gains profits from it, but doesn‘t have to expend
money or risk in foreign markets
Choice of licensee important – don‘t want to create a competitor
Franchising: is a specialized form of licensing in which the franchisor not only grants a
franchisee the use of the intangible property (usually a trademark), but also operationally
assists the business on a continuing basis, such as through sales promotion and training.
Specialized form of license – includes operational assistance on on-going basis
(sales promotion, training)
Franchisor may provide supplies or other elements of business (generally at a cost
to franchisee)
May be corporate-owned franchises to showcase franchise in foreign market
Success usually dependent on 3 factors
Product and service standardization
High identification through promotion
Effective cost controls
Allows rapid expansion without majority of risks
Management Contracts/Contract for Service: Foreign management contracts are used
primarily when the foreign company can manage better than the owners.
Assist company (for a fee) in management and administrative know-how
Better management capabilities arise due to industry-specific capabilities
Company rendering service has no control of operations; makes foreign profits
without making a capital outlay
Way to exploit advantages you‘ve gained – borders are not boundaries
But can give rise to payment issues and difficulty of finding next contract
Turnkey Operations: are types of collaborative arrangements in which one company
contracts with another to build complete, ready-to-operate facilities. Turnkey operations
are: most commonly performed by industrial-equipment, construction, and consulting
companies and often performed for a governmental agency.
One company contracts with another to build complete, ready-to-use facilities
Builder turns over facilities to company contracting for them once complete
Contracts often in billions of dollars – so dominated by a few international
companies
Payment generally occurs in stages as work completed
Importance of clearly defining when work ―satisfactorily‖ completed
Contracts often contain sweeteners to hedge risks
Large potential for profit and large risks
Problems with Collaborative Arrangements:
How to dissolve?
Planned or unplanned
Friendly or unfriendly
Mutually agreed upon or disputed
• What are likely outcomes?
Termination by acquisition
Termination by dissolution
Termination by reorganization/restructuring of the alliance
Main reasons for problems:
Relative importance to partners: one partner may give more management attention
to a collaborative arrangement than the others do. If things go wrong, the active
partner blames the less active partner for its lack of attention, and the less active
partner blames the more active partner for making poor decisions.
Divergent objectives: One partner may want to expand the product line and sales
territory, and the other may see this as competition with its wholly owned operations.
Questions of control: Sharing assets with another company may generate confusion
over control.
Comparative contributions and appropriations: Partners‘ relative capabilities of
contributing technology, capital, or some other asset may change over time.
Differences in culture
Company culture: Managers and the companies for which they work are
affected by their national cultures, such as in how they evaluate the success of
their operations.
Corporate culture: For example, one company may be accustomed to
promoting managers from within the organization, whereas the other opens its
searches to outsiders.
Managing International Collaboration:
Need to continually re-examine
Is this still working for each of us?
Based on greater experience, should collaboration change?
The right partner is critical
Not just what bring to table, also their motivation and how work together
Trust is central to collaborations
But how can you establish trust?
Negotiate the appropriate arrangement
Protect our IP? Confidentiality regarding terms of agreement?
Ch. 15 – The Organization of International Business
Lecture 11: December 2, 2010
Organizing is the process of creating the structure, systems, and culture needed to implement the
company‘s strategy.
The Goal:
To design and implement the organizational structure, culture, coordination, control and
compensation systems to support the company‘s overall strategy
A company is only as good as its people. People will only be as good as the system
allows them to be. There are positive and negatives to decentralization, freedom, etc.
Questions:
How can you control behaviour?
Should you try to control behaviour?
How do you determine and evaluate goals?
How do you structure the company to attain the greatest benefit from employee‘s
ideas, knowledge of markets, but also maintain control?
Organization: is how the company (1) specifies the framework for work, (2) develops the
systems that coordinate and control what is done, and (3) cultivates a common workplace culture
among its employees.
ORGANIZATIONAL STRUCTURE: Organizational structure – formal arrangement of
jobs, responsibilities, and relationships within an organization
Vertical differentiation – the specification of the degrees of centralization and
decentralization of decision-making in an organization
Where is authority concentrated? Centralized, Decentralized or Multidomestic
Centralization vs. Decentralization: Centralization is the degree to which high-level
managers, usually above the country level, make strategic decision and delegate them to
lower levels for implementation. Decentralization is the degree to which lower-level
managers, usually at or below the country level, make and implement strategic decisions.
Decision making should occur at the level of the people who are most directly affected
and have the most direct knowledge of the situation.
Centralization Decentralization
Uniform products, policies Need local responsiveness
Low transportation costs and need to produce volume Economies of scale achieved through national
production
Local managers are not capable or experienced Capable lower level managers
Decisions are important and risk of loss is great Decisions must be made quickly. Company is
geographically dispersed
Ensures consistent decisions. Coordinated activities More flexible, responsive to local needs. Greater
authority to lower level employees.
Discourages innovation and initiative Greater risk of errors. Subsidiary interests vs.
company‘s
Ethnocentric? Greater power for subsidiaries. Greater ability for
foreigners to rise in organization
Technological developments encourage centralization
Horizontal Differentiation: How the company specifies, divides, and assigns the set of
organizational tasks.
Assigns authority and authority relationships to make sure work is organized to support
company‘s strategy
Types (pg.564):
1. Functional – by business function (related products). Functional structures: group
specialized jobs according to traditional business functions; and are popular among
companies with narrow product lines.
2. International Division – all international activities in one dept. International division:
creates a critical mass of international expertise and competes with powerful domestic
divisions for resources
3. Product Division – activities grouped by product line (diverse product base). Product
divisions are popular among international companies with diverse products.
4. Geographic – regional basis; extensive foreign operations. Geographic divisions are
popular when foreign operations are large and no single country or region dominates
sales.
5. Matrix – two-tiered. Dual reporting and oversight, requires coordination and
interdependence. A matrix organization: institutes overlaps among functional and
divisional forms; gives functional, product, and geographic groups a common focus, and
has dual-reporting relationship rather than a single line of command.
CONTEMPORARY STRUCTURES: Some MNEs find the preceding types of structures,
typically referred to as traditional structures, inadequate responses to dynamic environments and
complex strategies.
Network Structure – is a core organization that outsources value activities in which it
does no command as core competencies to those that do – or, as the saying goes, ―Do
what you do best and outsource the rest.‖
Do what you do best and outsource the rest
Coordinates outsourced activities while maintaining unified sense of organization
Keiretsu –type of network; each firm owns a percentage of others in network
Virtual Organization – is the antithesis of a vertical hierarchy. They acquire strategic
capabilities by creating a temporary network among independent companies, suppliers,
customers, and even rivals. - Quick response to opportunities. The flexibility of virtual
structures means poorly performing partners can be easily replaced.
COORDINATION AND CONTROL SYSTEMS:
Coordination: Working together to translate company‘s core competencies into powerful value
chain. For example, designing innovative products in Japan, sourcing inputs from Australia,
transporting them to production facilities in China, and distributing them to consumers
worldwide creates interdependent activities. Coordination systems synchronize the work
responsibilities of the value chain so that the company uses its resources efficiently and makes
decisions effectively. Managers apply several approaches to coordinate operations. Three
prevalent approaches include coordination by standardization, by plan, and by mutual
adjustment.
By standardization – System whereby universal rules and procedures that apply to units
worldwide, thereby enforcing consistency in the performance of activities in
geographically dispersed units.
By Plan – system that relies on general goals and detailed objectives to coordinate
activities
By Mutual Adjustment – system whereby managers interact extensively with
counterparts in setting common goals
Requires collaboration – rotate managers
Boundaries among people and departments must be broken down
CONTROL:
Control systems: process by which managers compare performance to plans, identify
differences, and where found, assess the basis for the gap and implement corrective action;
ensure that activities are completed in ways that support the company‘s strategy
Planning, implementation, evaluation and correction of performance in order to ensure
organizational objectives are achieved
Planning – process of meshing objectives with internal and external constraints and
resources. Sets the means to implement, monitor and correct operations
Control Tools:
Reports – enables management to respond to situations and shortfalls
Subsidiary visits – Face-to-face meetings, rigorous budget reviews, or on-site
management seminars clarify control. Also, provide opportunities to socialize with
local managers.
Evaluative measures – budget vs. profit
Information systems - Most MNEs use enterprise resource planning to monitor value
activities, such as product planning, parts purchasing, maintaining inventories,
customer service, and order fulfillment.
Degree of subsidiary‘s involvement in planning and directing budget will have an influence
on its performance
ORGANIZATION CULTURE:
Organization culture: the shared meaning and beliefs that shape how employees interpret
information, make decision, and implement actions.
Shared meaning, values and beliefs that shape how employees interpret information, make
decisions and implement actions
Can be powerful tool to support goals and behaviour of employees to help implement the
company‘s strategy
Employees perceive an organization‘s culture based on what they see, hear or experience
within the company
Chart on p. 581
Ch. 16 – Marketing Globally
Lecture 10: November 25, 2010
Marketing Overview: The international application of five common marketing orientations:
production, sales, customer, strategic marketing, and social marketing.
Marketing – achieving organizational goals consists in determining the needs and wants of
target markets and delivering the desired satisfactions more effectively and efficiently than
competitors
―Marketing‘s job is to convert societal needs into profitable opportunities‖
―Marketing…is the whole business seen from the point of view of its final result, that is from
the customer‘s point of view…Business success is not determined by the producer, but by the
customer‖ Peter Drucker
Market – group of people who share a similar need
―While great devices are invented in the laboratory, great products are invented in the
marketing department‖ William Davidow
Positioning – act of designing the company‘s offer and image so that the target market
understands what the company stands for in relation to its competitors
Four P‘s
PRODUCT
PROMOTION
PRICE
PLACE (DISTRIBUTION)
Which global companies are good marketers and why?
PRODUCT:
Must satisfy a need or want
Orientation:
Production - focused on price or quality
Sales – similar products globally (assume similar tastes)
Customer – varied to appeal to country / market, e.g. Coca-Cola
Strategic Marketing – continually adapting product
Social – consider social impact (health, environment)
Alterations – rationale: Legal: Explicit legal requirements, usually meant to protect consumers,
are the most obvious reason for altering products for foreign markets. Packaging requirements –
one of the more cumbersome product alterations for companies‘ concerns laws on packaging,
such as the placement of warning labels. Cultural: Religious differences obviously limit the
standardization of product offerings globally; thus food franchise companies limit sales of pork
products in Islamic countries and meat of any kind in India. Economic: Income: If a country‘s
average consumers have low incomes, too few of them may be able to buy a product the MNE
sells domestically. Infrastructure: Poor infrastructure may also require product alterations and
Income distribution: vary uneven income distribution may create demand for labor, such as
household servants, at the expense of laborsaving products.
THE PRODUCT LINE: EXTENT AND MIX: It is doubtful that all of a company‘s multiple
products could generate sufficient sales to justify the cost of penetrating each market with each
product.
Sales and Cost Considerations: In reaching product-line decisions, a company should
consider the possible effects on sales and the cost of having a large versus small family of
products.
Product Life Cycle Considerations: Companies may differ in either the shape of the length
of a product‘s life cycle. Thus a product facing declining sales in one country may have
growing or sustained sales in another.
SEGMENTING AND TARGETING MARKETS: dividing market by income levels, taste,
education, age, gender, ethnicity to target end consumers.
Approaches: By country: A company may decide, for example, to go for the time being
only to the Japanese market because of its population size and purchasing power; Global
segment: A company may identify some segments globally, such as segments based primarily
on income; Multiple criteria: a company can combine these by looking first at countries as
segments, second by identifying segments within each country, and third by comparing these
within-country segments with those in other countries.
Mass market vs. Niche: At the same time, most companies have multiple products and
product variations that appeal to different segments; thus they must decide which to introduce
abroad and whether to target them to mass markets versus niche segments. Sales to a mass
market may be necessary if a company is to gain sufficient economies in production and
distribution.
Examples: Mustard (Grey Poupon): It was first sold as ingredient for gourmet recipes.
The product had a nice return of 5-10% growth every year. They found they had 90%
distribution in supermarkets, but only reached 30% of households. Their strategy was to sell it as
mustard for hotdog and sandwiches. They also mass marketed it without white wine or French
recipes and sales took off for about 20% growth rate every year since then; Gap; and Jeans.
PRICING STRATEGIES:
Pricing Tactics:
1. Skimming strategy – charging a high price for a new product by aiming first at
consumers willing to pay the price, and then progressively lowering the price
2. Penetration strategy – introducing a product at a low price to induce a maximum
number of consumers to try it
3. Cost-plus strategy – pricing at a desired margin over cost
POTENTIAL OBSTACLES IN INTERNATIONAL PRICING:
Government Intervention: Every country has laws that affect the prices of goods, such as
price controls that set either minimum or maximum prices. Minimum prices are usually set to
prevent companies from eliminating competitors to gain monopoly positions. Maximum
prices are usually set so that poor consumers can buy products and services.
Export Price Escalation: If standard markups occur within distribution channels,
lengthening the channels or adding expenses somewhere within the system will further
increase the price to the consumer – a situation known as export price escalation. For
example, assume the markup is 50 percent and the product costs $1.00 to produce. The price
to the consumer would be $1.50. However, if expenses in the system were to increase costs
to $1.20, the 50 percent markup would make the price $1.80, not $1.70 as might be expected.
Currency Value and Price Changes: For companies accustomed to operating with one
stable currency, pricing in highly volatile currencies can be extremely troublesome. Mangers
should price to assure the company of enough funds to replenish its inventory and still make
a profit. Gray Market – is the selling and handling of goods through unofficial distributors.
Such unauthorized selling can undermine the longer-term viability of the distributorship
system, cause a company‘s operations in different countries to compete with each other, and
prevent companies from charging what the market will bear in each country.
Fixed vs. Variable pricing: Companies often negotiate their export prices with importers.
There is evidence that small companies, especially those from developing countries,
frequently give price concessions too quickly, limiting their ability to negotiate on a range of
marketing factors that affect their costs.
Supplier Relations: Dominant companies with clout (influence) can get suppliers to offer
them lower prices, in turn enabling them to gain cost advantages over competitors. But if
they buy locally, they have this clout only where they have the dominance. Wal-mart is an
example.
PROMOTION STRATEGIES: Presentation of messages intended to help sell your product or
service
Push (direct selling) or Pull (mass media) Mix: Promotion may be categorized as push,
which uses direct selling techniques, or pull, which relies on mass media. Push is more likely
when: self-service is no predominant, advertising is restricted; product price is a high portion
of income.
Standardization of message: Advantages of standardized advertising include: some cost
savings; better quality at local level; and rapid entry into different countries.
Translation: when a company is going to sell in a country with a different language,
translation is usually necessary unless the advertiser is trying to communicate an aura
of foreignness. The most audible problem in commercial translation is dubbing,
because words on an added sound track never quite correspond to lip movements.
However, it can be avoided by having no actors speaking (can have background
speakers), Legality: what is legal advertising in one country may be illegal
elsewhere. For instance, China bans ads for feminine hygiene pads, hemorrhoid
medications, and athlete‘s foot ointment during mealtimes. It also bans the use of pigs
in ads because it offends Muslim population, Message Needs: an advertising theme
may not be appropriate everywhere because of national differences in how well
consumers know the product and how they perceive it, who will make the purchasing
decision, and what appeal are most important.
BRANDING STRATEGIES: Brand: is an identifying mark for product or service, to
differentiate it in marketplace
Differentiation can lead to premium pricing
DISTRIBUTION STRATEGIES: Distribution is the course – physical path and legal path that
goods take between production and consumption. In international marketing, a company must
decide on the method of distribution among countries as well as the method within the country
where final scale occurs.
Distribution channels, e.g. Fisher Girl, Proctor & Gamble
Hidden costs
Infrastructure conditions
Levels in distribution system (how many)
Retail inefficiencies
Size
Inventory stock-outs
MANAGING THE MARKETING MIX: Although every element in the marketing mix –
product, price, promotion, brand, and distribution – is important, the relative importance of one
versus another may vary from place to place and over time. Gap Analysis – a method for
estimating a company‘s potential sales by identifying potential customers it is not serving
adequately.
E-COMMERCE AND THE INTERNET: Estimates vary widely on the current and future
number of worldwide online households and the electronic commerce generated through online
sales. They all indicate substantial growth. The growth in online households creates new
distributional opportunities and challenges in selling globally over the Internet. However, many
households, especially in developing countries, lack access to Internet connections. Meaning, if
companies wants to mass-market, they will have to go with promotion and distribution.
Ch. 17 – Global Manufacturing and Supply Chain Management
Lecture 10: November 25, 2010
Supply Chain Management: Supply chain – is the network that links together different aspects
of value chain from producer to customer. A company‘s supply chain encompasses the
coordination of materials, information, and funds from the initial raw-material supplier to the
ultimate customer.
Sourcing and coordination of materials, information and funds from raw material supplier to
final customer
Logistics – controls effective and efficient flow of goods & services and related info from
point of origin to point of consumption
GLOBAL MANUFACTURING STRATEGIES:
4 Key Elements of Global Manufacturing:
1. Compatibility: Compatibility in this context is the degree of consistency between
the foreign investment decision and the company‘s competitive strategy. Direct
manufacturing, for instance, made sense in Samsonite‘s case but not in Nike‘s.
Some company strategies that managers must consider: efficiency/cost strategies;
dependability; quality; innovation; and flexibility.
2. Configuration: Manufacturing configuration: centralized manufacturing in one
country; manufacturing facilities in specific regions to service those regions; multi-
domestic facilities in each country.
3. Coordination: is the linking or integrating of activities into a unified system.
4. Control: can be the measuring of performance so companies can respond
appropriately to changing conditions.
Issues – environmental, scarce resources
INFORMATION TECHNOLOGY AND GLOBAL SUPPLY-CHAIN MANAGEMENT: A
key to making the global supply chain work is a good information system.
EDI: Electronic Data Interchange – Many companies use EDI to link suppliers,
manufacturers, customers, and intermediaries, especially in the food-manufacturers,
customers, and car-making industries, in which suppliers replenish in high volumes.
Enterprise Resource Planning: ERP is a software that can link information flows from
different parts of a business and from different geographic areas. Material Requirement
Planning – a computerized information system that addresses complex inventory situations
and calculates the demand for parts from the production schedules of the companies that use
the parts.
Radio Frequency ID (RFID): a system that labels a product with an electronic tag, which
stores and transmits information regarding the product‘s origin, destination, and quantity.
The database collects, organizes, stores, and moves the data and is often used in conjunction
with an ERP system.
E-commerce: the use of the Internet to join together suppliers with companies and
companies with customers. Internet; Extranet - The extension of a company's intranet out
on to the Internet, for example, to allow selected customers, suppliers and mobile workers to
access the company's private data and applications via the world wide web.; Intranet - A
private website or portal, secured or password-protected, specifically designed for workers in
an organization to conduct internal business.
QUALITY: is defined as meeting or exceeding the expectations of the customer. [An important
aspect of all levels of the global supply chain is quality management, which true for service as
well as manufacturing companies.]
Acceptable quality level vs. Zero defects: Zero defects – the refusal to tolerate defects of
any kind. Before the strong emphasize on zero defects, many companies operated according
to the premise of Acceptable Quality Level (AQL) – a tolerable level of defects that can be
corrected through repair and service warranties.
Total Quality Management: a process that stresses customer satisfaction, employee
involvement, and continuous improvement of quality. Its goal is to eliminate all defects.
Principles: Satisfaction; Continuous Improvement; Employee involvement
TQM often focuses on Benchmarking world-class standards, product, service design,
process design and purchasing.
Six Sigma –statistical approach to quality management that has been very effective and is
popular in the U.S. A quality control system aimed at eliminating defects, slashing product
cycle times, and cutting costs across the board.
Quality Standards (ISO) – ISO stands for International Organization for
Standardization – in Geneva was formed in 1947 to facilitate the international coordination
and unification of industrial standards.
SUPPLIER NETWORKS:
Sourcing – firm‘s process of having inputs (raw materials and parts) supplied to it from
outside suppliers for production process
Make or Buy Decision
Outsourcing – company externalizes process or function to another company -
Supplier relations
Purchasing function (4 phases)
Domestic only
Foreign buying based on needs
Foreign buying as part of procurement strategy
Integration of global procurement strategy
Inventory Management
Just in Time
Lean Manufacturing
International Examples:
Ford
Walmart
Coca-Cola
Mattel
Other
Ch. 20 – Human Resource Management
Lecture 11: December 02, 2010
Human Resource Management (HRM): is the approach a company takes to manage its most
valued assets – the people who implement its strategy.
Managing People:
―Tell me how I am being compensated and I will tell you how I will act‖ - Paul Wayne,
Accounting Professor
HRM FRAMEWORKS IN THE MNE: HRM managers have designed frameworks – conceptual
structures used to solve complex issues – to guide decision making.
Ethnocentric – Ethnocentrism occurs when one group place itself at the top of an imagined
hierarchy of all groups, thereby seeing other groups as inferior. Also, it reflects the belief that
the principles and practices used by the home-office country are superior to those used by
rivals in other countries.
International approach –promotes cultural arrogance
Polycentric – sees the effectiveness of the business practices of foreign ―centers‖ as
equivalent to those in home ―center.‖ Also, uses host-country nationals to manage local
subsidiaries.
Broad decisions made at head office, local units adapt to local market
Least expensive operationally – reduces global perspective
Multi-domestic approach – adapts to local differences (poss. too much)
Geocentric – Seeks best people for key jobs throughout the organization, regardless of
nationality.
Headquarters and subsidiaries collaborate to identify best practices
Tough to develop, costly to run, hard to maintain
Global / Transnational approach – opens learning opportunities
Managing Expatriates: move away from one's native country and adopt a new residence abroad.
Meaning MNEs needs to find those people who are prepared for international assignments, devise
ways to motivate them to perform well, and capitalize on their new skills and refined outlook when
they are ready for their next job.
Managers go abroad for opportunities and to move up in organization
Training and pre-departure prep increases success
Infuses technological competence, help control foreign operations, diffuse organizational
culture
Candidates show technical competence, leadership skills and adaptability
Ensure spouse adapts well to country as well
Compensation tends to be higher than at home