International Business Transactions: An Example

An entrepreneur, traveling around the world from San Francisco, for pleasure and profit, landed in a less developed country and observed that the capital city in which he was staying lacked an up-to date energy distribution system. He approached country’s government and negotiated a contract with the following major provisions.

1. The entrepreneur would raise capital on world markets, incorporate off-shore, design, procure and construct a state-of-the-art generation and distribution system and sell energy within the boundaries of the city.

2. The government would award a franchise to the entrepreneur for a limited period and would commit to purchase a specified volume of energy per year for the first 5 years, subject to:

3. The entrepreneur spending not less than an agreed sum within 18 months and delivering energy into distribution system within 30 months of the contract date.

The money was raised in London. The primary energy supply, which was coal, was sourced in Australia. Design and procurement were carried out in the UK and the component parts were shipped to site for assembly and final construction.

The owners’ project manger was given substantial stock incentives. The system started up later than the contract provided for, but the lateness

was excused and the new undertaking survived the banking crisis that affected its source of working capital and ultimately went on to prosper.

Question: In when was this project conceived and built?

Handout: Globalization Example– What company?

The Hong Kong Gas Company– Now merged with China Gas (“Towngas”)

– What year? 1862

The Great Globalization Debate

Globalization is… Not so new… Not well defined… Imperfect… Goes beyond the USA…

Debate Goals Introduce contested ideas… Consider different points of view… Develop/reinforce your beliefs… Provide a basis for further discussion… Have fun…

The Great Globalization Debate

Wendy Jeffus

Harvard Summer School

International Business

Introduction Ulrich Suter – “Airline Industry” Chapter 14: Entry Strategy & Strategic Alliances Chapter 15: Exporting, Importing, and

Countertrade Case Study: JCB in India Case Study: Tesco Goes Global Chapter 18: Global Human Resources

Management

Session 1: Top Participation Performers

4) Christian Hein

3) Monica Garcia de la Cadena

2) Andre Da Silva

1) Stuart Haigh

Session 2: Top Participation Performers

4) Elena Ponomareva, Angela Pernsteiner

3) Ulrich Suter

2) Pablo Cienfuegos

1) Natalia Biteli Santos

Wendy Jeffus

Harvard Summer School

Chapter 14: Entry Strategy and Strategic Alliances

Group Projects: Section 1Green Car

(China)Wheel G

(Brazil)Spacebox

(China)AESNI

(U.S.)P-I-M

(Switzerland)

Group 1:Stuart Haigh (Australia)Alexandra Bustros (Lebanon)Jin Ji (China)Christian HeinGreen Car Corp, China

Group 2: Stefan Lorscheid (Germany)Juliana Nascimento (Brazil)Adomas Kraunevicius (Lithuania)Shariar Sean Monfared (US)WheelGuard, Brazil

Group 3: Andre Ribeiro Da Silva (Canada)Rodrigo Robles (Mexico)Katerina Barka (Greece)Spacebox, Japan

Group 4: Raya Awad (Lebanon)Benedikt Bingler (Germany)Concubhar O’Drisceoil (Ireland)Wajahat Laiq (US) AESNI-gadget in Cambridge, US

Group 5:Mariana Vega Silva (Mexico)Audun H. Hansen (Norway)Jan Icken (Germany)Kristian Andersen (Denmark)Soren Mogensen (Denmark)Professionals-in-Motion, Switzerland

Group 6:Rima Markarian (US)Jennifer Grygiel (US)Frank Dike (US)Petra Steger (Austria)TOMS shoes, Ethiopia

Group 7: Sarti Stefano (Italiy)Mads Krarup (Denmark)Hernik Gerstrom (Denmark) Original Food, Dubai

Group 8: Ayhan Sebin (Turkey)Monica Garcia de la Cadena Lozano (Mexico)Chamroeun Sieng (Cambodia)Marc Burde (Sweden)Muvbox, Spain

Group 9:Laurent Blumberg (Belgium)Mohit Gupta (India)Birgitte Egdal (Denmark)Healthy Foods, Netherlands

Group 10: Agnieska Sala (Poland)Min Shin Ang (Singapore)Georgi Petrov (Bulgaria)Smart Home International, Moscow

Shoes(Ethiopia)

Food(U.A.E.)

Muvbox(Spain)

Healthy F(Netherlands)

Smart H(Russia)

Group Projects: Session 1

Green Car(China)

Wheel G(Brazil)

Spacebox(China)

AESNI(U.S.)

P-I-M(Switzerland)

Shoes(Ethiopia)

Food(U.A.E.)

Muvbox(Spain)

Healthy F(Netherlands)

Smart H(Russia)

Group Projects: Section 2Natura

(Russia)Rollasole

(Singapore)Shortlister

(Singapore)Energy

(U.S.)Charge

(U.S.)

Group 1:Carolina Camargo (Brazil)Hitesh Uttamchandani (India)Natura, Russia (with Group 8)

Group 2: Nikhil Sharma (India)Nina Wagner (Canada)Nethra Murali (Singapore)Rollasole, Singapore

Group 3:Sweta Joshi (India)Andrew Buks (US)Andre Ukon (Brazil)Mar del Perez Alonso (Spain)Shortlister, Singapore

Group 4: Fernando Trinidad (Phillipines)Carol Reyes (Bolivia)Zhao Xuan (China)Natural Energy Drink in US

Group 5:Elena Ponomareva (Russia)James Freckleton (Australia)Sanjeev Masih (US)Ipek Hizlikan (Turkey)Electric Car Charging Station in California

Group 6: Deepika Choudhary (India)Samuel Turnwald (Germany)Judy Chua (Phillipines)Green Consultants in Japan

Group 7:Natalia Santo (Brazil)Angela Pernsteiner (Austria)Abhay Jain (India)Umbrella-o-mat in London

Group 8: Daniel Czajkowski (US)Umut Ozeren (Turkey)David Inbarajan (India)Akshay JainNatura, Russia (with Group 1)

Group 9:Daniel Tueni (Lebanon)Madhu Varshiti (India)Pablo Cienfuegos (Mexico)Sebastian Morad (Sweden) Custom Home Entertainment, France

Group 10: Ulrich Suter (Switzerland)Bernadette Almeda (US)Zilin Guan (China)Zhu Jin (China) Alternative Energy, China

Consult(Japan)

Umbrella(England)

Natura(Russia)

Home E(France)

Alt. E(China)

Group Projects: Session 2

Natura(Russia)

Rollasole(Singapore)

Shortlister(Singapore)

Energy(U.S.)

Charge(U.S.)

Consult(Japan)

Umbrella(England)

Natura(Russia)

Home E(France)

Alt. E(China)

What type of market would you like to enter? Rich, educated, healthy citizens Abundant resources Low political risk Low economic risk No exchange rate risk No competition Marketing opportunities

Which Foreign Markets? The choice must be based on an assessment of

a nation’s long-run profit potential The attractiveness of a country depends upon

balancing the benefits, costs, and risks associated with doing business in that country

Benefits include– Size of market– Present wealth of the consumers in the market– Likely future wealth of consumers– Economic growth rates

Timing the Entry Advantages frequently associated with entering

a market early are commonly known as first-mover advantages

– The ability to preempt rivals and capture demand by establishing a strong brand name

– Ability to build sales volume– Ability of early entrants to create switching costs

Disadvantages associated with entering a foreign market before other international businesses are referred to as first-mover disadvantages

– Pioneering costs are costs that an early entrant has to bear– Possibility that regulations may change

First Mover Disadvantage Risk - Without previous experience to draw upon, first movers

usually make the worst mistakes in terms of judging whether a product will be suitable for the market. Successive companies can reduce risk by learning from these mistakes.

– Example – China’s market over the last decade clearly shows the divide. Some rushed in, others chose to wait, convinced that many of the first-movers would get their fingers burned.

– Example - Silicon Valley, is full of companies that had first-mover advantage but still failed; it has been estimated that only about one in a hundred Silicon Valley start-ups survives for more than two years.

The first-mover advantage is no absolute guarantee of success, and often, late-arriving (and occasionally inferior?!) products take over the market from the first-movers.

– Example - Sony learned this to its cost, when its Betamax video recorder system was driven out of the market by VHS.

Source: FT.com (Financial Time’s Online Management Dictionary)http://content.answers.com/main/content/wp/en/thumb/7/72/180px-Betavhs2.jpg

First Mover Disadvantage– Visicalc, the first desktop spreadsheet program, faded away as

Lotus took over the field with 1-2-3. In time the Lotus software was itself crushed by Microsoft's Excel.

– Prodigy Communications was a first mover in online connections. And it had powerful backers at its launch in 1984.

– Dumont led the way in selling TV sets when they were new gadgets, but the company lost out to latecomers like RCA and Motorola.

– Chux was the leading disposable diaper yet succumbed to Procter & Gamble.

– Ampex had a commanding position in video recorders and tapes for two decades until Sony took over.

http://www.forbes.com/forbes/2007/0618/154.html, Image Sources: http://www.earlytelevision.org/images/DuMont-RA-108-hd.jpghttp://www.aresluna.org/attached/pics/computerhistory/articles/25latzakratkami/visicalc-reklama.big.jpg

More Examples Hotmail and Yahoo weren’t the first companies to offer free email. "Juno was first

and had a $20 million ad budget" – Investors tend to invest in me-too companies because they have a degree of comfort that

they're investing in an established market. "We're more impressed to know there are competitors," agrees Neil Weintraut of 21st Century Intenret Venture Partners

The computer industry is littered with companies that were first to market and lost the race big time - remember the Osborne portable computer or the Gavilan notebook?

"History imposes first mover advantage honors," notes Roger McNamee of Integral Capital Partners. "If you asked who was the first computer game software company a lot of people might say Electronic Arts because they're still standing, but EA was about the 41st game software company to get funding."

Source: “The Myth of the First Mover Advantage” by David Needle; http://www.roguepc.com/images/juno2.gifhttp://www.uweb.ucsb.edu/~rverduzco10/images/thunderbird-hotmail.jpg; http://cache.eb.com/eb/image?id=23627&rendTypeId=4http://oldcomputers.net/pics/gavilan-capsules.jpg

Scale of Entry Large scale entry

– Strategic Commitments - a decision that has a long-term impact and is difficult to reverse.

Pros: May cause rivals to rethink market entry, better chance to capture first mover advantages like switching costs, economies of scale & shows potential customers and distributors that you’re committed to the market.

Cons: Fewer resources to pursue other markets (hindering strategic flexibility)

Small scale entry– Pros: Gives the firm time to learn about market & reduces risk– Cons: Lack of commitment may make it harder to capture first

mover advantages, etc.P-I-M

(Switzerland)Natura

(Russia)

Entry Modes Firms can use six different methods to

enter a market1. Exporting

2. Turnkey Projects

3. Licensing

4. Franchising

5. Joint Ventures

6. Wholly Owned SubsidiariesIn

crea

sed

Con

trol

Increased Risk

Wholly OwnedSubsidiary

Joint Venture

Exporting

Licensing

Franchising

Turnkey Projects

Exporting

Dr. Obioha had started by exporting ethnic hair care products to West Africa. He realized one way he could ensure the top-notch quality, of his merchandise was to manufacture the products himself. He was from Nigeria, so he started in the territory that he knew the best.

Then he moved to European countries. After about five years, the entrepreneur recognized the need for his quality skin care throughout the world. The product has been on the market now since 1990.

Exporting– Advantages:

Avoids cost of establishing manufacturing operations

May help achieve experience curve and location economies

– Disadvantages: May be hard to compete

with low-cost manufacturers– Possible high

transportation costs– Tariff barriers

Possible lack of control over marketing reps

http://www.bluefieldinc.com/BF_Corporate.htmlhttp://findarticles.com/p/articles/mi_qa5342/is_200111/ai_n21481091

Turnkey projects Advantage:

– Less risky than conventional FDI

Disadvantages:– May create a competitor– Selling process

technology may be selling competitive advantage as well

Contractor agreesto handle everydetail of projectfor foreign client

Forum hotel in Warsaw 1974 - Skanska S.A.1st turnkey projectoutside of Sweden

http://www.skanska.pl/skanska/templates/page.asp?id=11579http://www.bouygues.com/us/

After reconstructing and upgrading Lebanon's power grid in 1995, Bouygues Construction handed over the Beirut Seafront redevelopment in May 2000

Licensing A licensing agreement is an arrangement

whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee.– Example: Warner licenses images from the Harry

Potter books.– Example: Coca Cola (see Next Slide)

http://www.sfondideldesktop.com/Images-Movies/Harry-Potter/Harry-Potter-0036/Harry-Potter-0036.jpg; zipcar.com

Licensing

Licensing Advantages

– Reduces development costs and risks of establishing foreign enterprise

– Unfamiliar or politically volatile market– Overcomes restrictive investment barriers– Others can develop new business applications

Disadvantages– Less control over manufacturing, marketing, etc.– Limits the ability to coordinate a strategy across countries.– Risk loosing control of technology Agreement where

licensor grants rights to intangible property to another entity for a specified period

of time in returnfor royalties.

Franchising Franchising is an advanced form of licensing in

which the franchisor, like “McDonalds” allows an entrepreneur (the franchisee) the right to use an entire business system in exchange for compensation.

Franchising

Franchising a McDonalds Imagine that you're opening your own McDonald's. To do this, you have to buy a McDonald's franchise. In order to qualify for a conventional franchise, you have to have

$175,000 (not borrowed). – Your total costs to open the restaurant, will be anywhere from $430,000 to

$750,000, which goes to paying for the building, equipment, etc. – Forty percent of this cost has to be from your own (non-borrowed) funds. – You'll pay an initial franchise fee of $45,000 directly to McDonald's. The

other costs go to suppliers, so this is the only upfront fee you pay to McDonald's.

– Then, you'll go through a rigorous nine-month training period where you'll learn about the McDonald's way of doing things -- things like their standards for quality, service, value, formulas and specifications for menu items, their method of operation, and inventory control techniques.

– You'll have to agree to operate the restaurant from a single location, usually for 20 years, following their guidelines for decor, signage, layout and everything else that makes McDonald's McDonald's.

Source: http://money.howstuffworks.com/franchising1.htm

Franchising a McDonalds Once you've completed training and are ready to go, McDonalds will offer you a location they've already developed.

– The exterior of the building will be complete, but you will have to take care of interior additions such as kitchen equipment, seating and landscaping.

– You'll get constant support from a McDonald's Field Consultant, who can advise you on details and will visit regularly.

– You'll pay McDonald's a monthly fee of 4 percent of your sales, and either a flat base rent or a percentage rent of at least 8.5 percent of your sales. How much money you make depends on many things, including the location and its popularity, the efficiency of your operating costs, and your ability to manage and control the business.

Think of franchising as paying someone for their business strategy, marketing strategy, operations strategy, and the use of their name. That's pretty much what franchising is -- you are establishing a relationship with a successful business so you can use its systems and capitalize on its existing brand awareness in order to get a quicker return on your own investment. You are using its proven system and name, and running it by its rules.

Are you still your own boss? In some respects, no. You still have to answer to someone else and follow thier direction. You don't really own the business; you own the assets you've purchased in order to establish the business.

Source: http://money.howstuffworks.com/franchising1.htm

FranchisingAdvantages:

– Reduces costs and risk of establishing enterprise– Quality control

Disadvantages:– May prohibit movement of profits from one country

to support operations in another country

Franchiser sellsintangible propertyand insists on rules

for operating business

Joint Venture A form of collaboration between two or more

firms to create a jointly owned enterprise.

Licensing (& JV) To enter the Japanese market Xerox (inventor of the

photocopier) established a joint venture with Fuji Photo. (25/75)

Xerox licensed its xerographic know-how to Fuji Xerox. Fuji Xerox paid a royalty fee equal to 5% of the next

sales revenue that Fuji Xerox earned from the sales of photocopiers based on Xerox’s patented know-how

Joint VenturesAdvantages:

– Benefit from local partner’s knowledge– Shared costs/risks with partner– Reduced political risk

Disadvantages:– Risk giving control of technology to partner– May not realize experience curve or location

economies– Shared ownership can lead to conflict

Wholly Owned SubsidiaryThe parent firm owns 100% of the stock.Subsidiaries could be Greenfield

investments or acquisitionsAdvantages:

– No risk of losing technical competence to a competitor– Tight control of operations– Realize learning curve and location economies

Disadvantage:– Bear full cost and risk

Wholly Owned Subsidiaries 2006 - Swedwood International a wholly-owned

subsidiary of IKEA built it’s first U.S. plant in Virginia

IKEA wanted control – Quality– Operations– Company secrets

http://www.pittced.com/news/ikea-subsidiary-swedwood-to-build-first-u.s.-manufacturing-facility-in-vir-2.html

Core Competencies and Entry Mode The optimal entry mode for firms depends to

some degree on the nature of their core competencies

A distinction can be drawn between firms whose core competency is– Technological know-how (avoid licensing & JVs)– Management know-how (franchisee/JV is okay)

The greater the pressures for cost reductions are, the more likely a firm will want to pursue some combination of exporting and wholly owned subsidiaries

Core Competencies and Entry Mode Technological Know-

How– Licensing and joint-venture

arrangements should be avoided if possible

– Should probably use a wholly owned subsidiary

– Exceptions include An arrangement can be

structured to reduce the risk of licensees

If the technological advantage is only transitory

Management Know-How

– The firm’s valuable asset is normally a brand name

– The result is that franchising and subsidiaries are very attractive

– Often times a joint venture is politically more acceptable

Food(U.A.E.)

Home E(France)

Acquisition or Greenfield

Pros:– Quick to execute– Preempt competitors– Possibly less risky

Cons:– Disappointing results– Overpay for firm– Culture clash– Problems with proposed

synergies

Pros:– Can build the subsidiary it

wants– Easy to establish

operating routines

Cons:– Slow to establish– Risky– Preemption by aggressive

competitors

Greenfield Ventures Pros and Cons:

Acquisitions Pros and Cons:

Acquisition or GreenfieldAcquisitions are

attractive if:– There are well established

firms already in operation– Competitors want to enter

the region

Greenfield ventures are attractive if:

– There are no competitors– Competitors have a

competitive advantage that consists of embedded competencies, skills, routines, and culture

Image Source:http://earthfirst.com/wp-content/uploads/2008/06/trump-hair.jpg

Strategic AlliancesCooperative agreements between potential or

actual competitorsAdvantages:

– Facilitate entry into market– Share fixed costs– Bring together skills and assets that neither company has

or can develop– Establish industry technology standards

Disadvantages:– Competitors get low cost route to technology and markets

University of Victoria’s Strategic Alliances

http://external.uvic.ca/http://external.uvic.ca/corp-rels/Strategic-Alliance-Logo-Listing.gif

ASQ Project Management’s Strategic Alliances

http://www.asqprojects.com/images/partners.gif

Soaring Word’s Stratgic Allicances

http://www.soaringwords.org/content/images/strategic_alliances.gif

Phoenix Banking’s Strategic Alliances

http://www.vistaatm.com/about/alliances/logos.jpg

Alliances are PopularHigh cost of technology developmentCompany may not have skill, money or

people to survive aloneGood way to learnGood way to secure access to foreign

marketsHost country may require some local

ownership

Partner SelectionGet as much information as possible on

the potential partnerCollect data from informed third parties

– Former partners– Investment bankers– Former employees

Get to know the potential partner before committing

Structuring the Alliance to Reduce Opportunism

Wendy Jeffus

Harvard Summer School

Chapter 15: Exporting, Importing and Countertrade

Remember Parkers?

An International Company Parker’s Maple Barn

– Note: the population of Mason, NH was 1,147 at the 2000 census.

– http://www.parkersmaplebarn.com/

Why? Falling barriers to trade… Transportation is cheaper and faster… Communication technology is new…

– The internet …more widely used…

– The fax machine (first invented in 1843) …and is faster, more convenient, and less

expensive!– Cost of a 3-minute phone call from NY to London in

1930? $244.65

The Opportunity…The global market is

– 5 times larger than any domestic market…China has 1,338,612,968 people according to the

World Fact Book (July 2009) while the world population is 6,790,062,216.

– Much larger than many markets!The global market is 1,457 times larger than the

market in Singapore.– 2009 Population: 4,657,542

Information Sources U.S. Department of Commerce (www.commerce.gov)

– to foster, promote, and develop the foreign and domestic commerce – www.recovery.gov

International Trade Administration (trade.gov/index.asp)– strengthening the competitiveness of U.S. industry, promoting trade and

investment, and ensuring fair trade and compliance with trade laws and agreements.

Export.gov– Market research and trade leads from the U.S. Department of

Commerce’s Commercial Service – Export finance information from Export-Import Bank and the Small

Business Administration– Agricultural export assistance from USDA

Leads… Apparel & Textiles

– Joint Venture/Franchise for Sporting Goods Location: Karachi, Pakistan Expiration: 05/30/2010

Services– U.S. Pest Control Technology Wanted Location: Safat, Kuwait

Expiration: 10/06/2009– Looking to partner with a U.S company operating in Market Research

Location: Casablanca, Morocco Expiration: 03/30/2010 Healthcare

– Immediate: Chilean Company Needs a Manufacturer of Screening Equipment to Location: Santiago, Chile Expiration: 09/14/2009

Travel (2007)– Chartered Airlift Providers for Cricket World Cup Location: Kingston 5,

Jamaica Expiration: 12/31/2007– Jilin City Developing Beidahu Ski Resort for 2007 Asian Winter Games

Location: Jilin City, China Expiration: 12/31/2007

http://www.export.gov/industry/

Trade Commissions– Maintained by many large cities– Provide business counseling, information gathering,

and financing

Commercial banks and major accounting firms

Other Information Sources

The Minnesota Mining & Manufacturing Company (Ch. 13) Main Principles:

– Enter on a small scale to reduce risks “Make a little, sell a little”

– Add additional product lines (once the initial products become successful)

– Hire local talent to promote the firm’s products UK & Germany – office cleaning crews passed out products Italy – product distributors passed out samples Malaysia – hired young people to pass out samples

“FIDO” First In Defeats Others

Export Strategy

Export and Import Financing

Preference of a US Exporter

Preference of a French Importer

A problem… Firms engaged in international trade have to

work with someone whom…– They have never met…– Lives in a different country…– Speaks a different language…– Follows (or doesn’t follow) a different legal system…– May be difficult to find.

The solution

Tools Used to Aid Transactions Letters of Credit (LOC)

– Bank guarantee on behalf of importer to exporter assuring payment when exporter presents specified documents

This can be quite complicated and expensive in some countries Drafts (Bill of Exchange)

– Written order by exporter, telling an importer to pay a specified amount of money at a specified time

Sight drafts - payable on presentation to the drawee Time draft - negotiable instrument allowing for delay in payment

Bill of Lading (“Title”)– Issued to the exporter by the common carrier transporting the merchandise– Serves three purposes:

1. Receipt - merchandise described on document has been received by carrier2. Contract - carrier is obligated to provide transportation service in return for a certain

charge3. Document of title – can be used to obtain payment or a written promise before the

merchandise is released to the importer

Typical International Transaction

www. Exim.gov

Export Assistance Two forms of government-backed assistance

prospective U.S. exporters can draw on for financing

– Export-Import Bank (www.exim.gov) Referred to as Eximbank Provides loans and loan-guarantee programs Makes commercial banks more willing to lend

cash to foreign enterprises Lends money to foreign borrowers to purchase

U.S. exports– Export Credit Insurance (www.fcia.com)

Provided by Foreign Credit Insurance Association (FCIA)

Consists of private commercial institutions operating under the guidance of Export-Import Bank

Provides credit insurance in case importer defaults in payment

Commercial and political risks taken into account

The Role of Government in the Export/Import Environment

Political– Protecting jobs and industries– National security– Retaliation

Economic– Develop/protect infant industry– Strategic trade policy

First mover advantage The ‘catch-up’ argument

Types of Countertrade Barter

– Direct exchange of goods and services between two parties without a cash transaction– Two-fold problems

If goods are not exchanged simultaneously, one party ends up financing the other for a period Goods may be unwanted, unusable, or have a low re-sale value

Counterpurchase– China buys industrial equipment from a US firm and the US firm promises to spend some of

the proceeds on Chinese textiles Offset

– One party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale

– Party can fulfill the obligation with any firm in the country to which the sale is being made– Gives exporter greater flexibility to choose goods to be purchased

Switch trading– Occurs when a third-party trading house buys the firm’s counterpurchase credits and sells

them to another firm that can better use them Compensation or buybacks

– Occurs when a firm builds a plant in a country or supplies technology, equipment, training, or other services

– Agrees to take certain percentage of plant’s output as partial payment for the contract

Countertrade

Advantages Means to finance an export deal

when other means are not available

Unwilling firms may lose an export opportunity and be at a competitive disadvantage

Disadvantages No hard currency Exchange of unusable or poor-

quality goods that cannot be disposed profitably

Expenses relating to maintaining an in-house trading department to arrange and manage countertrade deals

Countertrade is most attractive to huge multinationals that can use their worldwide network of contacts to most profitably dispose goods

Wendy Jeffus

Harvard Summer School

Chapter 18: Global Human Resources Management

IBM Thinkpad In 2004 Lenovo purchased IBM’s PC division for

$1.75B.

Moved global headquarters to New YorkAcquired 4,000 employees (2,400 in the U.S.)Appointed Stephen Ward the former head of IBM’s PC division as the CEO of Lenovo

http://www.lenovo.com/planetwide/select/selector.html

Human Resource Management Four major tasks of HRM

– Staffing policy Who do you hire?

– Management training and development How do you train them?

– Performance appraisal How do you critique their performance?

– Compensation policy What should you pay them?

HRM Strategic role: HRM policies should be congruent

with the firm’s strategy and its formal and informal structure and controls

Summer 2006 Intern trip to Sea World San Antonio

Source: Company websites

International HRM Task complicated by profound differences

between countries:– Labor Markets

Skilled labor, average workday, influence of unions,

– Culture Role of women, role of religion, distance between the boss

and the employee, emphasis on time!

– Legal Handshake, legal support, labor laws

– Economic Systems Fixed vs. floating currencies

International Human Resource Mgmt.

HR plays a large role in an organization’s architecture

Staffing Policy Staffing policy

– Selecting individuals with skills to do a particular job– But also a tool for developing and promoting

corporate culture

3 types of Staffing Policy

Source: Company website

1. Ethnocentric Policy Key management positions filled by parent-

country nationals (belief: Home country skills are superior)

Advantages:– Overcomes lack of qualified managers in host nation– Unified culture– Helps transfer core competencies

Disadvantages:– Produces resentment in host country– Can lead to cultural shortsightedness

2. Polycentric Policy Host-country nationals manage subsidiaries Parent company nationals hold key headquarter

positions (belief: each host country is unique) Advantages:

– Alleviates cultural shortsightedness– Inexpensive to implement– Helps transfer core competencies

Disadvantages:– Limits opportunity to gain experience of host country nationals

outside their own country– Can create gap between home and host country operations

3. Geocentric Policy Seek best people, regardless of nationality (belief: there

are both similarities and differences) Advantages:

– Enables the firm to make best use of its human resources– Equips executives to work in a number of cultures– Helps build strong unifying culture and informal management

network Disadvantages:

– National immigration policies may limit implementation– Expensive to implement due to training and relocation– Compensation structure can be a problem

Nestlé: Global HRM Headquarters: Vevey, Switzerland ~250,000 employees, (100 different nationalities) Emphasis on language skills (You must be fluent in English and in

two other languages) All entry level graduate positions featured are international careers.

– Engineering– Nestlé Audit Group– Nestlé Productivity Team– Marketing & Sales

Expatriates at Nestlé make a long-term commitment to carry out a series of two to three year assignments abroad, moving from one country to another.

– International expatriates have the opportunity to work in many locations – mainly in Asia, Africa, Eastern Europe and Latin America.

http://www.nestle.com/Careers/Introduction/Careers.htm

The Expatriate Problem Expatriate: citizens of one country working in

another– Expatriate failure: premature return of the expatriate

manager to his/her home country Cost of failure is high: estimate = 3X the expatriate’s annual

salary plus the cost of relocation.

US multinationals– Inability of spouse to adjust– Manager’s inability to adjust– Other family problems– Manager’s personal or

emotional immaturity– Inability to cope with larger

overseas responsibilities

Japanese Firms– Inability to cope with larger

overseas responsibilities– Difficulties with the new

environment– Personal or emotional

problems– Lack of technical competence– Inability of spouse to adjust

Reasons for Expatriate Failure

Expatriate Failure Rate

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Expatriate Selection Reduce expatriate failure rates by improving

selection procedures An executive’s domestic performance does not

(necessarily) equate to his/her overseas performance potential

Employees need to be selected not solely on technical expertise, but also on cross-cultural fluency

1. Self-Orientation– Possessing high self-esteem, self-confidence and mental well-

being

2. Others-Orientation– Ability to develop relationships with host country nationals – Willingness to communicate

3. Perceptual Ability– The ability to understand why people of other countries behave

the way they do– Being nonjudgmental and flexible in management style

4. Cultural Toughness– Relationship between country of assignment and the expatriate’s

adjustment to it

Four Attributes that Predict Success

Training Cultural training:

– Seeks to foster an appreciation of the host country’s culture

Language training: – Can improve expatriate’s effectiveness, aids in

relating more easily to foreign culture, and fosters a better firm image

Practical training: – Ease into the day-to-day life of the host country

Management Development Development:

– Broader concept involving developing manager’s skills over his or her career with the firm

Several foreign postings over a number of years Attend management education programs at regular intervals

Repatriation of Expatriates

Didn’t know what position they hold upon return.

Firm vague about return, role and career progression.

Took lower level job.

Leave firm within one year.

Leave firm within three years

10 20 30 40 50 60 70percent

Management Development & Strategy Development programs designed to increase the

overall skill levels of managers through:– Ongoing management education– Rotation of managers through a number of jobs within

the firm to give broad range of experiences Used as a strategic tool to build a strong unifying

culture and informal management network

Performance Appraisal Problems:

– Unintentional bias Host nation biased by cultural frame of reference Home country biased by distance and lack of experience working

abroad

Expatriate managers believe that headquarters unfairly evaluate and under-appreciate them

In a survey of personnel managers in U.S. multinationals, 56% stated foreign assignment either detrimental or immaterial to one’s career

Compensation Two issues:

1. Pay Should you pay executives in different countries according

to the standards in each country OR equalize pay on a global basis?

2. Method of payment

Compensation in Various Countries

Additional source: US Bureau of Labor Statistics http://www.bls.gov/fls/

Compensation in Various Countries

Typically use balance sheet approach– Equalizes purchasing power to maintain same

standard of living across countries – Provides financial incentives to offset qualitative

differences between assignment locations

Expatriate Pay

Components of Expatriate Pay Base Salary

– Same range as a similar position in the home country Foreign service premium

– Extra pay for work outside country of origin Allowances

– Hardship, housing, cost-of-living, and education allowances Taxation

– Firm pays expatriate’s income tax in the host country Benefits

– Level of medical and pension benefits identical overseas

The Balance Sheet Approach

International Labor Relations Key Issue

– Degree to which organized labor can limit the choices of an international business

Aims to foster harmony and minimize conflicts between firms and organized labor

Concerns of Organized Labor Multinational can counter union bargaining

power with threats to move production to another country

Multinational will keep highly skilled tasks in its home country and farm out only low-skilled tasks to foreign plants– Easy to switch locations if economic conditions

warrant– Bargaining power of organized labor is reduced

Friday Review Session Harvard Hall Room 202

– 1:00pm – 3:30pm

Brian will be available to Review/Edit your final projects.