Slide 1.1 Alan M Rugman and Simon Collinson, International Business, 5 th Edition, © Pearson Education Limited 2009 Regional and global strategy Chapter

Slide 1.1

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009

Regional and global strategy

Chapter 1

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Introduction

• International business: the study of transactions taking place across national borders for the purpose of satisfying the needs of individuals and organizations.

• Multinational enterprises (MNEs): a company headquartered in one country but having operations in other countries.

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• Most MNE activity can be classified into two major categories: (1) Trade (exports and imports): More than 50% of all trade is made by the world’s largest 500 MNEs.

(2) Foreign direct investment (FDI): 80% of all FDI is made by the world’s largest 500 MNEs.

MNE activity

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Trade and investment

• Trade consists of exports and imports:– Exports: goods and services produced in one

country and then sent to another country.

– Imports: goods and services produced in one country and bought in another country.

• Foreign Investment: consists of companies investing funds to start or improve operations in another country.

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The triad

• Most global transactions take place within and between three key regions: the United States, the European Union and Japan; these are referred to as: the ‘triad’.

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The triad: the United States (US)

• The US has the largest economy in the world with a GDP of over $10 trillion.

• The US is part of the North American Free Trade Agreement (NAFTA) with Canada and Mexico.

• The US economy is significantly larger than that of its two trading partners and is therefore a triad member on its own.

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The triad: the European Union (EU)

• The EU (or EU27) is composed of the countries in the EU15 (Austria, Belgium, Denmark, Finland, Germany, Greece, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the UK) and twelve new, mainly Central European, countries that joined in 2004 and 2007.

• The collective GDP of the EU is greater than that of the US and Japan.

• The EU27 is the world’s largest importer and exporter.

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The triad: Japan

• Japan is the largest economy in Asia.• Japan is the 4th largest importer and 4th largest

exporter in the world.

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Today’s international environment

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• The international business environment has changed rapidly in recent years as a result of:– an overall slowdown of triad economies;

– increased trade liberalization through trade agreements;

– improvements in technology;

– the emergence of SMEs.

International business environment

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Slowdown of triad economies

• In the late 1990s and early 2000s, the United States, the EU and Japan all experienced a reduction in economic activity, which in turn decreased international business activity.

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International trade regulation

• An important international business trend has been the emergence of regional and global trade and investment liberalization and international regulation.– The World Trade Organization (WTO).

– General Agreement on Tariffs and Trade (GATT).

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The world trade organization

• Established on January 1, 1995.• An international organization that deals with rules

of trade among member countries.• Enforces the provisions of the General Agreement

on Tariffs and Trade (GATT).• Acts as a dispute-settlement mechanism.

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The general agreement on tariffs and trade (GATT)

• Established in 1947 to liberalize trade and to negotiate trade concessions among member countries.

• Today, the WTO is enforcing the provisions of the GATT.

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Improved technology

• More powerful and affordable technology has promoted fast easy worldwide communication and improved production capabilities enabling organizations to operate more effectively in the international marketplace.

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Small and medium-sizedenterprises (SMEs)

• The definition of SMEs varies according to the nation. In general, it refers to companies with between 11 and 500 employees with sales of less than $5 million.

• MNEs often purchase from SMEs. This is because their specialized workforces, innovation and technology allows SMEs to provide goods and services more efficiently than if the MNE were to source these internally.

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Globalization and strategic management

Regional triad strategies

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Misconceptions about MNEs

Common misconceptions about MNEs:– MNEs have far-flung operations or earn most of

their revenues overseas.

– MNEs are globally monolithic and excessively powerful in political terms.

– MNEs produce homogeneous products for the world market and through their efficient techniques are able to dominate local markets everywhere.

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In fact,– MNEs earn most of their revenues in their home

regions.

– The largest 500 MNEs are not spread around the world but clustered around the triad.

– These MNEs engage not in global competition but in triad/regional competition; this rivalry effectively eliminates enduring political advantage.

– MNEs adapt their products for the local market.

Misconceptions about MNEs (Continued)

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The Multinational enterprise (MNE)

Chapter 2

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• Objectives• The nature of multinational enterprises• Strategic management and multinational

enterprises• A framework for global strategies: the FSA/CSA

matrix.• It’s regional, not flat.

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Objectives

• Describe the characteristics of MNEs.• Explain the internationalization process.• Explain why firms become MNEs.• Discuss the strategic philosophy of these firms.• Introduce a country/firm framework for examining

a firm’s competitiveness.

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• A company headquartered in one country but with operations in one or more other countries.

• MNEs often downplay the fact that they are foreign-held.

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The nature of MNEs

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Table 2.1 The world’s largest 500 multinational enterprises, 2007Source: Authors’ calculations and adapted from Fortune, The Global 500, July 23, 2007

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Characteristics of MNES

• Affiliates must be responsive to a number of important environmental forces, including competitors, customers, suppliers, financial institutions, and government.

• Draw on a common pool of resources, including assets, patents, trademarks, information, and human resources.

• Affiliates and business partners are linked together by a common strategic vision.

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Figure 2.1 The multinational enterprise and its environment

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The internationalization process

• Internationalization: The process by which a company enters a foreign market.

• Not all international business is done by MNEs. Indeed, setting up a wholly-owned subsidiary is usually the last stage of doing business abroad.

• Why do businesses wait to set up wholly-owned subsidiaries?

– Foreign markets are risky.

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A typical internationalization process

• Initially, the firm might license patents, trademarks or technology to a foreign company in exchange for a fee or royalty.

• The firm sees a potential for extra sales by exporting and uses a local agent or distributor to enter a foreign market.

• The firm may use exporting as a “vent” for its surplus production and might have no long-term commitment to the international market.

• As exports become more important, the MNE will set up an office for its sales representative or a sales subsidiary.

• The firm might set up local packaging and/or assembly operations.

• Finally, the firm will set up a wholly-owned subsidiary (FDI).

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Figure 2.2 Entry into foreign markets: the internationalization process

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Why do firms become MNEs?

• to diversify themselves against the risks and uncertainties of the domestic business cycle;

• to tap the growing world market for goods and services;

• in response to foreign competition; • to reduce costs;• to overcome barriers to entry into foreign markets;• to take advantage of technological expertise by

manufacturing goods directly.

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The strategic philosophy of MNEs

• MNEs make decisions based on what is best for the overall company, even if this means transferring jobs to other countries and cutting back the local workforce.

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Table 2.2 The international expansion of four MNEsSource: United Nations, World Investment Report 2001 (Geneva: United Nations Conference on Trade and Development, 2001)

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Strategic management and MNEs

• The strategic management process involves four major functions: strategy formulation, strategy implementation, evaluation, and the control of operations.

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Figure 2.3 The strategic management process in action

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Basic mission

• The following questions must be answered to determine the firm’s basic mission:– What is the firm’s business?– What is the reason for its existence?

For example,• Royal Dutch/Shell; BP Amoco and Texaco are in the

energy business, not the oil business.

• AT&T, Sprint and MCI are in the communications business, not the telephone business.

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Analysis of the external andinternal environment

• The goal of external environmental analysis is to identify opportunities and threats that will need to be addressed.

• The purpose of an internal environmental analysis is to evaluate the company’s financial and personnel strengths and weaknesses.

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Formulation of objectivesand overall plan

• Internal and external analyses will help identify long-term (2–5 years) and short-term (< 2 years) goals.

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The implementation process

• Once goals have been established, the plan is then broken into major parts and each affiliate and department is assigned goals and responsibilities.

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Evaluation and control of operations

• Progress is periodically evaluated and changes are made in the plan to accommodate changing circumstances and new information.

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Framework for global strategies:the FSA/CSA matrix

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Building blocks in our international business

• There are two basic building blocks in an international business course.– Firm-specific advantages (FSAs): a unique

capability proprietary to the organization It may be built upon product or process technology,

marketing or distributional skills.

– Country-specific advantages (CSAs): country factors Natural resource endowments (minerals, energy

and forests), the labour force and associated cultural factors, etc.

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Figure 2.4 The basic components of international business

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Figure 2.5 The FSA-CSA matrix

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The competitive advantage matrix

• Quadrant 1: resource-based and/or mature, globally-oriented firms producing a commodity-type product cost leadership (Improving FSA can make them move to quadrant 3.)

• Quadrant 2: inefficient, floundering firms no alternative but to exit or to restructure

• Quadrant 3: follow any of the generic strategies both cost leadership & differentiation

• Quadrant 4: differentiated firms with strong FSAs in marketing and customization differentiation (the CSA is not relevant)

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It’s regional, not flat

• The world is flat by Thomas Friedman, the New York Times journalist.

–Today, a large proportion of international business

takes place through offshoring leading to globalization.

• The world is not flat!–There remain strong barriers as a business attempts

to cross the boundaries of triad regions. –The liability of inter-regional foreignness.

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CULTURE

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What is Culture?

Integrated system of learned behavior patterns that are characteristic of the members of any given society.

Context Orientation in Major Cultures

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Introduction

• Culture: “the sum total of the beliefs, rules, techniques, institutions and artifacts that characterize human populations” or “the collective programming of the mind”.

• Socialization Process: The process of enculturation or the adoption of the behaviour patterns of the surrounding culture.

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Table 5.1 World population percentages in terms of home region, language and religionSources: www.census.gov; www.adherents.com

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Language

• Language is critical to culture because it is the primary means used to transmit information and ideas.

• Knowledge of local language can:– permit a clearer understanding of a situation;

– provide access to local people;

– allows the person to pick up nuances, implied meanings, and other information that is not stated outright.

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Religion

• Religions influence lifestyles, beliefs, values and attitudes and can have a dramatic effect on the way people in a society act toward each other and towards those in other societies.

• Religion also influences:– the work habits of people;

– the work and social customs (from the days of the week on which people work to their dietary habits);

– politics and business.

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Values and attitudes

• Values: basic convictions that people have regarding what is right and wrong, good and bad, important and unimportant.

• Attitude: a persistent tendency to feel and behave in a particular way toward some object.

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Customs and manners

• Customs: common or established practices.• Manners: behaviour regarded as appropriate in a

particular society.

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The importance of culture in different business contexts

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Influences of culture on international management

Culture influences strategic management in a number of ways:• Work attitudes

–for example, work ethics, organization commitment, etc.

• Achievement motivation –the desire to accomplish objectives and achieve success.

• Time and future–for example: punctuality, decision-making time constraints, time expectations on implementation

of plans, etc.• Ethics

–standards of conduct and morality.

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Geert Hofstede’s four cultural dimensions

• Power distance: measures the degree to which less powerful members of organizations and institutions accept the fact that power is not distributed equally.

• Uncertainty avoidance: measures the extent to which people feel threatened by ambiguous situations and have created institutions and beliefs for minimizing or avoiding those uncertainties.

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• Individualism vs. collectivism– Individualism: the tendency of people to look after

themselves and their immediate family only.

– Collectivism: the tendency of people to belong to groups who look after each other in exchange for loyalty.

Geert Hofstede’s four cultural dimensions (Continued)

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• Masculinity vs. femininity– Masculinity: the degree to which the dominant

values of a society are success, money and material goods.

– Femininity: the degree to which the dominant values of a society are caring for others and the quality of life.

Geert Hofstede’s four cultural dimensions (Continued)

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Figure 5.2 Hofstede’s power distance against individualism for 20 countriesSource: Hofstede, G. (1983). The cultural relativity of organizational practices and theories, Journal of International Business Studies, Fall, p. 92. Copyright © Geert Hofstede

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Elements of Culture

CONCRETE ELEMENTS

•LanguageVerbalNonverbal

•Infrastructure

•Education

•Social Institutions

ABSTRACT ELEMENTS

•Religion

•Values and attitudes

•Manners and customs

•Aesthetics

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Understanding Cultural Differences

Four Dimensions of Culture

• Individualism

• Power distance

• Uncertainty avoidance

• Masculinity

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Societal and Institutional Differences

Aspects China

United States

Ethnic Culture•Centered around "relationships"•"Reclusive", each minding his/her own business (especially with "strangers" and people outside of the relationship network)

•Centered around "individuals"•"Messianic": "let's save the world"

Source of Trust Trust those around you; don't "lose face" and credibility by failing to live up to written or oral agreements

Trust the contract; don't get into legal hassles by not fulfilling the agreement

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Business Culture Quiet and reserved; clumsy communicators

Outspoken; eloquent; effective communicators

Negotiation Style Group decision; final say by the "boss"

More individual authority and distributed decision making

Dealing with Business Counterparts

Indirect; courteous; take things personally; long memory for both favors and humiliations

Direct; more matter-of-factly; memory for conflict superceded by business objective

Ability to Make Immediate Response

Weak Strong

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Aspects China

United States

Interpersonal "Relationship" comes first "Economics" comes first

On "Humility" "Humility" viewed as a virtue "Humility" is a sign of weakness; there is every reason for the abled to be proud

Time Horizon Accountable by the generation (~30 years)

Accountable by the quarter (~3 months)

What Commands Respect Respect for seniority, wisdom, ability

Respect for success, achievement, wealth

On "Family" Children should learn to respect the elder, love the young, and rely on the "extended family"

Children should learn to be independent

On "the Strong" and "the Weak" It is not righteous to bully It is an honor to win; business is all a competition; it is only natural that the weak is preyed on by the strong

Discipline (in following procedures and schedules)

Strong Depends on the individual

Tolerance of Diversity / Openness to Alternative (possibly opposing) Ideas

Openly - very receptive; but actually, less so

More open

Shame or Humiliation Long memory; need and urge to exonerate

Tends to be superceded by business priorities

Priorities Mixed: business, individual, factional, nationalistic, and political

Almost strictly business

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JAPAN

Culture and firms’ analysis

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Social and cultural characteristics

• Collectivism rather than individualism, dominates many aspects of Japanese life.

• Within companies certain characteristics have strong religious roots, including honour, respect, sincerity, loyalty (chu), duty, obligation or responsibility (giri), ritual and hierarchy.

• Parent–child relationships characterise the hierarchical nature of inter-organizational and interpersonal links, such as government–industry, large firm–small firm, manager–employee, etc.

• Respect for elders, ritualistic (highly-complex) language forms and behaviour, group activities and consensus decision making are all important elements.

• These contrast individualism and meritocratic forms of organization and tend overall to unify the Japanese in their response to gaijin (or outsiders).

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Hai ≠ Yes

• Hai can mean one of at least four levels of yes:– recognition, but not necessarily understanding; – understanding, but not necessarily acceptance and

agreement; – responsibility, understanding, but must consult with

others and secure their agreement before acceptance; and

– agreement, which means understanding, agreement and acceptance.

• The non-verbal signals from the speaker have to be understood to determine, which yes is being meant.

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Keiretsu

• The renowned Japanese corporate groupings or keiretsu, characterised by cross-shareholdings and regular meetings between executives, represent more or less closely tied groups of integrated businesses.

• There are broadly two types of keiretsu, the horizontal (kinyu) type and the vertical, manufacturing keiretsu.

• In the early 1980’s the top six keiretsu alone directly accounted for about 5% of the Japanese labour force and 16% of total Japanese corporate sales.

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Distribution, retailing and customer-orientation

• Associated with the keiretsu industry groupings are multi layered distribution and retail networks in Japan.

• This “tied” system of distribution, bound by strong face-to-face ties between sellers and buyers at each level, adds substantial costs to the final product.

• Many elements of this complex distribution system remain in Japan today. The multi tiered distribution hierarchy has become more simplified, however, driven by the growth in discount stores and cost-reduction measures.

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• We can distil some of the main characteristics of the generic Japanese management style as: – Effective communications internally and with

outside firms, and the use of cross-disciplinary, cross-business and cross-functional workshops.

– Less separation of R&D, design, manufacturing and marketing functions.

– Life-time employment, low labour mobility and substantial investments in training. There is also a strong emphasis on training on-the-job and job-rotation within the firm.

Characteristics of Japanese management

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– Strict formal hierarchy combined with strong underlying informal networks and a tendency towards consensus-based decision making (‘horizontal promotion’ for high-fliers and a lack of outsiders entering the firm at senior levels).

– General “long-termism” with a focus on growth and employment stability and market share rather than profits and shareholder dividends.

Characteristics of Japanese management (Continued)

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• Abegglen and Stalk (1985) sum up some of the distinctive characteristics of Japan as the ‘‘3 Ms’’. – marketing: direct links with consumers via

retailers and wholesalers and strong customer-led product development;

– money: cross-shareholding and the lack of outside pressure for short-term returns and stock price improvements;

– manpower strategy: worker involvement, loyalty, effective team-working, and devolvement of responsibility combined with hierarchy.

Kaisha (“company”)

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Emerging economies

Chapter 19

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Introduction

• Emerging market countries are: – Growing in importance for international managers

for both market-seeking investments and resource-seeking investment.

– Strongly government-controlled, in that government agencies play a central role in negotiating with foreign investors and deciding the local rules of the game.

– Less predictable and riskier than triad markets, which investors often underestimate in their pursuit of the high level of rewards on offer.

– The source of new competitors, as local firms move up the value-chain, becoming more sophisticated and more international.

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• There are two types of international expansion that are important in relation to non-triad firms:– internationalization from the triad into non-triad

regions;

– the internationalization of newer MNEs from outside the triad who are looking to access larger economies.

Types of international expansion

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Triad firms and emerging economy firms: why the mutual interest?

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• For triad-based MNEs:– Triad economies are growing slowly relative to

emerging markets both large, like India, China and Brazil and small, like Poland or Malaysia

– Triad regions also tend to be more expensive, in terms of labour costs, infrastructure, land, materials and supporting industries, relative to non-triad regions.

– As a result, there are strong incentives for triad-based firms to: sell products, services, and other outputs into these

growing, non-triad markets; to source inputs, from cheap labour or manufactured

components to services, from such places.

Triad firms and emerging economyfirms: why the mutual interest?

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• For non-triad-based MNEs:– Large, mature markets like the US, the EU and

Japan offer opportunities to sell their products.

– Many firms also look to these countries to fill gaps in their assets, resources and capabilities, from technological know-how or specialist components, to brands.

Triad firms and emerging economyfirms: why the mutual interest? (Continued)

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Figure 19.1 What is the attraction for triad and non-triad firms investing in each other’s home regions?

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An overview of emergingeconomies, by region

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Asia-Pacific and the Middle East

• Receive 22% of global FDI flows, the most of any non-triad region.

• 90% of FDI is concentrated in only 10 countries.– China, Hong Kong (China) & Singapore receive the

most FDI.

– The oil rich countries of the Middle East also experience FDI, but this is almost exclusively related to their oil industries.

• Many of the countries in the region continue to liberalize their economies and privatize state-owned assets.

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• There are two clear trends that indicate the dynamism of the Asia region.– The growth on intra-regional investment,

particularly driven by the regional giants India and China joining countries like Malaysia, South Korea, Taiwan and Singapore as active investors.

– FDI in services is growing rapidly and now represents over 50% of FDI stock in the Asia region.

Asia-Pacific and the MiddleEast (Continued)

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• 36 out of the 50 largest non-financial MNEs from developing countries listed by UNCTAD are from the Asia-Pacific region.– The largest number from any country comes from

Hong Kong (China), for example, Hutchison Whampoa (Hong Kong)

– Others from the region include Singtel (Singapore); Petronas (Malaysia); Samsung Electronics (South Korea); etc.

MNEs from Asia Pacific

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Central and Eastern Europe

• Despite years of political and economic change, including liberalization, the Central and Eastern European region still attracts a relatively small percentage of global FDI inflows (just over 4%).

• Poland, the Czech Republic and Hungary receive larger shares of FDI than other countries in the region but have experienced declines in recent years, as has the Russian Federation.

• These, plus 5 other CEE countries (Estonia, Latvia, Lithuania, Slovenia and Slovakia) joined the EU in May 2004 and all saw FDI inflows shrink recently, but prospects look better from now on.

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MNEs from Central and Eastern Europe

• The largest MNEs in the CEE region are Russian, many of them based on the country’s abundant natural-resources, such as Gazprom, Rosneft and LuKoil.

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Latin America and the Caribbean

• 11% of global FDI went to the Latin America region in 2006.

• The three largest economies of Argentina, Brazil and Mexico had a difficult decade in terms of economic growth and recession, which stymied FDI inflows.

• A spate of privatizations during the late 1990s boosted inward FDI for these and other regional economies and as this process came to an end, so did the FDI inflows.

• Brazil and Mexico still received the highest amounts of FDI and, as we would expect, one-third of all FDI into the region came from the USA.

• Many Latin American countries now face increased competition for US manufacturing investment from China and the Asian region.

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MNEs from Latin America

• 8 of the 50 largest non-financial MNEs from developing countries listed by UNCTAD are from the Latin American region.– Half of them are based in Mexico.

• Many of the largest are natural resources based. – These include the largest of all, Cemex (Mexico),

Petrobras (Brazil), Companhia Vale do Rio Doce (Brazil), Metalurgica Gerdau (Brazil) and Perez Companc (Argentina).

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Africa

• Less than 4% of total global FDI goes to Africa.– Resource-rich economies (oil, diamonds, gold and

platinum)

• Home to most of the world’s least-developed countries (LDCs).

• Africa has always recorded low levels of inward FDI because of its relative lack of political instability, weak infrastructure, poor labour skills and macro-economic fragility.

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MNEs from Africa

• Only 5 of the 50 largest non-financial MNEs from developing countries listed by UNCTAD are from Africa and they are all South-African.

• Sappi, Sasol, MTN Group and Barloworld are major players in their respective sectors throughout the region.

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Figure 19.6 Firm-specific advantages (FSAs) for the new multinationals

Documents

Slide 1.1 Alan M Rugman and Simon Collinson, International Business, 5 th Edition, © Pearson Education Limited 2009 Regional and global strategy Chapter