Sri Chandrasekharendra Saraswathi Viswa Maha Vidyalaya
Department of Management Studies
International Business Environment
SWARAJ Assistant Professor UNIT I Characteristics of Business
Change Govern Large ment Size Control
Characteris Competi tics Diversifi of tion Business cation
Informa Globaliz tion ation Technol ogy International Business
International Business • Activities that buys and sells goods and services across two or more national boundaries • International business is related with those enterprises which have operating units outside their own country • Conducting international business is really not like playing a whole new ball game but it is like playing in a different ball park, where the managers have to learn the factors unique to Business Excellence (Getting the Big Picture of business) Who are the Stakeholders of Business ?
• Shareholders and Promoters
• Customers
• Employees
• Suppliers and Partners (incl Contractors, Agents etc)
• Government
• Society Most Admired Business “Balancing and Exceeding the Expectations of all it’s Stakeholders.” Most Admired Business “Balancing and Exceeding the Expectations of all it’s Stakeholders.”
Effectiveness of Business Achievement of Objectives.
Efficiency in Business Achievement of Results with the least amount of Resources.
Innovation Emerging Waves
Factor Yesterday Today
Market Sellers Buyers Players Few Several Kind of Players National Global Price Level High Dropping Consumer No choice Multiple Choice Technology Low High Quality Average High Delivery Weeks/Months/Years Off the shelf Needs Limited Enhanced Response Sluggish Quick Relation Curt Respect Approach Mass Personalised International Business Scope : “World is turning into a Global village”. “SMOOTH” 1. Source raw materials wherever they are cheapest. 2. Manufacture anywhere in the world where it is most cost effective. 3. Obtain and Sell in those global markets where prices are highest. 4. Organize and Raise finances globally. 5. Try and Forge international strategic alliances. 6. Hire the best talent from all over the world. To manage all the above points. And you will have achieved the stature of a true Global Organization International Business Difference between Domestic and International business 1. Higher rate of profits (Absolute advantages, taxes, concessions and incentives) 2. Expansion of production capacities 3. Competition (pull & push effects) 4. Wide market 5. Political stability 6. Technology 7. High cost of transportation International Business Growing importance of International Business Current trends are towards the increasing globalisation and interdependence of firms, markets and countries.
Intense competition at global level
Exchange rate developments – shift from –ve to +ve growth
Global capital flows to LDCs
Differences in Price and Cost
Restructuring the economy to integrate with global economy
Increased importance of CSR
The growing importance on enhancing standard of living in LDCs
Liberal trade policies and procedures
Revolution in communication and transportation International Business International Business Corporate Approaches
1. Ethnocentric (Home country orientation)
2. Polycentric (Host country orientation)
3. Regiocentric (Regional orientation)
4. Geocentric (World orientation) Types of International Organisation
• Built-in Export Department
• Separate Export Department
• Export Sales Subsidiary
• International Division
• Global Organisational Structure International Business Home Country Economic Environment
1. Domestic Markets & Size
2. Economic Policies
3. Promotional and Regulatory measures International Business Host Country Economic Environment 1. Size of the Markets 2. Gross Domestic Product 3. Industrialisation 4. Development of Banking Facilities 5. Purchasing Power and Standard of Living 6. Foreign Exchange Situation 7. Income levels 8. Economic diversity (urbanisation – Rural dev. Ex Johannesburg, Sao Paolo International Business Global Economic Environment 1. International organisations
2. Trading Blocs
3. Strategic Locations
4. Global Political Environments and Issues International Business SAARC (7): South Asian Association for Regional Cooperation India, Pakistan, Sri Lanka, Nepal, Bhutan, Bangladesh, Maldives
NAFTA (3) : North American Free Trade Agreement USA, Canada, Mexico
LAFTA (9) : Latin American Free Trade Area Argentina, Brazil, Mexico, Chile, Peru, Uruguay, Paraguay, Columbia, Ecuador
ASEAN (5) : The Association of South East Asian Nations was formed by the Bangkok Declaration, 1967, by five countries, viz., Indonesia, Malaysia, Philippines, Singapore and Thailand. International Business EU (15) : European Union Austria, Belgium, Britain, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden. Euro : Common currency of the EU was launched by 11 members on 1.1.1999, Britain, Denmark, Sweden did’nt join. Greece joined in 1.1.2001 Maastricht Treaty of 1991 set the stage for the monetory union. EU Additions With effect from May 1, 2004 the total membership of EU increased to 25. Following ten countries were inducted. Estonia, Latvia, Lithuania, Poland, Czech Republic, Hungary, Slovenia, Slovakia, Cyprus and Malta. Two more members, Bulgaria and Romania, were inducted in 2007, taking the tally to 27 countries. International Business International Business Environment 1. Internal Environment Org. Structure ( I P O ) Production Marketing Finance H R R & D I T Business Development International Business International Business Environment 2. External Environment a. External Micro Environment All Stakeholders and Competitors
b. External Macro Environment S T E P I N (Social, Technical, Economical, Political, International, and Natural) Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria and other diseases Ensure environmental sustainability Develop a global partnership for development Stop Child Labour Importance of International Business
If you are not thinking international,
you are not thinking business management
23 Global Environment and Chapter 4 International Managers Topics Difficulties Operating in Borderless World Challenges Economic Legal-political Socio-cultural Multinational Corporations Foreign Markets - Entrance
Managers’ Challenge: Wal-Mart Managers
24 A Borderless World Business is becoming a unified, global field Companies that think globally have a competitive edge Domestic markets are saturated for many companies Consumers can no longer tell from which country they are buying
25 Four Stages of Globalization
Domestic stage: market potential is limited to the home country production and marketing facilities located at home International stage: exports increase company usually adopts a multi-domestic approach Multinational stage: marketing and production facilities located in many countries more than 1/3 of its sales outside the home country Global (or stateless) stage: making sales and acquiring resources in whatever country offers the best opportunities and lowest cost ownership, control, and top management tend to be dispersed
26 4 Stages of Globalization 1. Domestic 2. International 3. Multinational 4. Global
Strategic Orientation Domestically Export- Oriented Multinational Global Oriented multi-domestic
Stage of Development Initial foreign Competitive Explosion of Global involvement positioning international operations
Cultural Sensitivity Of little Very important Somewhat Critically importance important important
Manager Assumptions “One best “Many good “The least-cost “Many good way” ways” way” ways”
SOURCE: Based on Nancy J. Adler, International Dimensions of Organizational Behavior, 4th ed. (Cincinnati, Ohio: South-Western, 2002), 8- 9.
27 Global (stateless) Corporations Number is increasing Awareness of national borders decreasing Rising managers expected to know a 2nd or 3rd language Corporate Example – Nestle (Swiss) CEO Peter Brabeck–Letmathe (Austrian) Half of general managers (non-Swiss) Strong faith in regional managers who are native to the region
28 The International Business Environment
International management is management of business operations conducted in more than one country Fundamental tasks do not change Basic management functions are the same - domestic or international Greater difficulties and risks when performing on an international scale
29 International Environment Factors
Economic Legal-Political •Economic •Political risk development •Infrastructure •Government •Resource and takeovers product markets •Tariffs, quotas, taxes Organization •Per capita •Terrorism, political Income instability •Exchange rates •Laws, regulations •Economic conditions Sociocultural •Socio values, beliefs •Language •Religion (objects, taboos, holidays) •Kinship patterns •Formal education, literary •Time orientation
30 Types of Businesses Forms of Business Ownership
Forms of business ownership and types of businesses describe how they are organized and run. The four main forms of business ownership are listed below. • sole proprietorship • partnership A franchise is a • corporation • co-operatives combination, or hybrid, of the four forms of ownership. Sole Proprietorships A sole proprietorship is a business owned by one person who is known as the proprietor. The proprietor has a wide range of responsibilities including arranging displays and selling to customers to name a few. Funds to run the business usually come from the owner’s savings, friends, family, or from a bank loan. If the business prospers, the owner receives all of the profits. If the business does poorly, the owner is responsible for its losses. This is called unlimited liability. 31 Types of Businesses Forms of Business Ownership
Partnerships A partnership refers to a type of business in which two or more individuals share the costs and responsibilities of owning and operating it.
The terms of the partnership are recorded in the partnership agreement. The most common form of partnership is a general partnership. When two individuals form a limited partnership, the partners are only responsible for the funds they both invested in the initial business. This is called limited liability.
32 Types of Businesses Forms of Business Ownership
Corporations A corporation is a business granted legal status with rights, privileges, and liabilities that are distinct from those of the people who work for the business. Corporations can be small such as a one-person business or large such as A multinational that conducts business in several different countries.
Small portions of corporate ownership that are owned publicly are called stocks or shares. Individuals who own shares of a corporation are called shareholders and become owners of the business. Shareholders have limited liability. A board of directors runs a corporation that is owned by shareholders.
A publicly traded corporation that makes a profit may pay out dividends to shareholders. 33 Types of Businesses Forms of Business Ownership
Types of Corporations • private corporations • public corporations • Crown corporations •municipal corporations Co-operatives A co-operative is owned by the workers or members who buy the products or use the services that the business offers. This type of business is motivated by service and not profit. Adaptations of this business model include consumer, retail, and worker co-operatives.
34 Types of Businesses Forms of Business Ownership
Franchises The franchiser licenses the rights to its name, operating procedure, designs, and business expertise to another business called the franchisee.
A franchise agreement can provide the franchisee with • a ready made, fully operational business • brand recognition that is appealing to consumers
Requirements before a franchise is awarded may include • paying the franchise fee • agreeing to pay a monthly percentage fee as well as any national or local advertising costs • purchasing all supplies centrally from the franchiser • participating in franchiser standards training
35 Types of Businesses Going into Business
Eight Questions to Ask Before Going into Business 1. Why Start Your Own Business? People who desire to be the boss and take responsibility for making decisions often decide to run their own business. They believe it is the best way for them to achieve financial independence, to allow them to use their skills and knowledge, and to be creative.
2. What Different Types of Businesses Are There? service business retail business not-for-profit organization manufacturing business
3. What Are Your Skills and Interests? Different ideas, skills, and knowledge can be used to start a new business. Two popular ones are home-based or Web-based businesses.
36 Types of Businesses Going into Business
i. Should Your Business Be Home-based? Technology has changed how SOHO (“small office, home-based”) businesses operate. Computers, scanners, and Internet access are a few of the tools that home office businesses use today to be successful.
ii. Should Your Business be Web-based? E-commerce (“electronic commerce”) is a marketplace where consumers and sellers meet without face-to-face contact. In the “real world,” products are tangible. Products and services are sold to us by personal contact with the sellers. In cyberspace or online, we do not interact with products or come face-to-face with the sellers. Our experience with services is limited or non-existent. Consumers are often reluctant to purchase online due to unreliable or dishonest businesses and privacy issues.
37 Types of Businesses Going into Business
4. Where Can You Find Information About a Business? Businesses require accurate and current information to make good decisions. Important resources to find information include libraries trade associations the Internet existing businesses federal and provincial governments (i.e., Strategis and Statistics Canada are two helpful government sites or agencies.) 5. What Are the Start-up Costs? Capital resources to run a business are available through debt financing referred to as borrowing money to run the business. Using your savings or investor savings called equity financing is an alternative way to fund a business. 38 Types of Businesses Going into Business
6. What Level of Risk Can You Expect? Even with research and planning, business can be risky. Risks or threats beyond and within the owner’s control can put the business in financial difficulty.
7. What Steps Are Involved in Running This Business? Some types of businesses, such as manufacturing, are complex. A complex business requires many people with different skills to successfully start and operate it.
39 Types of Businesses Going into Business
8. What Resources Will You Need? Forecasting is determining the resources the business requires and how much financing it needs to obtain them.
Revenue is the amount of money gained from the sale of products or services.
40 Types of Businesses International Business Structures
A number of different business structures allow businesses to expand into international markets.
Joint Ventures A joint venture can match the skills and expertise of two different individuals or businesses to generate more benefits for both parties.
International Franchises An international franchise is a way to achieve an international presence by buying the rights to a chain operation from the franchiser.
41 Types of Businesses Forms of Business Ownership
Strategic Alliances Strategic alliances occur when two or more businesses agree to commit particular resources to achieve a common set of objectives. Alliance partners remain separate and entirely independent of each other.
Mergers Mergers happen when two or more companies join together: one of the businesses usually wants to purchase a controlling interest in the other company, or both business have combined interests. 42 Types of Businesses Forms of Business Ownership
Offshoring Offshoring relocates some of a company’s operations to another country. Usually this happens to take advantage of lower labour costs, to be closer to large and emerging buyer markets, and to have access to skilled workforces.
Multinational Corporations A business enterprise that conducts business in another country or several different countries is a multinational corporation. A multinational corporation offers different benefits to the country it invests in. Some positive benefits include new jobs and training for people. Negative consequences could be less pay and more financial instability for citizens of that country.
43 MULTINATIONAL COMPANIES Multinational Corporation It is a corporation that:
Manages Delivers And/or production services
In more than one country Definition
Multinational corporation (MNC) is a enterprise that manages production or delivers services in more than one country can also be referred to as an international corporation. What is a Multinational Corporation? (continued) According to Franklin Root (1994), an MNC is a parent company that:
engages in foreign production through its affiliates located in several countries, exercises direct control over the policies of its affiliates, implements business strategies in production, marketing, finance and staffing that transcend national boundaries. EXAMPLES OF MNCs:
The largest MNCs:
Ford Wal-Mart Stores
IBM Exxon Mobil
British Petroleum Royal Dutch Shell
Mc Donald’s These companies have turnovers in excess of Phillips the GNPs of some countries. How Is A Company Classified As An MNC?
Subsidiaries in Stakeholders foreign are from countries; Operations in a different number of High proportion ofcountries. countries; assets in or/ and revenues from global operations; History And Evolution of MNCs:
These corporations originated early in the 20th century and expanded after World War II.
A multinational corporation developed new products in its native country and manufactured them abroad.
Almost all the earliest and largest multinational firms were either American, Japanese, or West European. History And Evolution of MNCs:
During the last three decades, many smaller corporations have also become multinational.
Such enterprises maintain that they create employment, create wealth, and improve technology in countries. MNC In India…
MNC in India represent a diversified portfolio of companies representing different nations. Multinational corporation structure: Organization of Multinational Corporations
Subsidiaries
Joint Ventures Companies
Franchise Holders
Turn Key Project.
SWOT Analysis of MNCs:
Strengths Weakness
• Low Cost • Location is often very distant • Well Developed • Lack of Transportation facilities Infrastructure • Relative Inflexibility
Opportunities Threats • Leverage Government • Attract new industries • Govt. restrictions •Quotas Reasons for The Establishment of MNCs To increase market share.
To secure cheaper premises and labour.
Employment and Health & Safety Legislations in other countries may be more relaxed.
To avoid or minimise the amount of tax to be paid.
To take advantage of government grants available. Conti... To save on costs of transporting goods to the market place.
To develop an international brand. Advantages
To the Host To the Home Country Country Advantages of MNCs to the Host Country: Transfer of technology, capital and entrepreneurship.
Increase in the investment level and thus, the income and employment in the host country.
Greater availability of products for local consumers.
Increase in exports and decrease in imports. Advantages of MNCs to the Home Country.
Acquisition of raw materials from abroad.
Technology and management expertise acquired from competing in global markets.
Export of components and finished goods for assembly or distribution in foreign markets.
Inflow of income from overseas profits, royalties and management contracts. Disadvantages of MNCs:
Trade restrictions imposed at the government-level
Limited quantities (quotas) of imports.
Effective management of a globally dispersed organization.
Slow down in the growth of employment in home countries.
Destroy competition and acquire monopoly. WORLD’S TOP MNCs: Fortune Global 500 List 2011: Top 10 RANK COMPANY COUNTRY FIELD
1 Wal-Mart Stores United States Retail
2 Royal Dutch Shell Netherlands Petroleum
3 Exxon Mobil United States Petroleum
4 BP United Kingdom Petroleum
5 Sinopec China Petroleum
China National 6 China Petroleum Petroleum
7 State Grid China Power
8 Toyota Motor Japan Automobiles
9 Japan Post Holdings Japan Diversified
10 Chevron United States Petroleum Fortune Global 500 2011: Country wise: RANK COUNTRY NUMBER OF COMPANIES
1 United States 133
2 Japan 68
3 China 61
4 France 35
5 Germany 34
6 United Kingdom 30
7 Switzerland 15
8 South Korea 14
9 Netherlands 12
10 Canada 11 Criticism of MNCs:
Creation of false needs in consumers. Interference and dominance in the internal affairs of sovereign nations. Invasive advertising and corporate lobbying. Creation of monopolies in the market and elimination of local competitors.
contd… Depletion of resources due to their continuous use by these corporations.
Centralization of R&D operations in their home country.
Low consideration for human rights and welfare.
The problem of Dumping.
India’s Big Dream
• Harnessing the global trends by encouraging the MNCs to engage in product innovation for local consumers represents a big challenge in India.
• Policy-makers, industry leaders and academic institutes need to work together to create and disseminate a list of "dream innovations" that will inspire people.
• The development of Tata Motor's Rs 1 lakh car provides a powerful example MNCs in India have a long history and tradition: What India offers???
One billion plus population.
India is ranked as the 10th largest economy, 4th largest in terms of Purchasing Power Parity.
250-300 million middle class.
Gross Domestic Product (GDP) is growing at over 7-9 %, making it one of the fastest growing economies in the world.
Opportunities for U.S. exporters with the right products or services.
Easier access to capital. Indian companies in fortune global 500 list 2011: COUNTRY COMPANY GLOBAL 500 CITY REVENUE RANK RANK ($ millions) 1 Indian Oil 98 New Delhi 68,837 2 Reliance Industries 134 Mumbai 58,900 3 Bharat Petroleum 272 Mumbai 34,102 4 State Bank of India 292 Mumbai 32,450 5 Hindustan 336 Mumbai 28,593 Petroleum 6 Tata Motors 359 Mumbai 27,046 7 Oil & Natural Gas 361 Dehradun 26,945 8 Tata Steel 370 Mumbai 26,065 Trends Of MNCs In INDIA:
First MNC in India was the EAST INDIA Company. in 1600.
American companies account for around 37% of the turnover of the top 20 firms operating in India.
Oil companies and Infrastructure builders from the Middle East are also flocking in India to catch the boom. Contd……. Increasing flocking of Europian Union companies to India. Finnish mobile handset manufacturing giant Nokia is the largest Multinational Corporation In India. Italian automobile giants like Fiat, Ford Motors, Piaggio etc expanded their operations in India with R&D wing attached.
South Korean Electronics giants Samsung and LG Electronics and small and mid-segment car giant Hyundai Motors are doing excellent business and using India as a hub for global delivery. Key Advantages of existence of MNCs in India Work culture for employees.
Training and Learning.
Technology – especially concept of working with better technologies.
Safety, Health and Environmental Learning.
Excellent training grounds for many entrepreneurs. Key challenges that Indian MNCs Face: Domestic market like India vis - a - vis International expansion.
Language.
Culture.
Autonomy to “local” managers .
Styles of doing business.
Handling of potential liabilities related to Labor, IPR etc. Types of International Organization
: The company’s approach to global expansion needs to fit in to its corporate agenda, and be in tune with the industry and time. Cross national business have been labeled into four types in terms of organizational structure by researchers. Multi-domestic Organization:
It is one that exports to/imports from organizations in other countries with primarily domestic production. The subsidiaries develop into decentralized decision-making units, make use of local resources to create a self-sufficient entity. Ex: GM, is a firm with subsidiaries extending over Europe that stand along as self-contained units. International Organization:
It has its assets centralized at its headquarters. The knowledge base is developed at the center, and from there it is dispersed to overseas locations. Subsidiary units are expected to leverage their local capabilities. Here core competencies are central, parent company capabilities are used, and knowledge disseminates from center outwards. Ex: Microsoft, Core product is developed at center, and the subsidiaries take care of localizing the product to fit the customer requirements that are regional or local. Global Organization:
It is one that is centralized but scaled globally, with knowledge retained at the center. Control is retained at the center. The subsidiary units have to furnish information to the center and comply with the headquarters control. Subsidiary units must draw from the best practices and experiences of all the subsidiary units and adopt the most efficient strategies from the entire company. Ex: Intel, keeping performance up to global standards and taking advantage of the learning, drawn from experience to show in terms of low costs and location advantages. Transnational:
Refers to an enterprise where national boundaries get blurred. Both centralized and decentralized methods are adopted in this model. While units are specialized, interdependence of units is also a characteristic feature. The subsidiary units abroad play an active role in the development of the firm’s capabilities and share knowledge with worldwide locations. This model enables a firm to “think globally and Act locally”. Ex: Caterpillar Inc., has set up manufacturing units in certain locations for many identical components. It however has assembly units in each of its major markets, so that the product can be made to suit local needs. UNIT II The shift toward a more integrated and interdependent world economy Two components: The globalization of markets The globalization of production Vizio flat panel TV is designed in a small office in California assembled in Mexico From panels made in South Korea electronic components made in China microprocessors made in the U.S. Largest retailer in the world –Over 4500 stores International expansion in 1991begins with Mexico in response to market saturation in the US Localization strategy adopted after trial and error Global buying power has allowed it to reap economies of scale Wal-mart faces significant competition from other global retailers, but has the first mover advantage in some markets
1-89 We experience international transactions daily
Imports and exports reach even remote areas
Technology and e-biz promote trade
Consumers and companies pull markets closer
Trend toward greater economic, cultural, political and technological interdependence among national institutions and economies
Globalization of Globalization of markets production Dispersal of production Convergence in buyer activities worldwide to preferences in markets minimize costs or around the world maximize quality Globalization Globalization of markets of production
• Reduces marketing costs • Access lower-cost labor • New market opportunities • Access technical expertise • Levels income stream • Access production inputs Remove barriers to trade and investment GATT
WTO
Regional trade agreements Notable global institutions include the World Trade Organization (WTO) which is responsible for policing the world trading system and ensuring that nations adhere to the rules established in WTO treaties In 2008, 151 nations accounting for 97% of world trade were members of the WTO the International Monetary Fund (IMF) which maintains order in the international monetary system the World Bank which promotes economic development the United Nations (UN) which maintains international peace and security, develops friendly relations among nations, cooperates in solving international problems and promotes respect for human rights, and is a center for harmonizing the actions of nations Email and Internet, intranets, Transportation videoconferencing advancements
Better Improved More efficient, coordination communications dependable and control and management shipping In the 1960s: The U.S. dominated the world economy and the world trade picture U.S. multinationals dominated the international business scene About half the world-- the centrally planned economies of the communist world-- was off limits to Western international business Today, much of this has changed. Highly mobile Fear of jobs labor market moving abroad
Free-flowing Backlash among capital and trade the disaffected Opponents Supporters
Eliminates jobs in Increases wealth and developed nations efficiency everywhere
Lowers wages in Generates labor market developed nations flexibility in developed countries
Exploits workers in Advances economies developing nations of developing nations Opponents Supporters
– Globalization lowers + Investment raises labor standards labor standards
– Weakens protection of + Open economies most the environment environment friendly
– Exploits workers in + Companies concerned poor nations for future markets Communicate effectively
Know the customer
Emphasize global awareness
Market effectively
Monitor business environments
Analyze problems correctly Opponents Supporters
Supranational Globalization has institutions reduce benefited societies by autonomy of national, helping to spread regional, and local democracy worldwide governments Opponents Supporters
• Destroys cultural • Specialize and trade diversity to obtain other goods • Homogenizes our • Import cultural goods world from other nations • Bankrupts local • Protects deeper moral small businesses and cultural norms Material Desire
Artistic Influence
Western Values
A Force for Good
Deeper Values International business environment The environment of international business is regarded as the sum total of all the external forces working upon the firm as it goes about its affairs in foreign and domestic markets. The environment can be classified in terms of domestic, foreign, and international spheres of impact. The domestic environment – is familiar to managers and consists of those uncontrollable external forces that affect the firm in its home market. The foreign environment - can be taken as those factors which operate in those other countries within which the MNC operates. The international environment - is conceived as the interaction between domestic and foreign factors and indeed they cover a wide spectrum of forces. Economic Environment Factors
Economic development Infrastructure Resource and product markets Exchange rates Inflation Interest rates Economic growth
107 Economic Development
● Countries categorized as “developing” or “developed” ● Criterion used to classify is per capita income ● Developing countries have low per capita incomes ● LDCs located in Asia, Africa, and South America ● Developed are North America, Europe, & Japan ● Driving global growth in Asia, Eastern Europe, & Latin America
108 Infrastructure A country’s physical facilities that support economic activities
Airports, highways, and railroads Energy-producing facilities Communication facilities
109 Resource and Product Markets
When operating in another country... Managers must evaluate market demand To develop plants, resource markets must be available – raw materials and labor
Corporate Example – McDonald
110 Exchange Rates
Rate at which one country’s currency is exchanged for another country’s Has become a major concern for companies doing business internationally Changes in the exchange rate can have major implications for profitability of international operations
111 The Legal-Political Environment
Political Risk– due to events or actions by host governments ● Loss of assets ● Loss of earning power ● Loss of managerial control ● Government takeovers ● Acts of violence
112 Political Instability
Events such as riots, revolutions, or government upheavals that affect the operations of an international company
113 Laws and Regulations Government laws and regulations differ from country to country Make doing business a true challenge for international firms Internet has increased impact of foreign laws on U.S. companies – expands potential for doing business on global basis
114 Sociocultural Environment Culture – shared knowledge, beliefs, values, common modes of behavior, and ways of thinking among members of a society Intangible Pervasive Difficult for outsider to learn
Managers need to understand difference in social values to comprehend local cultures and deal with them effectively
115 Hofstede’s Value Dimensions Research = national value systems influence organizational and employee working relationships Power distance (high = accept inequality) Uncertainty avoidance (uncomfortable with uncertainty) Individualism and collectivism (Individualism take care of themselves) Masculinity/femininity (preference for achievement/assertiveness; femininity for relationship) Long-term/short-term orientation = 5th dimension
Ethical Dilemma: The Problem in Asia
116 Four Dimensions of National Value
117 GLOBE Value Dimensions Global Leadership and Organizational Behavior Effectiveness project
More comprehensive view of cultural similarities and differences
Assertiveness Power distance Future orientation Societal collectivism Uncertainty avoidance Individual collectivism Gender differentiation Performance orientation Humane orientation
118 International Cultural Influences
Other Cultural Characteristics Language Religion Attitudes Social Organization Education Linguistic pluralism – several languages exist Ethnocentrism – regard own culture superior
119 WTO Trade liberalization – Implications of India WTO The World TRADE Organization is a Multi-lateral organization which facilitates the free flow of goods and services across the world and encourages fair trade among nations Global income increases due to increased trade Overall enhancement in the prosperity levels of the member nations WTO encourages a multi-lateral trading system within its member countries. WTO is of a very recent origin, it came into formal existence on January 1st 1995 GATT (General Agreement on Tariffs and TRADE) was replaced by WTO GATT members effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO. BASIC FACTS Location: Geneva, Switzerland Established: 1 January 1995 Created by : Uruguay Round negotiations (1986-94) Membership: 164 member states Director-General : Roberto Azevêdo (Continuously for 2 terms) Budget : 197 million Swiss francs for 2020 Purpose: Reduction of tariffs and other barriers to trade OBJECTIVES & FUNCTIONS The overriding objective of the World Trade Organization is to help trade flow smoothly WTO performs the following functions *Administering W.T.O TRADE Agreements * Acting as a Forum for TRADE negotiations * Settling and Handling TRADE disputes *Monitoring and reviewing national TRADE policies * Assisting the member in TRADE policies through technical assistance and training programmes * Technical assistance and training for developing countries * Co-operation with other International Organization PRINCIPLES Non-Discrimination - This is a very simple principle which advocates that every member country must treat all its TRADING partners equally without any discrimination Reciprocity This Principle reflects that any concession extended by one country to another need to be reciprocated with an equal concession such that there is not a big difference in the countries Payments situation Transparency The multilateral TRADING system is an attempt by governments to make the business environment stable and predictable MAJOR AGREEMENTS IN WTO Tariff reduction on specific manufactured goods and services Other agreements deal with TRADE in Textiles, Agriculture, Services Trade in Intellectual Property, cross-border Investments, anti-dumping duties Few agreements that aim to reduce the Non-Tariff Barriers that hinder trade between countries BENEFITS – MEMBER COUNTRIES The system helps promote peace Disputes are handled constructively Rules make life easier for all Free TRADE cuts the costs of living It provides more choice of products and qualities TRADE raises incomes & stimulates economic growth The basic principles make life more efficient Governments are shielded from lobbying The system encourages good government IMPLICATIONS - INDIA India is a founder member of World TRADE Organization, and also treated as the part of developing countries group for accessing the concessions granted by the organization Reduction of peak and average tariffs on manufactured products Trade Related INVESTMENT Measures (TRIMS) - The agreement prohibits the host country to discriminate the investment from abroad with domestic investment, which implies that it favours national treatment of foreign investment TRADE Related Intellectual Property Rights (TRIPS) - the agreement stipulated some basic uniformity of law among all trading partners Agreement on Agriculture (AOA)- deals with market access, Export subsidies and government subsidies Agreement on Sanitary and phyto-sanitary measures (SPM) - restricting exports of a country if they do not comply with the international standards of germs/bacteria etc Multi-Fiber Agreement (MFA) - a huge textile MARKET is opened up for developing countries textile industry as well as for other countries that have competitive advantage in this area Agreement on Subsidies and Countervailing measures - The SCM Agreement contains a definition of the term “subsidy”: a financial contribution by a government or any public body within the territory of a member which confers a benefit. Only 4 “specific” subsidies are under the purview of SCM Agreement disciplines. a. Enterprise-specificity b. Industry-specificity c. Regional specificity d. Prohibited subsidies General Agreement on Trade in Services: GATS was inspired by the ideas of creating a credible system of international trade norms; principle of non-discrimination; stimulating economic activity through definite policy bindings and progressive liberalisation of trade. Market Access , which propagates free MARKET access to products and reduction of tariff and non-tariff barriers The TRADING countries are allowed to impose an Anti- Dumping Duty (ADD) against imported products if the charge of Dumping is claimed against them. The requirement is to prove that the product is being sold at a price, which results in material injury to the domestic industries. UNIT III Organizational Structure & Designs for Multinational Companies Nature of Organization Design In small organizations, there is little reason to divide work Everyone does the same thing and everything As organizations grow, there is a need to divide work and the organization There is no one best organizational design The Basic Functional Structure Departments perform separate business functions such as marketing or manufacturing Simplest of organizations Most smaller organizations have functional structures A Basic Functional Structure The Basic Functional Structure Works best when organization has: Few products Few locations Few types of customers A stable environment Routine technology The Basic Product and Geographic Structures Product structure: departments or subunits based on different product groups Geographic structure: departments or subunits based on geographic regions Usually less efficient than the functional organization Allows a company to serve customer needs that vary by region or product Product Structure A Basic Geographic Structure The Basic Product and Geographic Structures Managers choose product structures when: Product or an area sufficiently unique to require focused functional efforts on one type of product or service Hybrid structure: mixes functional, geographic, and product units Organizational Structures to Implement Multinational Strategies When company first goes international, it seldom changes structure. Passive exporter Licensing has little impact on domestic structures. However, when international sales become more central, structures need to be changed. Export Department
Coordinates and controls a company’s export operations Export department Is created when exports become significant Deals with international sales of all products A Functional Structure with an Export Department Foreign Subsidiaries Subunit of the multinational company that is located in another country Types of foreign subsidiaries Minireplica subsidiary: smaller version of the parent company Uses the same technology and producing the same products as the parent company Transnational subsidiary: has no companywide form or function Each subsidiary contributes what it does best Foreign Subsidiaries Multinationals choose the mix of functions based on: The firm’s multinational strategy or strategies The subsidiaries’ capabilities and resources The economic and political risk of building and managing a subunit in another country How the subsidiaries fit into the overall multinational organizational structure International Division Responsible for managing exports, international sales, and foreign subsidiaries Usual step after export department Deals with all products Manages overseas sales force and manufacturing sites An International Division Organizational Structures to Implement Multinational Strategies Reasons to abandon the international division Diverse products overwhelm capacities of multinational Not close enough to local markets Cannot take advantage of global economies of scale or global sources of knowledge Several options available to deal with these shortcomings Worldwide Geographic Structure Has geographical units representing regions of the world Prime reason is to implement a multidomestic or regional strategy Organizational design with maximum geographic flexibility Separate divisions for large market countries Royal Vopak Geographic Structure Worldwide Product Structure Worldwide product structure Gives product divisions responsibility to produce and sell their products or services throughout the world Implements strategies that emphasize global products Provides an efficient way to organize and centralize the production and sales of similar products Worldwide Product Structure Hybrids Both worldwide product structure and worldwide geographic structure have advantages and disadvantages Product structure: supports global products Geographic structure: emphasizes local adaptation Multinationals often want both abilities Use hybrids Front-back Hybrid Structure The front side has units based on geography to provide a multidomestic or regional focus The backside has units based on product groups to capture global economies of scale in R&D and production Tetra Pak’s Front-Back Hybrid Structure Worldwide Matrix Structures Symmetrical organization with equal emphasis on Worldwide product groups and Regional geographical divisions Worldwide Matrix Structures Balances the benefits produced by area and product structures Creates equal lines of authority for products and areas Works best with near equal demands from both sides Requires extensive resources for communication and coordination Requires middle and upper level managers with good human relations skills Worldwide Matrix Organization Matrix Structures Problems emerging with worldwide matrix structures Slow decision making process Too bureaucratic Too many meetings and too much conflict Result Companies have redesigned their matrix structures to be more flexible with speedier decision making Other companies have abandoned their matrices and returned to product structures The Transnational-Network Structure Newest solution to the complex demand of being locally responsive and taking advantage of global economies of scale Combines functional, product, and geographic subunits Dispersed subunits Specialized operations Interdependent relationships Has no symmetry or balance in its structural form Resources, people, and ideas flow in all directions Nodes or centers in the network coordinate product, functional, and geographic information Geographic Links in the Philips Transnational Structure Product Links in the Same Organization Components of the Transnational- Network Structure 1. Dispersed subunits: subsidiaries located anywhere where they can most benefit the company 2.Specialized operations: subunits specializing in particular product, research areas, or marketing areas 3.Interdependent relationships: continuous sharing of information and resources by dispersed and specialized subunits Metanational Structure Large entrepreneurial multinational Can tap into pockets of innovation, technology, and markets located around the world Develops extensive systems to encourage organizational learning and entrepreneurial activities Metanational Characteristics Nonstandard business formulas for any local activity Looking to emerging markets as sources of knowledge and ideas Creating a culture supporting global learning Extensive use of strategic alliances to gain knowledge for varied sources Characteristics of Metanationals High levels of trust between partners to encourage knowledge sharing Centerless organization that moves strategic functions away from headquarters to major markets Decentralization of decision making to managers who serve key customers and strategic partners Multinational Strategy and Structure: An Overview Most companies support early internationalization efforts with export department Depending on globalization strategy, they evolve into product or geographic structure Pressure for local adaptation and global efficiencies result into matrix or transnational-network No company reaches any pure form—use hybrids Control Systems Control system: helps link the organization vertically, up and down the organizational hierarchy Basic functions of control system Measure or monitor the performances of subunits Provide feedback to subunit managers regarding the effectiveness of their units Coordination Systems Coordination system: horizontal organizational links Provide information flows among subsidiaries Options for Control Systems Four types of control systems Output control system Bureaucratic control system Decision-making control Cultural control system Output Control Systems Assesses the performance of a unit based on results, not on the processes used to achieve these results Profit center: unit controlled by its profit or loss performance Bureaucratic control system Focuses on managing behaviors within the organization Budgets: financial targets for expenditures Statistical reports: information to top management about nonfinancial outcomes Standard operating procedures: rules and regulations of appropriate behavior Control and Coordination Systems Decision-making control: level in the organizational hierarchy where managers have the authority to make decisions Cultural control system: uses organizational culture to control behaviors and attitudes of employees Use of Control Mechanisms in Multinational Organizational Structures Design Options for Coordination Systems Textual communication: e-mail, memos, and reports Direct contact: face-to-face interaction of employees Liaison roles: part of a person’s job in one department to communicate with people in another department Design Options for Coordination Systems Task forces: temporary teams created to solve a particular organizational problem Full-time integrators: cross-unit coordination is the main job responsibility Teams: permanent unit of the organization International Business Decisions A firm which plans to go international has to make a series of strategic decisions The foremost important decision is whether to take up international business or not It is based on the following factors- Present & future overseas opportunities, present & future domestic market opportunities, company resources & objectives Market selection decision Thorough analysis of the potentials of the various overseas markets & their respective marketing environment is essential Proper selection of the overseas market is very important in the International business Entry & Operating decisions Determine the appropriate mode of entering the foreign market Marketing mix decision The success of international business depends on the appropriateness of the marketing mix Suitably designed so that they may be adapted to the characteristics of the overseas market International Organization decision Appropriate structuring has to be used for the Organization structure It is based on the following factors like international orientation, nature of business, size of business, future plans Challenges/issues faced by MNCs while setting up business in India Infrastructure. Selecting a suitable place in India can be quite a challenge for Multinational Companies. ... Recruitment. ... Diverse Culture. ... Price Centric Customers. SOCIAL ISSUES - Business Ethics, Social responsibility, Environmental factors & labour standards Business Ethics Business ethics refers to the system of moral principles & rules of conduct applied to business Ethical norms vary from country to country Social responsibility Companies shall contribute to social welfare, over & above the statutory requirements Responsibility connotes that the business has some moral obligations to the society Corporate citizenship is commonly used to refer to the moral obligations of business to the society Business is a social function & plays a role in promoting social welfare activity MNC’s can go a long way to improve the social welfare in poor countries Social orientation Social responsibility models * Carroll’s model – obligations of corporate performance – economic, legal, ethical & discretionary * Halal’s model – Return on resources model of corporate performance points out that firms can only attempt to unite diverse interest of various social groups to form a workable coalition * Ackerman’s model – Development of the social responsiveness of a company Factors affecting Social orientation Promoters & top mgt Board of directors Stakeholders & internal power relationship Societal factors Industry & trade associations Govt & laws Political influences Competitors Resources Ethical influences Responsibility towards different sections Shareholders – Company has to ensure that the shareholders can feel proud of the company Employees – Employee morale depends to a large extent on the discharge of the company’s responsibility to render comfortable environment for the employees Consumers – Customer satisfaction Community – Community development preojects SOCIAL OBLIGATIONS Globalization tends to increase environmental problems Child labour need to be prohibited Fair working conditions Designing products which are recyclable or energy efficient. Ethically managing supply chains to eliminate abuse 4 CATEGORIEs of CSR
1. Environmental responsibility Environmental responsibility initiatives aim at reducing pollution and greenhouse gas emissions, and the sustainable use of natural resources. 2. Human rights responsibility Human rights responsibility initiatives involve providing fair labor practices (e.g., equal pay for equal work) and fair trade practices, and disavowing child labor. 3. Philanthropic responsibility Philanthropic responsibility can include things such as funding educational programs, supporting health initiatives, donating to causes, and supporting community beautification projects. 4. Economic responsibility Economic responsibility initiatives involve improving the firm’s business operation while participating in sustainable practices – for example, using a new manufacturing process to minimize wastage. BUSINESS BENEFITS OF CSR 1. Stronger brand image, recognition, and reputation CSR adds value to firms by establishing and maintaining a good corporate reputation and/or brand equity. 2. Increased customer loyalty and sales Customers of a firm that practices CSR feel that they are helping the firm support good causes. 3. Operational cost savings Investing in operational efficiencies results in operational cost savings as well as reduced environmental impact. 4. Retaining key and talented employees Employees often stay longer and are more committed to their firm knowing that they are working for a business that practices CSR. 5. Easier access to funding Many investors are more willing to support a business that practices CSR. 6. Reduced regulatory burden Strong relationships with regulatory bodies can help to reduce a firm’s regulatory burden. UNIT IV Regional Trade Blocks Regional trade blocs are intergovernmental associations that manage and promote trade activities for specific regions of the world. Such blocs have liberal rules for member countries while a separate set of rules is laid for non-members. For example, European Union (EU), Association of South East Asian Nations (ASEAN). Economic Integration Economic integration is a new reality in the international business market. Business and governments have created a range of institutions, treaties, and agreements that help to Overcome trade differences Boost the free movement of trade, investment, and services across national boundaries Economic integration is concerned with: The removal of trade barriers or impediments between at least two participating nations The establishment of cooperation and coordination between them Integration creates high levels of globalization and regionalization The level of integration defines the nature and degree of economic links among countries Major Trade Blocks EU (European Union ) NAFTA (North American Free Trade Agreement) MERCOSUR (Mercado Comun del Cono Sur, also known as Southern Common Markets (SCCM) ASEAN (Association of Southeast Asian Nations) SAARC (South Asian association for regional cooperation) South Asian / SAARC Preferential Trading Arrangement (SAPTA) South Asian Free Trade Area (SAFTA) European Union
Objectives:- Setting up a common market Continuous & balanced expansion Closer relations between the member states. ACTIVITIES OF EU Elimination of custom duties, quantitative restrictions with regard to export & imports. Establishment of a common custom tariff & commercial policy. Abolition of all obstacles for movement of persons, services & capital. Application of programmes in order to coordinate the economic policies. ASEAN Established in 1992 Total six members- Singapore, Brunei, Malaysia, Philippines, Thailand & Indonesia. To establish a common effective preferential tariffs (CEPT) plan. The CEPT allows for tariffs cut ranging from 0.50% to 20.00% beginning with 15 products. In 1994, ASEAN countries formed AFTA in order to develop inter ASEAN trade. Objectives of AFTA To encourage inflow of foreign investment into this region. To establish free trade area in the member countries. To reduce tariff of the products produced in ASEAN countries (40% value addition in the ASEAN countries to the product value is treated as manufactured in ASEAN countries). NAFTA Initially bilateral trade between Canada & U.S. NAFTA went into effect in 1994 after the joining of Mexico. U.S.- Canada trade is the largest bilateral trade in the world. The U.S. 1st Mexico’s & Canada largest trading partner. NAFTA is a powerful trading bloc with a combined population and GNP greater than 15 member EU. Provisions of NAFTA Duty-free market access. Trade rules- safeguard, subsidies, countervailing & antidumping duties, health & safety standards. Rules on trade in services & investment Protection of intellectual property. Dispute settlement mechanism. MERCOSUR Established in 1991 by Brazil, Argentina, Paraguay, Uruguay. These four members generate 70% GNP of south America. By 1996, MERCOSUR had abolished tariffs on goods accounting for 90% of the trade between its members countries, with remaining tariffs to be abolished by 2000. MERCOSUR & EU Signed a cooperation agreement to pave the way for a free trade accord in 2001. SAARC Established in August 1983. Members-India, Bangladesh, Bhutan, Pakistan, Srilanka The Maldives & Afghanistan Objectives of SAARC To improve the quality of life & welfare of the people of the member countries. To develop the region economically, socially & culturally To provide the opportunity to the people of the region to live in dignity & to exploit their potentialities. To enhance the mutual assistance among member countries in the areas of economic, social, cultural, scientific & technical field. To enhance cooperation to other trade blocs. SAPTA The council of ministers have signed the SAARC preferential trading arrangement agreement on April 11, 1993. Objectives of SAPTA To gradually liberalize the trade among members of SAARC. To eliminate trade barriers among SAARC countries & reduce or eliminate tariffs. To promote and sustain mutual trade & economic cooperation among member countries. Advantages of Trading Blocs 1. Access to larger markets leads to internal economies of scale. 2. External economies of scale due to improved infrastructure (e.g. transport and telecoms links) 3. Greater international bargaining power. 4. Increased competition between members. 5. More rapid spread of technology. Disadvantages of Trading Blocs
1. Country may lose resources to more efficient members, or to geographical center, and become depressed region. 2. Firms may co-operate, collude and merge, leading to greater monopoly power. 3. Diseconomies of scale if firms become very large. 4. High administrative costs of trading bloc. Trade Blocs-Opportunities a. Elimination of trade barriers within the region would encourage the efficient firms to expand their business activities in all countries within the region. b. Healthy competition within the region would help the less efficient firms in acquiring competencies in order to challenge the efficient firms. c. The overall business performance in 'terms of productivity, quality, price, d. Delivery and customer service will improve. e. Consumers get better quality goods and services at competitive price f. Employment opportunities in the region increase. Trading Blocs - Threat a. The removal of trade barriers provides opportunities to the efficient firms to enter the different markets within the region. This endangers the survival of the less efficient firms. b. The resources of the less efficient countries are exploited by the firms from the advanced countries of the region. c. The less developed countries of the region mostly become consumption centres while the advanced countries of the region become the production centres. d. The less developed countries become still poorer whereas the advanced countries of the region become still richer. e. It discourages trade with non-members as trade with non-members is subject to strict rules and trade barriers. Levels of Integration: Preferential trading agreement Free trade area Customs union Common union Economic union Political union Preferential Trading Agreement A preferential trading agreement is the loosest form of economic integration .Under this a group of countries have a formal agreement to allow each other’s goods and services to be traded on preferential terms. This requires that the tariffs are reduce between the countries or that special quotas allow preferential access for their products. Free Trade Area: In a free trade area all barriers to the trade of goods and services among member countries are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to determine its own trade policies with regard to nonmembers. Ex: EFTA and NAFTA
Customs Union: eliminates trade barriers between member-countries and adopts a common external trade policy. Ex: Andean Pact Common Market:
• The theoretically ideal common market has no barriers to trade between member-countries and a common external trade policy. Unlike in a customs union, in a common market factors of production also are allowed to move freely between member-countries. Thus, labour and capital are free to move, as there are no restrictions on immigration, emigration, or cross-border flows of capital between member-countries. Economic Union : An Economic Union involves the free flow of products and factors of production between member-countries and the adoption of a common external trade policy. A full economic union also requires a common currency, harmonization of the member-countries tax rates and a common monetary and fiscal policy. Political Union While some degree of political integration often accompanies economic integration, political union implies more formal political links between countries. A limited form of political union may exist where two or more countries share common decision making bodies and have common polices . In its fullest sense, it involves the unification of previously separate nations. Examples for Levels of Integration: Type Example Membership Principal features (Level) Free Trade North American Free Trade United States No internal tariffs. Area Agreement (NAFTA) Canada ,Mexico Each country determines its own trade Closer Economic Relations Australia policies toward non-members. (CER) New Zealand Customs Andean Pact Bolivia ,Colombia As for FTA above. Union Ecuador Common external tariff on goods Peru imported from outside. Common European Community (EC) 12 European As for customs union above. Market before January 1994. There countries. Labour and capital free to move. has not been another. No restrictions on migration. Economic European Union (EU) as from 25 European As for common market above. Union January 1999. countries. Common currency - European Monetary Unit (called the 'Euro') Harmonisation of tax rates. Common monetary and fiscal policies. Political EU has some elements; see 25 European European parliament, directly elected by Union previous level. The ultimate countries, but may citizens of EU countries. aim is a United States of include 28 countries Council of Ministers: government Europe. by 2007. ministers for each EU country. An administrative bureaucracy. Court of Justice: the official interpreter of EU law. Impacts of economic integration
Short-term effects (shift of production) Trade creation: production shifts to more efficient member countries from inefficient domestic or outside countries. Trade diversion: production shift to inefficient member countries from more efficient outsiders.
Dynamic effects: Long-term effects Cost reduction due to economies of scale Cost reduction due to increased competition. Impact on business Creation of single markets Protected markets, now open Lower costs doing business in single market
Differences in culture and competitive practices make realizing economies of scale difficult More price competition Outside firms shut out of market Implications of the Integrated European Market Perhaps the most important implication for Europe is the economic growth that is expected to result Several specific sources of increased growth have been identified: Gains from eliminating transaction costs Achievement of economies of scale More intense competition Cheaper transaction costs and reduced currency risks Many U.S. firms fear a unified Europe
220 North American Economic Integration
Although the EU is undoubtedly the most successful and well-known integrative effort, integration efforts in North America has gained momentum and attention North American integration has an interest in purely economic issues and there are no constituencies for political integration U.S.-Canada Free Trade Agreement North American Free Trade Agreement (NAFTA)
221 Integration in Latin America
Before the signing of the U.S.-Canada Free Trade Agreement, all of the major trading bloc activity in the Americas had taken place in Latin America One of the longest lived integration efforts among developing countries was the Latin America Free Trade Association (LAFTA), formed in 1961
222 Integration in Asia and Integration in Africa and the Middle East
The development in Asia Africa’s economic groupings has been different from range from currency unions that in Europe and the among European nations Americas and their former colonies to Asian interest in regional customs unions among integration is increasing for neighboring states pragmatic reasons Countries in the Arab world have made some progress in economic integration
223 Economic Integration and the International Manager Regional economic integration creates opportunities and challenges for the international manager Economic integration may have an impact on a company’s entry mode Decisions regarding integrating markets must be assessed from four different perspectives Effects of change Strategic planning Reorganization Lobbying
224 Differences between Inter-Regional Trade & International Trade 1. Immobility of factors of production
According to classical writers, labour and capital were perfectly mobile within the country and immobile between countries, The immobility is due to differences in language, social and political life, religion and traditions, etc. 2. Differences in production conditions Production conditions differs due to several causes. An advanced country in science and technology uses better methods of production than that of an under developed country. Due to this the costs and prices also vary. Because of these differences in production costs and prices, that international trade takes place. 3. Natural Resources The countries differ in natural resources and geographical conditions. This leads to territorial division of labour and localization in industries. Countries rich in iron and coal resources specialize in the production of steel. And countries having plenty of land and favorable climate produce agricultural commodities. These advantages can not be transferred at all to other countries. It is only possible to transfer, thereby the cost becomes extremely prohibitive 4. Currency system differs Different countries have different currency systems, and conversion of one country currency into another currency is difficult. Sometimes scarcity of foreign exchange restricts the imports. Besides, due to changes in the monetary policies, the price levels also vary, and this makes international trade much more difficult. 5. Trade and Exchange controls There are lot of restrictions like exchange controls, customs duties, tariff barriers and quotas followed by countries which restrict the free flow of international trade. 6. Market knowledge People possess a very good knowledge of the conditions of trade in their own country. But they cannot be so conversant with the conditions obtained in other countries. This lack of knowledge may hinder international trade. 7. Barter systems In international trade exchange of goods and services is done mostly on barter terms. In external trade the exchange is often made for money of that country. 8. Difference in law Internal trade is governed by the law of the land. But international trade is conditioned by the law of the exporting countries and importing countries and the countries through which the goods and services pass 9. Objective differs In internal trade profit motive in terms of monetary unit of the that country is the primary objective. But in international trade, the main objective is one of balancing the payments position between different countries 10. Cultural distinctions The various cultural practices between countries make international trade difficult. Eg. Britain produces right hand driven cars while the France uses left hand driven cars. The trade in cars between these two countries will not take place. Markets are also separated by language, customs, trading, usage, habits, tastes and other factors which make trade between countries difficult. CASE STUDY Inter Regional Trade in Indonesia
UNIT V EXPORT PROMOTION IN INDIA THE CONCEPT OF EXPORT PROMOTION All national governments have established institutional set-ups to support export activities.
The major objective of export promotion programmes is to create awareness about exports and make the people understand that it is one of the most crucial instruments of growth and market expansion.
A non-exporter needs to be motivated by making him or her aware of the international marketing opportunities. A first-time exporter has to be assisted in finding export marketing opportunities and may be supported on matters related to export policy, procedures and documentations.
An exporters consistently attempt to explore ways to improve their international marketing operations and need to be assisted by way of trade fairs, buyer sellers meet, and market promotion programmes.
The export promotion programmes initiated by the government are in the form of public policy measures. The functions of export promotion programmes are:
To create awareness about exporting as an instrument of growth and market expansion. To reduce and remove barriers of exporting, To create promotional incentives. To provide various forms of assistance to potential and actual exporters.
The export promotion programmes are basically designed to assist firms in entering international markets and achieving optimum opportunities from their international business activities. ROLE OF EXPORT PROMOTION INSTITUTIONS IN IM The export promotion organizations(EPOs) are meant to assist an international marketing manager to identify overseas market opportunities, product and packaging requirements, the pricing patterns, identifying IM channels, and marketing opportunities. Statutory requirements, such as registration-cum- membership certificates(RCMCs), quota administration , and disbursement of incentives through promotion organizations, make it necessary for the marketers to approach these organizations. INSTITUTIONAL SET-UP FOR EXPORT PROMOTION IN INDIA
In order to provide guidance and assistance to an exporter, the Government of India has setup several institutions. The institutional set-up for export promotion in India can be divided into six different tires: 1. Department of commerce 2. Advisory Bodies 3. Commodity Organizations 4. Service Organizations 5. Government Trading Organizations 6. State Export Promotion Agencies Department of Commerce:- It is the primary government agency responsible for evolving and directing foreign trade policy and programmes , maintaining commercial relations with other countries, supervising state trading, initiating various trade promotion measures, and developing and regulating export-oriented industries. Following are the divisions of the Department of Commerce: The economic division is engaged in export planning, formulating export strategies and periodic appraisal, and review of policies. The trade policy division is responsible for maintaining India’s compatibility with regional trading agreements such as EU, NAFTA, SAFTA, Commonwealth, etc. Foreign trade territorial division looks after the development of trade in different countries and regions of the world. The export division looks at the problems connected with production, generation of surplus, and development of products for exports under its jurisdiction. The export industries is responsible for the development and regulation of rubber, tobacco, and cardamom sectors. The export division deals with the problems of export assistance , such as export credit, export house etc. Advisory Bodies: The advisory bodies provide an effective mechanism to maintain continuous dialogue with trade and industry and increased coordination among various departments and ministries concerned with export promotion. Bodies for promoting international trade: Board of Trade The Board of Trade was setup under the chairmanship of Union Minister of Commerce and Industry in May 1989.The broad terms of reference of Board of Trade are as follows: To advice the govt. on policy measures for the preparation and implementation of both short and long- term plans. To review export performance of various sectors, identify constraints, and suggest measures to be taken. To examine the existing institutional framework for exports and suggest practical measures for reorganization. To review the policy instrument, package of incentives, and procedures for exports, and suggest steps to rationalize and channelize incentives to areas where they are most needed Export Promotion Board: In order to effect greater co-ordination among ministers involved in exports, Export Promotion Board was setup. It works under the chairmanship of the Cabinet Secretary and provides policy and infrastructural support to the exporters. Commodity Organizations
There are various commodity organizations, such as,
Export promotion councils Commodity boards Autonomous bodies
These organizations look at sector-specific exports. Export promotion councils : Export promotion councils are non-profit organizations. They are provided by financial assistance by the central government. At present there are 20 export promotion councils. Their basic objective is to promote and develop exports in the country. The main role of the EPCs is to project India as a reliable supplier of high quality goods and services in the international market. Each council is responsible for the promotion of a particular group of products, projects and services. The present set-up of EPCs covers the following sectors: Engineering Project Electronics and computer software Plastics and linoleums Chemical and allied projects Gems and jewellery Leather Indian milk Carpet Cotton textiles Handicraft Functions : To provide commercially useful information and assistance. To offer professional advice to the members. To organize visits to abroad to the members. To organize participation in trade fairs, exhibitions. To promote interaction between the exporting community and government. Commodity boards: In order to look after the issues related to production, marketing and development of commodities. The commodities which follows, Tea board Coffee board Coir board Central silk board All India handlooms and handicraft board Rubber board Cardamom board Tobacco board Spices board Functions : Provide an integrated approach for production development and marketing of the commodity
They act as a link between Indian exporters and importers aboard
They formulate and implement quality improvement systems, research and development programmes.
They act as an interface between the international agencies such as the ITC, FAO,UNIDO etc. They collect information on production, processing and marketing of the product under its purview and dissemination. They organize export promotion activities such as participation in international trade fairs, buyer-seller meeting. Autonomous bodies: APEDA – agriculture and Processed Food Products Export Development Authority. APEDA looks after the promotion of exports of agriculture and processed food products. It works as a link between the Indian exporters and the global markets The products are, Fruits , vegetables, and their products Meat and meat products Poultry and poultry products Dairy products Biscuits , and bakery products Honey , jaggery and sugar products Cashew nuts, groundnuts and papads Herbal and medical products
The basic functions of APEDA are as follows: It develops database on products, markets, and services. It develops and implements various publicity exercises. It invites official and business delegations from abroad. MDEDA- Marine Export Development Authority
MDEPA is an autonomous body under the ministry of commerce. It covers all kinds of marine products.
The prime objective are to increase export-oriented production, specify standards for processing and export marketing. Functions :
It provides timely and efficient services to overseas buyers
It establishes trade links between Indian suppliers and overseas buyers
It participates overseas trade fairs and exhibitions
It arrange products displays for visiting overseas buyers SERVICE INSTITUTES . Indian institute of foreign trade
. Indian council of arbitration
. India trade promotion organization
. National centre for trade information
. Export-credit guarantee corporation
. Export import bank of India
. Indian institute of packing
. Federation of Indian export org. Indian government’s trade representatives abroad
The institutional set-ups developed and strengthened within the country are supplemented by the Indian trade representatives abroad. The trade representations in the embassies and consultants are continually being strengthened to enable them to effectively support the effort, which is being made within the country. Government participation in Foreign Trade For supplementing the efforts of the private sector in the field of foreign trade, the govt. of India has set up a no. of corporations, namely STC, MMTC, spices trading corporation ltd., MSTC.
These corporations results at diversifying the country’s foreign trade. They perform following activities:-
To arrange for exports where bulk handling and long term contracts are beneficial. To organize production to meet export demand and to help production units overcome difficulties in raw material procurement. To undertake import of commodities where bulk purchase is advantageous. To facilitate exports of ‘difficult to sell’ items through various devices such as linking essential imports with additional exports under barter, link and parallel deals. States involvement in promoting export
States being the prime centers for export production need to be involved actively in export promotion. The central and state government has taken a number of measures to promote export, which have been discussed as follows: States’ cell in the ministry of commerce:
1. To act as a nodal agency for interacting with state government on matters related to export and import from the state and for handling references received from them. To process all references of general nature emanating from state governments and state export corporation. To monitor proposals submitted by the state government to the ministry of commerce and coordinate with other divisions of the ministry. To act as a bridge between state level corporations and associations. To provide guidance to state level export organizations. Export promotion initiatives by state govt.
Provide information on export opportunities. Allot land for starting export oriented unit. Plan for the development of export promotion industrial parks. They exempt entry tax on supplies to EPZ units. Impediments in export promotion State govt. are reluctant to promote export activities due to the following reasons:- Export never become number one priority of state agenda b’coz revenue never go to the state coffers. State govt. do not distinguish between exporting unit and domestic unit b’coz of same reason. The govt, generally lack the required expertise for export promotion. Additional facilities for export-oriented development mean more cost for the state governments. Information about international markets, export policy etc.. Is lacking among state administration.
EXIM Policy Export Import Policy is two fold, one within the organization and the second is the larger EXIM policy adopted for the nation
EXIM Policy of a nation is not of recent origin but dates back to 1970
Govt accorded exports and its due importance by formulating the policy
Its is known as Export Policy Resolution, 1970 FEATURES OF EXPORT POLICY RESOLUTION Making Indian products competitive Modernizing machinery Improving quality control Providing marketing support Providing adequate and timely finance Providing adequate shipping facilities at reasonable freight rates EXIM POLICY The foreign trade of India is guided by the Export Import policy of govt. of India. Regulated by the foreign trade development and regulatory Act 1992. Exim policy contain various policy decision with respect to import and export of the country. It is prepared and announced by the central government. •EXIM Policy is the export import policy of the government that is announced every five years.
• It is also known as the Foreign Trade Policy.
•This policy consists of general provisions regarding exports and imports, promotional measures, duty exemption schemes, export promotion schemes, special economic zone programs and other details for different sectors.
•Every year the government announces a supplement to this policy. GENERAL OBJECTVE OF EXIM POLICY It aims to developing export potential, improving export performance, encourage foreign trade & creating favourable balance of payment position. To establish the framework for globalization. To promote internationally competitive import substitution and self reliance To encourage the attainment of high & internationally accepted standards of quality. OBJECTIVES OF 2009-14 The key objective for the Foreign Trade Policy was to arrest the declining exports and reverse the trend. To double India’s exports of goods and services by 2014. To double India’s share in global merchandise trade by 2020 as long term aim of this policy. India’s share in global merchandise export was 1.45% in 2008. Simplification of the application procedure for availing various benefits. To set in motion the strategies and policy measures which catalyze the growth of exports.
To encourage exports through a “ mix of measures including fiscal incentives, institutional charges, procedural rationalization and efforts for enhance market access around the world and diversification of export markets. AIMS IN GENERAL
The policy aims at developing export potential , improving export performance, boosting foreign trade and earning valuable foreign exchange.FTP assumes great significance this year as India's export have battered by the global recession.
A fall in exports have led to the closure of several small and medium-scale export oriented units, resulting in large scale unemployment. TARGET Export target : $ 200 billions for 2010-2011.
Export growth rate :15% for next two years and 25% there after.
In an endeavour to make India a diamond international trading hub, it is planned to establish “Diamond Bourse(s)”. EPCG SCHEME
Obligation under EPCG scheme relaxed.
To aid technological up gradation of export sector , EPCG scheme at Zero Duty has been introduced.
Export obligation on import of spares , mould etc. under EPCG Scheme has reduced by 50%. Announcements for FPS,FMS,MLFPS 26 new market s added in this scheme.
Incentives under FMS raised from 2.5% to 3%.
Incentives available under Focus Product Scheme(FPS) Raised from 1.25% to 2%.
Extra products included in the scope of benefits under FPS. *FPS- Focus Product Scheme *FMS- Focus Market Scheme *MLFPS – Market linked focus product scheme ANNOUNCEMENT FOR MARINE SECTOR
Fisheries exempted from maintenance of average EO (export obligation) under EPCG Scheme (along with 7 sectors) however Fishing Trawlers, boats, ships, and other similar items shall not be allowed for this exemption.
Additional flexibility under Target Plus Scheme / Duty free certificate of Entitlement Scheme for the marine sector. GEMS AND JEWELLERY SECTOR Duty Drawbacks is allowed on Gold Jewellery Exports to neutralize duty incidence.
Plan to establish “Diamond Bourse (s ) with an aim to make India an International Trading Hub announced.
Introduction of a new facility to allow import on consignment basis of cut and polished diamonds for the purpose of grading / certification. ANNOUNCEMENTS FOR AGRO EXPORTS Introduction to a single window system to facilitate export of perishable agricultural produce with an aim to reduce transaction and handling cost.
This system will involve creation of multi-functional nodal agencies .These agencies will be accredited by APEDA.( Agricultural and Processed Food Products Export Development Authority) ANNOUNCEMENT FOR LEATHER EXPORT On the payment of 50% applicable export duty, Leather sector shall be allowed re-export of unsold imported raw hides and skins and semi finished leather from public bounded warehouse. ANNOUNCEMENTS FOR TEA EXPORTS The existing minimum value addition under advance authorisation scheme for export of tea is 100%. To 50%. DTA (domestic tarriff area) sales limit to instant tea by EOU units increased from 30% to 50 %. Export of tea has been included under VKGUY Scheme benefits. ANNOUNCEMENT FOR PHARMA EXPORT Export Obligation Period for advance authorization issued increased from existing 6 months to 36 months.
Pharma sector included under MLFPS for countries in Africa and Latin America and some countries in Oceania and Far East. ANNOUNCEMENT FOR HANDLOOM EXPORTS
The claim under Focus Product Scheme, the requirement of “Handloom mark” was required earlier. This has been removed.
ANNOUNCEMENT FOR AUTOMOBILE INDUSTRY Those automobile industries which have R & D establishment will be allowed free import of reference fuels up to a maximum of 5 kl/annum,which are not manufactured in India. Simplification in EPCG for automobile industry. SET UP OF DIRECTORATE OF TRADE REMEDY MEASURE
A Directorate of Trade Remedy Measure shall be set up , which will enable support to Indian industry and exporters , especially the Micro Small & medium Enterprises MSMEs in availing their rights through trade remedy instruments. Restricted items can be imported now against transferred DFIAs(Duty Free Import Authorisation ) as the present DFRC(Duty Free Replenishment Certificate) scheme. There is provision for state run banks to provide dollar credits. EXIM BANK The Export-Import Bank of India, also known as Exim Bank of India leading export finance institution in the country, wholly owned by government of India The bank was set up in the year 1982 under the Export- Import Bank of India Act 1981. The bank offers wide-ranging services for enhancing the prospect of Indian project exports. It plays the role of source of financial, promoter ,coordinator & consultation of India’s Foreign Trade. Objectives
Established “for providing financial assistance to exporters and importers, and for functioning as the principal financial institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country’s international trade…”
Source : Export-Import Bank of India Act, 1981 Evolving Vision
Product Centric Approach “To develop commercially viable Export relationships with a target set of Credits externally oriented companies by 1982-85 offering them a comprehensive range of products and services, aimed at enhancing their internationalisation Export Capability efforts” Creation 1986-94
Customer Centric Comprehensive Range of Approach Products And Services – All Stages of the Business Cycle – Exim Bank TODAY
Leadership and Expertise in India’s Export Finance We are at All Stages of the Export Business
Export Pre- Marketing shipment
Export Post- Production shipment
Export Product Investment Development Abroad
Import Advisory Finance Services Network of 14 Offices in India & Overseas
Head Office + 9 Domestic Offices
Delhi Guwahati
Ahmedabad Kolkata
Mumbai Hyderabad Pune
Bangalore Chennai Role of Exim Bank Principal financial institution in India for coordinating working of institutions engaged in financing exports and imports
Range of Financing Programmes X Export Credits X Finance for Export Oriented Companies Export Services
Support Programmes Export Credits For Indian Companies Commercial Banks
Pre-shipment credit Export Bills Foreign Currency Pre- Rediscounting shipment Credit Refinance of Post-shipment Supplier’s Supplier’s Credit Credit Foreign Currency Pre- Finance for deemed exports shipment Credit Financing Rupee Expenditure for Project Exports Finance for Consultancy Overseas Entities and Technology Services Guarantee Facilities Buyer’s Credit Forfaiting Lines of Credit Value Based Services
ADVISORY SERVICES - Multilateral Agencies- Funded Projects Overseas - Exim Bank as Consultant
KNOWLEDGE BUILDING - Eximius Centre for Learning - Research Studies
INFORMATION Markets, Products, Countries
SUPPLEMENTS FINANCING PROGRAMMES Exim Bank : Partner in Globalisation
Technology F Final Products Capital (Foreign Investment) F Capital Goods Raw Materials Capital Goods F Capital (Overseas I Ventures)
F Product T Development F Production
F Marketing
F Pre shipment
F Post shipment
Four important trends in the value of India’s foreign trade Huge Growth in the Value of Trade: Higher Growth of Imports: Inadequate Growth of Exports: Reasons of Slow Export growth: A survey conducted by the Delhi School of Business on 150 export organizations revealed that the main reasons for the slow growth of exports in India were that 65 per cent of the export establishments were not using ITPO, MMTC and other such institutions. Mounting Trade Deficit: Deficit in the Balance of Trade:
Challenges, Performance & Strategic Imperatives MNCs in India MNCs in India have a long history and tradition … Defining success for MNCs in India Success for MNCs in India can be defined along 2 dimensions :
Capturing the Domestic Market Opportunity
Leveraging India’s resource base to derive additional value for the corporation R&D / Manufacturing / Sourcing / BPO Many MNCs have managed to achieve success along both lines…..
Source : CII BCG Report Performance of MNCs – An Analysis Over the last few decades, most MNCs have shown typical characteristics in their growth plans in India
Prefers operations to be less assets intensive
Lean operations as far as employees are concerned
Preference of profitability over growth
Most businesses generate high ROCEs ( Return of capital employed) Various studies have shown that there are 3 key success factors for MNCs operating in India … Commitment at global level Raise the profile of India Formulation of bold long term targets Empowered local Management More cost effective, enhances continuity, leverages understanding of local environment Localized product / market business models ; create customized products and services in response to unique environment in India Deliver the right product at the right price with right positioning for India Key Advantages of existence of MNCs in India ….i.e what has India really gained? Work culture for employees Systems Training and Learning Technology – especially concept of working with better technologies Safety Health and Environmental Learnings Culture and Ethos Excellent training grounds for many entrepreneurs Key gains NOW…… Outsourcing Centres for key processes setup by various MNCs
R&D Outsourcing – Pharmaceuticals, Engineering, IT, Telecom
Product development centres (Telecom, IT) Key gains NOW…… What are the key issues in the Indian context which have hindered MNCs growth? “Global parent strategy” dictates India plans
Limitations of growth due to regulatory / legislation / IPR issues
Limited Autonomy for top MNC Managers
Sometimes bureaucratic setups have delayed decision making – sharp contrast to most Indian entrepreneur companies
Insistence of some companies on having expats What are the key issues in the Indian context which have hindered MNCs growth? (Contd…)
Rigidity and insistence on evaluating India like any other market Not being able to recognize early enough that India is a price and quality conscious market Limitations of following aggressive M&A options (detail next slide) Many MNCs have got consistently caught in rounds of “parent consolidation” 100% subsidiary conundrum M&A strategies – MNCs Vs Indian companies
Except for India entry M&A plays, MNCs in India have been quite dormant on this front
“Not to go beyond parent portfolio”
Protocols – difficult to meet deal / transaction timelines
M&A is an important tool for growth in today’s context – a tool which could be too crucial to miss out on Some thoughts on Indian MNCs How we classify a company as an MNC?
Companies that operate in more than one country with headquarters located in “home country”
Generally, to qualify as an MNC, the following qualities are essential :
Subsidiaries in foreign countries
Operations in number of countries
High proportion of assets / revenues in / from global operations
Overseas operations should have manufacturing / R&D operations
Employees / Stakeholders should be from different countries The Indian MNCs ………………the list is subjective and endless….
Paints – Asian Paints Auto & Components – Tata Motors, Bharat Forge Chemicals – Tata Chemicals, United Phosphorus Metals – Sterlite Industries, TISCO Packaging – Essel Pharmaceuticals – Ranbaxy, Wockhardt, Sun, DRL Oil & Gas – ONGC Example : Asian Paints
Asian Paints rise from a mid sized domestic focused coatings company to a $ 500 million multinational with a global presence across 23 markets. Among the top 10 decorative coatings companies globally. Key strengths are continuous innovations in all spheres of operations, economies of scale, strong management team, IT capabilities, stronghold over the distribution network, width of product portfolio and strong brand equity Consistently generated EBITDAs of 16%+ and ROEs of 25%+ - higher than most Indian and global peers Operates in 23 countries across the world - manufacturing facilities in each of these countries and is the largest paint company in nine overseas markets. It is also India's largest exporter of paints, exporting to over 15 markets in the Asia- Pacific region, the Middle East and Africa. Key challenges that “Indian MNC” would face….
Domestic market like India vis a vis International expansion Language Culture Autonomy to “local” managers – how comfortable are we ? Styles of doing business Handling of potential liabilities related to Labour, IPR etc
And ………………Patience ! List of Manufacturing MNCs India
Ashok Leyland Bajaj Auto TVS Motors Hero Honda Motors Ltd. Apollo Tyres Asian Paints BPL Group Videocon Group Larsen & Toubro Jindal Steel Hindusthan Unilever Limited Moser Baer Godrej Group Bombay Dyeing Raymond Group Amul Dabur India Limited Cadila Healthcare Cipla Ranbaxy List of Service based MNCs in India HDFC ICICI TCS AIRTEL HCL Technologies Ltd Infosys Ltd Larsen & Toubro Infotech Ltd (LTI) Mphasis Ltd Oracle Financial Services Software Ltd Tech Mahindra Ltd Wipro Ltd UNIT VI INTERNATIONAL MANAGEMENT – GLOBAL PERSPECTIVE Challenges of globalization
Key concepts in the challenges of globalization: Global economy Globalization International management Global manager
337 Global economy Resource supplies, product markets, and business competition are worldwide, rather than local Globalization The process of growing interdependence of these components in the global economy
338 International management Management in organizations with business interests in more than one country Global manager Informed about international developments Transnational in outlook Competent in working with multicultural people Aware of regional developments in a changing world
339 International business
International businesses Conduct for-profit transactions of goods and services across national boundaries Reasons why businesses go international: Profits Customers Suppliers Capital Labor
340 Marketing Strategies
Market entry strategies involve the sale of goods or services to foreign markets but do not require expensive investments. Types of market entry strategies: Global sourcing Exporting Importing Licensing agreement Franchising
341 Common forms of international business—from market entry to direct investment strategies.
342 Direct investment strategies require major capital commitments but create rights of ownership and control over foreign operations. Types of direct investment strategies: Joint ventures Foreign subsidiaries
343 Criteria for choosing a joint venture partner: Familiarity with your firm’s major business. Strong local workforce. Future expansion possibilities. Strong local market for partner’s own products. Good profit potential. Sound financial standing.
344 Complications in the global business environment: Environment is complex, dynamic, and highly competitive. Global business executives must deal with differences in the environment of business in different countries. World Trade Organization resolves trade and tariff disputes among countries. Protectionism can complicate global trading relationships.
345 MNC A multinational corporation (MNC) is a business with extensive international operations in more than one foreign country.
346 Mutual benefits for host country and MNC:
Shared growth opportunities
Shared income opportunities
Shared learning opportunities
Shared development opportunities
347 Host country complaints about MNCs: Excessive profits Domination of local economy Interference with local government Hiring the best local talent Limited technology transfer Disrespect for local customs
348 349 MNC complaints about host countries:
Profit limitations
Overpriced resources
Exploitative rules
Foreign exchange restrictions
Failure to uphold contracts
350 Ethical issues for MNCs: Corruption — illegal practices that further one’s business interests. Sweatshops — employing workers at low wages for long hours and in poor working conditions. Child labor — full-time employment of children for work otherwise done by adults. Sustainable development — meeting current needs without compromising future needs.
351 Culture The shared set of beliefs, values, and patterns of behavior common to a group of people. Culture shock Confusion and discomfort a person experiences in an unfamiliar culture. Cultural intelligence The ability to adapt and adjust to new cultures Ethnocentrism Tendency to consider one’s own culture as superior to others.
352 Stages in adjusting to a new culture: Confusion Small victories The honeymoon Irritation and anger Reality
353 Popular dimensions of culture: Language Low-context cultures and high-context cultures Interpersonal space Time orientation Monochronic cultures and polychronic cultures Religion Contracts and agreements
354 Values and national cultures (Hofstede): Power distance Uncertainty avoidance Individualism-collectivism Masculinity-femininity Time orientation
355 Comparative management How management systematically differs among countries and/or cultures. Global managers Need to successfully apply management functions across international boundaries.
356 Are management theories universal?
U.S. management theories may be ethnocentric.
Participation and individual performance are not emphasized as much in other cultures. Not all Japanese management practices can be applied successfully abroad.
357 Global organizational learning: Companies can and should learn from each other. Readiness for global organizational learning varies based on managerial attitudes.
Ethnocentric attitudes
Polycentric attitudes
Geocentric attitudes Be alert, open, inquiring, but always cautious.
358
GLOBAL MANAGEMENT
TRANSITIONAL STRATEGIES
1–367 What Is Globalization?
Globalization is a process of closer integration and exchange between different countries and peoples worldwide.
Made possible by:
Falling trade and investment barriers
Advanced telecommunications
Reduced transportation costs
Importance of MNEs and FDIs
10–368 What Is Globalization?
Multinational Enterprise (MNE) Deploys resources and capabilities in the procurement, production, and distribution in at least two countries
Foreign Direct Investment (FDI) Investments in value chain activities abroad
Global Strategy To sustain a competitive advantage Competing against foreign and domestic companies around the world
10–369 Why Global?
Gain access to a larger market Capitalize on market potential, such as China, India, and emerging economies
Gain access to low-cost input factors Labor, natural resources, technology, logistics
Managing corporate risk
Leverage core competencies
Develop new competencies Location economies Unique locational advantages
10–370 STRATEGY HIGHLIGHT 10.1 Stages of Globalization
• Globalization 1.0: 1900–1941
Only sales and distribution took place overseas
• Globalization 2.0: 1945–2000 Duplicating business functions overseas
• Globalization 3.0: 21st century MNEs become global collaboration networks (see Exhibit 10.2)
1–371 EXHIBIT 10.2 Globalization 3.0 - Collaboration Networks
10–372 STRATEGY HIGHLIGHT 10.2 Does GM’s Future Reside in China? • Market opportunity in China
1.4 billion population, only 1 in 100 people owns a vehicle
• GM entered China in 1997
Joint venture with Shanghai Automotive Industrial Corp
China is 25% of GM’s revenues and GROWING fast
GM China factories are more productive than U.S. plants
• GM’s future relies on China and other emerging economies
$ 250 million on a state-of-the-art R&D center…in Shanghai
Future of GM likely decided in their international HQ…in Shanghai
10–373 1–373 Disadvantages of Expanding Internationally
Liability of foreignness
Additional cost of doing business in an unfamiliar cultural and economic environment
Cost of coordinating across geographic distance
Economic development may increase the cost of doing business
Rising wages with improved living standards
Difficulty in protecting intellectual property
10–374
Strategy around the World: Cost Reduction vs. Local Responsiveness
Local responsiveness:
Tailor product and service offerings to fit local consumer preferences and host-country requirements
Higher cost Example: McDonald’s uses mutton in India
Cost reduction:
MNEs enter global marketplace with the intention to reduce operation cost Example: Toyota Prius
10–376 EXHIBIT 10.6 The Integration-Responsiveness Framework Four Global Strategies
International strategy Leveraging home-based core competencies Selling the same products or services in both domestic and foreign markets Example: Selling Starbucks coffee internationally Localization (product differentiation) strategy Maximize local responsiveness via a multi-domestic strategy Consumers will perceive them to be domestic companies Example: Nestlé’s customized product offerings in international markets
10–378 Four Global Strategies
Global standardization (cost leadership) strategy Economies of scale and location economies Pursuing a global division of labor based on best-of-class capabilities reside at the lowest cost Example: Lenovo’s R&D in Beijing, Shanghai, and Raleigh; production center in Mexico, India, and China Transnational strategy Combination of localization strategy (high responsiveness) with global standardization strategy (lowest cost position attainable) Example: German multimedia conglomerate Bertelsmann : Caterpillar’s earth-moving equipment Wal-mart Retreats STRATEGY HIGHLIGHT 10.3 from Germany
• Wal-mart entered Germany Acquisition of 21 stores and 74 hypermarkets
• Wal-mart duplicated its U.S. policies and applied them in Germany Employees refused to accept those policies
• Wal-mart faced significant cultural differences
• Wal-mart could not develop efficient economies of scale and distribution centers to drive cost down
• The result is a defeated Wal-mart that sold its stores to Metro, Wal-mart’s key rival in Germany
• ALDI, another of Wal-mart’s competitors in Germany, is now expanding aggressively in the U.S.
1–380 National Competitive Advantage
Death-of-distance hypothesis Geographic location alone should not lead to firm-level competitive advantage because firms are now more able to source inputs globally (ex: capital, commodities, etc.) Labor markets also have become more global.
Computer manufacturers – China & Taiwan Consumer electronics – Japan & South Korea Mining companies – Australia
Why are certain industries in some countries more competitive than in others? Answer: National Competitive Advantage
10–381 International Business: Strategy, Management, and the New Realities 382 IKEA Applies a Transnational Strategy Some 90% of the product line is identical across more than two dozen countries. IKEA modifies some of its furniture to suit individual countries.
IKEA’s marketing is centrally developed at company headquarters, but implemented with local adjustments (e.g., to suit language differences in catalogs).
International Business: Strategy, 383 Management, and the New Realities