Global Business Perspectives Semester of notes
Global Business Perspectives Semester of notes I BUS
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IBUS300 Notes 17 Globalizing Business Avon Fights Recession One Lipstick at a Time Direct selling to be a great new line of work for individuals who feel the need to recession proof Direct selling can be a low risk way of experimenting with entrepreneurial ideas For unemployed individuals another bene t of direct selling is that it egets them out in the community International Business business that engages in international economic activities Can also refer to action of doing business abroad Multinational enterprise MNE rm that engages in foreign direct investment FDI by directly investing in controlling and managing value added activities in other countries Video games in China expensive Internet Cafe Multiplayer online games MMOGs popular Government came in to control health concern as well as threatening culture Chinese rms become major exporters to Asia and the rest of the world Global business business around the globe 1 International and 2 Domestic business activities Emerging economies term that has gradually replaced the term developing countries since the 1990s Emerging markets term that is often used interchangeably w emerging economies Emerging economies contribute approximately 45 of the global GDP GDP sum of value added by resident rms households and government operating in an economy Purchasing power parity a conversion that determines the equivalent amount of goods and services different currencies can purchase Gross National Income GNI GDP plus income from income from nonresident sources abroad GNI is the term used by the World Bank and other international organization to supersede the term GNP Triad North America Western Europe and Japan Base of the pyramid economies where people make less than 2000 a year Most MNEs focus on top and 2nd tiers 0s got to look at base of pyramid as well 3 reasons to study IB 1 Enhance your employability and advance your career in the global ecnomy 2 Better preparation for possible expatriate assignments abroad 3 Stronger competence in interacting with foreign suppliers partners and competitors and in working for foreign owned employers in your own country 2 themes of this book 1 Capabilities necessary to organize a global supply chain hints at the importance of resources and capabilities 2 A focus on the rules of the game more technically institutions Group of 20 G 20 the group of 19 major countries plus the EU whose leaders meet on a biannual basis to solve global economic problems Expatriate manager expat a manager who works abroad International premium a signi cant pay raise when working overseas What determines the success and failure of rms around the world 1 Institution based view 2 Resource based view Institution based view suggests that the success and failure of rms are enabled and constrained by institutions rules of the game both formal and informal Ex Hong Kong vs India Resource Based View focuses on rm s internal resources and capabilities whereas institution based View focuses on external environment Liability of foreignness the inherent disadvantage that foreign rms experience in host countries b c of their nonnative status Globalization close integration of countries and peoples of the world 3 View on globalization 1 A new force sweeping through the world in recent times 2 A long run historical evolution since the dawn of human history 3 A pendulum that swings from one extreme to another from time to time Risk management the identi cation and assessment of risks and the preparation to minimize the impact of high risk unfortunate events Scenario planning a technique to prepare and plan for multiple scenarios either hi gh low Semiglobalization a perspective that suggests that barriers to market integration at borders are hi gh but not high enough to completely insulate countries from each other semiglobalization is to be engaged Global Business and Globalization at a crossroads 1 A basic understanding of the global economy in necessary 2 Important to critically examine your own personal views and biases regarding globalization Nonnngovernemntal organizations NGOs organizations that are not af liated with governments many opponents of globalization Ch2 Understanding Formal Institutions Politics Laws and Economics Free market nancial crisis g government intervention Regardless of whether it is a white act or a black cat as long as it can catch mice it is a good cat Deng Xiaoping Institutions formal and informal rules of the game Institutional transitions fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect rms as players Institution based View a leading perspective in global business that suggests that the success and failure of rms are enabled and constrained by institutions Institutional framework made up of both the formal and informal institutions governing individual and rm behavior 3 pillars that support these institutions regulatory normative and cognitive pillars Formal institutions institutions represented by laws regulations and rules Regulatory pillar the coercive power of governments Informal institutions supported by 2 pillars normative and cognitive Normative pillar the mechanisms through which norms in uence individual and rm behavior Cognitive pillar the internalized or taken for granted values and beliefs that guide individual and rm behavior Key role of institutions is to reduce uncertainty Transaction costs the costs associated with economic transactions or more broadly the costs of doing business Opportunism the act of seeking self interest with guild 2 core propositions of the institution based view 1 Managers and rms pursue their interests and make choices rationally within the formal and informal constraints in a given institutional framework 2 Although formal and informal institutions combine to govern rm behavior in situations where formal constraints are unclear or fail informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and rms Political system the rules of the game on how a country is governed politically 1 Democracy political system in which citizens elect representatives to govern the country on their behalf 2 Totalitarianism dictatorship a political system in which one person or party exercises absolute political control over the population Political risk risk associated with political changes that may negatively impact domestic and foreign rms Legal system the rules of the game on how a country s law are enacted and enforced Civil law a legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments Common law a legal tradition that is shaped by precedents and traditions from previous judicial decisions Theocratic law legal system based on religious teachings Property rights the legal rights to use an economic property resource and to derive income and bene ts from it Intellectual property intangible property that is the result of intellectual activity Intellectual property rights IPR rights associated with the ownership of intellectual property Patents exclusive legal rights of inventors of new products or processes to derive income from such inventions Copyrights exclusive legal rights of authors and publishers to publish and disseminate their work Trademarks exclusive legal rights of rms to use speci c names brands and designs to differentiate their products from others Economic system rules of the game on how a country is governed economically Market economy an economy that is characterized by the invisible hand of market forces Command economy an economy that is characterized by government ownership and control of factors or production Mixed economy an economy that has elements of both a market economy and a command economy No country had a complete market economy nor command economy Debate points for differences in GDP capita 1 Culture geography and institutions Institutions have won the debate Washington Consensus a view centered on the unquestioned belief in the superiority of private ownership over state ownership in economic policy making which is often spearheaded by two Washington based international organizations the International monetary Fund and the World Bank Moral hazard recklessness when people and organizations including rms and governments do not have to face the full consequences of their actions Quiz questions Patent is not secret It s publicized world wide Foreign market eJ Russia has 13 more household income than Brazil IBUS3OO Notes 111 Ch3 Emphasizing Informal Institutions Cultures Ethics and Norms Case Cartoons that Exploded Danish cartoon drew Muslim prophet Muhammad violated Muslim norm against picturing prophets but also portrayed Muhammad in a highly negative insulting light especially those that pictured him as a terrorist 8 Furious explosion apology but not arguing freedom of speech Institution based view involves 2 propositions 1 Managers and firms rationally pursue their interests win a given institutional framework 2 In situations where formal institutions are unclear or fail informal institutions play a larger role in reducing uncertainty Informal institutions can be found almost everywhere Whereas formal institutions make up small prt of the rules of the game that govern individual and firm behavior Ethnocentrism a self centered mentality held by a group of people who perceive their own culture ethics and norms a natural rational and morally right Culture Culture the collective programming of the mind that distinguishes the members of one group of category of people from another 1 No strict one to one correspondence between cultures and nation states exists 2 Culture has many layers such as regional ethnic and religious Hispanic population within US 45 million transcreation However they are neither mainstream Anglo American nor pure Mexican L Language Lingua franca dominance of English as a global business language a English speaking countries contribute the largest share of global output b Recent globalization has called for the use of one common language Easier and cheaper But also good to know local language to not miss cultural subtleties Ex Coors Beer Ford etc II Religion 85 of the world s population reportedly have some religious belief 1 Christianity 2 Islam Hinduism Buddhism Importance to business Ex Christmas shopping III Social Structure Social structure refers to how a society broadly organizes its members with rigidity or flexibility 1 Social stratification the hierarchical arrangement of individuals into social categories strata such as classes castes or divisions within a society 2 Social mobility the degree to which members from a lower social category can rise to a higher status Higher stratified societies low degree of social mobility Multinational enterprises operating in highly socially stratified countries need to be sensitive to local hiring and staffing norms BUT societies are evolving as well IV Education Collectivistic societs p learning foster collectivistic values and emphasize the right answers in Individualistic societies emphasize individual initiatives and encourage more independent thinking no right or wrong answers Most selective university Indian Institute of Management Cultural differences Context cluster and dimension approaches I Context Context underlying background upon which social interaction takes place Low context cultures a culture in which communication is usually taken at face value without much reliance on unspoken context Ex German Swiss Scandinavian American British Canadian Spanish High context cultures a culture in which communication relies a lot on the underlying unspoken context which is as important as the words used no does not necessarily mean no Ex China Japan II Cluster Cluster countries that share similar cultures Ronen and Shenkar Clusters 1 Anglo 2 Arabic 3 Far Eastern 4 Germanic 5 Latin American 6 Latin European 7 Near Eastern 8 Nordic GLOBE clusters 1 Anglo 2 Germanic Europe 3 Latin American 4 Latin Europe 5 Nordic Europe 6 Confucian Asia 7 Eastern Europe 8 Middle East 9 Southern Asia 10 Sub Saharan Africa Civilization highest cultural grouping of people and the broadest level of cultural identity people have Huntington civilizations 1 African 2 Confucian Sinic 3 Hindu 4 Islamic 5 Japanese 6 Latin American 7 Slavic Orthodox 8 Western Ppl and firms are more comfortable doing business w other countries within the same cluster civilization III Dimension By focusing on multiple dimensions of cultural differences both within and across clusters the dimension approach has endeavored to overcome these limitations of context and cluster Power distance the extent to which less powerful members within a country expect and accept that power is distributed unequally Low US High British Germany Individualism the idea that an individual s identity is fundamentally his or her won Collectivism the idea that an individual s identity is fundamentally tied to the identity of his or her collective group Masculinity a relatively strong form of societal level sex role differentiation whereby men tend to have occupations that reward assertiveness and women tend to work in caring professions Ex Japan Femininity a relatively weak form of societal level sex role differentiation whereby more women occupy positions that reward assertiveness and more men work in caring professions Ex Sweden Uncertainty avoidance the extent to which members in a culture accept or avoid ambiguous situations and uncertainty High Greece Low Slngapore Long term orientation dimension of how much emphasis is placed on perseverance and savings for future betterment ExChina Criticism on Hofstede s Framework Cultural boundaries are not the same s national boundaries Dutch software o his mind will remain evident to the careful reader Research based on 116000 IBM employees working at 72 national subsidiaries during 196773 Data now 40yrs old Ethics Ethics the principles standards and norms of conduct that govern individual and firm behavior Code of conduct a set of guidelines for making ethical decisions Negative view firms may simply jump onto the ethics bandwagon under social pressure to appear more legitimate without necessarily becoming better A positive view some although not all firms may be self motivated to do things right regardless of social pressure Instrumental view believes that good ethics may simply be a useful instrument to help make money Value of ethical reputation is magnified during a time of crisis Ethical relativism a perspective that suggests that all ethical standards are relative Ethical imperialism a perspective that suggests that there is one set of Ethics with capital E and we have it 3 middle of the road guiding principles by Thomas Donaldson a business ethicist 1 Respect for human dignity and basic rights 2 Respect for local traditions 3 Respect for institutional context Corruption the abuse of public power for private benefits usually I the form of bribery Foreign corrupt practices Act a US law enacted in 1977 that bans bribery of foreign officials FCPA has to be institutionalized and enforced in every country to stop bribery and corruption Norms and Ethical Challenges 4 Broad strategic responses to ethical challenges by norms 1 Reactive deny responsibility do less than require Ex Ford Pinto fire 2 Defensive admit responsibility but fight it do the least that is required Ex Nike 3 Accommodative accept responsibility do all that is required Ex Ford Explorer rollovers 4 Proactive strategies anticipate responsibility do more than is required Ex BMW Debates and Extensions 1 Western values vs Eastern values 2 Cultural convergence vs Divergence 3 Opportunism vs individualismcollectivism Economic Development Western Values vs Eastern Values Max Weber39s Protestantism and Capitalism success Challenged by 1 Islam and 2 Asian Confucian Islam It is the western dominance that causes the lackluster economic performance of Muslim countries East Asia Confucianism criticized by Weber as backward but Japan and 4 Tigers and China generated the fastest economic growth in the world and for the longest time Every culture evolves debate thus erupts on the direction of cultural change Westernization in consumption does not necessarily mean Westernization in values Middle of the road group makes 2 points 1 End of the Cold War rise of the Internet and the ascendance of English as the language of business all offer evidence of some cultural convergence at least to the younger norm 2 Deep down cultural divergence may continue to be the norm acknowledges the validity of both sides of the debate Crossvergence that Thus more global approach may work when marketing products and services to younger customers but not older Opportunism vs IndividualismCollectivism Opportunism major source of uncertainty that adds to transaction costs and institutions emerge to combat opportunism Collectivists are more collaborative only when dealing with ingroup members individuals and firms regarded as part of usgt Collectivists discriminate more harshly against outgroup members individuals and firms not regarded as a part of us Individualists make less distinction between ingroup and out group f on balance the avg Chinese is not inherently more trustworthy than the avg American Management Savw For sawy managers around the globe emphasis on informal institutions suggests 2 broad implications 1 It is necessary to enhance Cultural intelligence an individual s ability to understand and adjust to new cultures a Awareness recognition of both the pros and cons of your mental software and the appreciation of people from other cultures b Knowledge ability to identify the symbols rituals and taboos in other cultures also known as cross cultural literacy c Skills based on awareness an knowledge plus good practice Although skills can be taught most effective way to gain cultural intelligence total immersion within a foreign culture Managers need to be aware fo the prevailing norms and their transitions globally 5 profiles of cultural intelligence 1 The local a person who works well with people from similar backgrounds but does not work effectively with people from different cultural backgrounds 2 The analyst a person who observes and learns from others and plans a strategy for interacting with people from different cultural backgrounds 3 The Natural a person who relies on intuition rather than on a systematic learning style when interacting with people from different cultural backgrounds 4 The Mimic a person who creates a comfort zone for people from different cultural backgrounds by adopting their general posture and communication style This is not pure imitation which may be regarded as mocking 5 The chameleon a person who may be mistaken for a native of the foreing country Heshe may achieve results that natives cannot due to hisher insider s skills and outsider s perspective This is very rare Implications for action 6 rules of thumb when venturing overseas Be prepared Slow down Establish trust Understand the importance of language Respect cultural diffrences Understand that no culture is inherently superior in all aspects Closing Case Siemens Needs to Claen Up around the Globe Headquartered in Munich and Berlin Scandals regarding allegations of public corruption including criminal breaches of fidcuciary duty including embezzlement as well as bribery money laundering and tax evasion among others Uncovered 19 billion in questionable payments Foreign corrupt practices ACT FCPA Corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company Settlement stopped the case from going to trial in both the US and Germany Siemens was cooperative Establish compliance committee IBUS3OO Notes 114 Ch6 Investing Abroad Directly Opening Case South African Firms Invest Abroad Surge of internationalization from South Africa Institution based view the lifting of anti apartheid sanctions by other countries and the generally open trade and investment environment worldwide have made such global expansion possible Resource based view since South Africa represents 10 of Africa39s population but 45 of its GDP winning firms in South Africa not surprisingly have a competitive edge in other less competitive African countries Can leverage to other countries they39re not afraid having done well in the most difficult continent on Earth International investment FDI and Foreign portfolio investment FPI Foreign portfolio investment FPI investment in portfolio of foreign securities such as stocks and bonds indirect investment Management control rights the right to appoint key managers and establish control mechanisms Horizontal FDI a type of FDI in which a firm duplicates its home country based activities at the same value chain stage in a host country Vertical FDI a type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country Upstream vertical FDI a type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country Downstream vertical FDI a type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country FDI flow the amount of FDI moving in a given period usually a year in a certain direction FDI inflow inbound FDI moving in to a country in a year FDI outflow outbound FDI moving out of a country in a year FDI stock total accumulation of inbound FDI in a country or outbound FDI from a country across a given period usually several years OLI advantages a firm s quest for ownership location advantages and internalization advantages via FDI Ownership an MNE s possession and leveraging of certain valuable rare hard to imitate and organizationally embedded VRIO assets overseas in the context of FDI Location advantages enjoyed by firms operating in a certain location Internalization the replacement of cross border markets such as exporting and importing with one firm the MNE locating and operating in 2 or more countries Market imperfections market failure the imperfect rules governing international transactions Why firms prefer FDI to licensing FDI reduces dissemination risks FD provides tight control over foreign operations FDI facilitates the transfer of tacit knowledge through learning by doing Dissemination risk the risk associated with unauthorized diffusion of firm specific know how Agglomeration clustering of economic activities in certain locations Agglomeration advantages stem from Knowledge spillover the diffusion of knowledge from one firm to others among closely located firms that attempt to hire individuals from competitors Industry demand that creates a skilled labor force whose members may work for different firms without moving out of the region Industry demand that facilitates a pool of specialized suppliers and buyers also located in the region Location advantages refer to the advantages one firm obtains when operating in a location due to its firm specific capabilities Oligopolies industry dominated by a small number of players internalization Transaction costs Intrafirm trade international transactions between 2 subsidiaries in 2 countries controlled by the same MNE Radical view on FDI a political view that is hostile to FDI Popularity of this view decline due to 1 Economic development in these countries was poor in the absence of FDI and 2 The few developing countries that embraced FDI attained enviable growth Free market view on FDI a political view that suggest that FDI unrestricted by government intervention is the best Pragmatic nationalism on FDI a political view that only approves FDI when its benefits outweigh its costs 4 primary benefits to host countries 1 Capital inflow can help improve a host country39s balance of payments 2 Technology especially more advanced technology from abroad can create technology spillovers that benefit domestic firms and industries Technology spill over technology diffused from foreign firms to domestic firms Local rivals after observing such technology may recognize its feasibility and strive to imitate it Demonstration contagion or imitation effect It underscores the important role that MNEs play in stimulating competition in host countries 3 Advanced mgmt know how may be highly valued In many developing countries it is often difficult for the development of management know how to reach a world class level if it is only domestic and not influenced by FDI 4 FDI creates jobs For example more ethan 50 of manufacturing employees in Ireland work for MNES 3 primary costs of FDI to host countries 1 Loss of sovereignty 2 Adverse effects on competition 3 Capital outflow 3 benefits to home countries 1 Repatriated earnings from profits from FDI 2 Increased exports of components and services to host countries 3 Learning via FDI from operations abroad Bargaining power ability to extract favorable outcome from negotiations due to one party39s strengths 3Cs common interests conflicting interests compromises Obsolescing bargain the deal struck by MNES and host governments which change their requirements after the initial FDI entry Typically unfolds in 3 rounds 1 The MNE and the govt negotiate a deal The MNE usually is not willing to enter in the absence of some govt assurance of property rights and incentives such as tax holidays 2 The MNE enters and if all goes well earns profits that may become visible 3 The govt often pressured by domestic political groups may demand renegotiations of the deal bc it seems to yield excessive profits to the foreign firm The previous deal thus becomes obsolete The govt tactics include removing incentive demanding a higher share of profits and taxes and even expropriation government39s confiscation of foreign assets Sunk costs cost that firm has to endure even when its investment turns out to be unsatisfactory Debates and Extensions FDI vs outsourcing facilitating vs confronting inbound FDI welcoming vs restricting sovereign wealth fund investment FDI vs Outsorucing 1 How critical is the activity to the core mission of the firm 2 How common is the activity within multiple end user industries 3 How readily available is overseas talent to perform this activity a If activity is marginal common across multiple end user industries and can be provided by proven talents overseas outsource Facilitating vs Confronting Inbound FDI Can we trust foreign firms in making decisions important to our economy Welcoming vs Restricting Sovereign Wealth Fund Investments Sovereign wealth fund a state owned investment fund composed of financial assets such as stocks bonds real estate or other financial instruments funded by foreign exchange assets Should country accept SWFs for rescue Or are they politically planned Management Savw 1 From a resource based view some firms are good at FDI b c they leverage ownership location and internalization advantages in a way that is valuable unique and hard to imitate by rival firms 2 From an institution based view the political realities either facilitate or constrain FDI Implications for Action 1 Carefully assess whether FDI is justified in light of other foreign entry modes such as outsourcing and licensing 2 Pay careful attention to the location advantages in combination with the firm s strategic goals 3 Be aware of the institutional constraints and enablers governing FDI and enhance FD s legitimacy in host countries Closing Case The Fate of Opel GM bankrupt what about OPEL GM agreed to support a proposal favored by the German govt to sell 55 of Opel s equity to a consortium led by Magna a Canadian auto parts maker that would take 20 of equity GM s concern it would be hit by a double whammy 1 Would lose important passenger car expertise that fueled a lot of GM s models beyond those carrying the Opel and Vauxhall plates 2 The sale would turn Magna into a major competitor overnight GM decided to keep OPEL h German angry h GM needs to repay 15 billion Euro of bridge loan that German govt paid to do whatever it wants to do IBUS3OO Notes 110 Business of International Business is Culture National Cultures and Organizational Cultures 5 dimensions of national culture 1 Power distance 2 Individualism vs Collectivism 77 Paticularism way of thinking in which the standards for the way a person should be treated depend on the group or category to which the person belongs f Universalism a way of thinking in which the standards for the way a person should be treated are the same for everybody 3 Masculinity vs Femininity 77 Women s values differ less among societies than men s values f Men s values from one country to another contain a dimension from very assertive and competitive and maximally different from women s values on the one side to modest and caring and similar to women s values on the other 4 Uncertainty Avoidance 5 Long term vs Short Term Orientation 77 Long term orientation thrift and perseverance f Short term orientation respect for tradition ful lling social obligations and protecting one s face Power distance High for Latin Asian and African countries and smaller for Germanic countries Individualism Prevails in developed and Western countries collectivism prevails in less developed and Eastern countries Japan takes a middle position on this dimension Masculinity high in Japan in some European countries like Germany Austria and Switzerland and moderately high in Anglo countries low in Nordic countries and in the Netherlands and moderately low in some Latin and Asian countries like France Spain and Thailand Uncertainty avoidance high in Latin countries Japan German speaking countries Low in Anglo Nordic and Chinese culture countries Long term orientation mostly in East Asian countries China Hong Kong Taiwan Japan South Korea IBUS3OO Notes 112 Ch4 Leveraging Resources and Capabilities Case Saturna Capital A Leading Company in Islamic Finance Located in Bellingham With about 40 employees provides an apt example of a rm s ability to transcend geographical barrier and compete on a global scale through persistent leverage of core competence Success 1 Mr Kaiser s exceptional talent as an investment manager 2 outstanding corporate governance nancial integrity vigilance in complying With nancial regulations governing the mutual fund industry Resource based View a leading perspective in global business that posits that rm performance is fundamentally driven by differences in rm speci c resources and capabilities SWOT Analysis An analytical tool for determining a rm s strengths Weaknesses opportunities and threats Institution based view O amp T Resource based view Internal S amp W Resource the tangible and intangible assets a rm uses to choose and implement its strategies Capability same as Resource Used interchangeably and often in parallel Tangible resources and capabilities assets that are observable and easily quanti ed Organized in 4 categories 1 Financial ability to generate internal funds raise external capital 2 Physical location of plants of ces and equipment access to raw materials and distribution channels 3 Technological possession of patents trademarks copyrights and trade secrets 4 Organizational formal planning command and control systems integrated management information systems Intangible resources and capabilities assets that are hard to observe and dif cult if not impossible to quantify 1 Human managerial talents organizational culture 2 Innovation RampD capabilities Capacities for organizational innovation and change 3 Reputational perceptions of product quality durability and reliability reputation as a good employer reputation as a socially responsible corporate citizen These are only examples not an exhaustive list Value chain a chain of vertical activities used in the production of goods and services that add value Value chain consists of primary and support activities Benchmarking an examination on Whether a rm has resources and capabilities to perform a particular activity in a manner superior to competitors Commoditization a process of market competition through Which unique products that command high prices and high margins gradually lose their ability to do so thus becoming commodities Outsourcing turning over an organizational activity to an outside supplier that will perform it on behalf of the focal rm Check gure 41 and 42 and 43 on pg 99100 Captive sourcing setting up subsidiaries abroad so the Work done is in house but the location is foreign Also known as foreign direct investment FDI Offshoring outsourcing to an international or foreign rm Inshoring outsouring to a domestic rm Case NCR suggests that value chain decisions regarding outsourcing vs in house production needs to be examined and re examined rigorously and continuously and that outsourcing is not necessarily the panacea for competitiveness problems VRIO framework the resource based framework that focuses on the value V rarity R imitability I and organizational O aspects of resources and capabilities Nonvalue adding resources and capabilities such as IBM s historical expertise in hardware may become weakness instead of strengths get rid of it Resources and capabilities must be both valuable and rare to have the potential to provide some temporary competitive advantage A lot more challenging to imitate intangible capabilities such as tacit knowledge superior motivation and managerial talents Casual ambiguity the dif culty of identifying the casual determinants of successful rm performance Only valuable rare and hard to imitate resources and capabilities may potentially lead to sustained competitive advantage Complementary assets the combination of numerous resources and assets that enable a rm to gain a competitive advantage Social complexity the socially intricate and interdependent ways rms are typically organized Only valuable rare and hard to imitate resources and capabilities that are organizationally embedded and exploited can possibly lead to persistently above average performance 2 leading debates 1 Domestic resources vs international capabilities 2 Offshoring vs not offshoring Do rms that are successful domestically have what it takes to win internationally Yes and No Increased outsourcing of more high end services IT BPO to countries such as India is controversial still debatable Proponents huge values cost saving Opponents Strategic core function moved outside what is left of the rm Ex RCA Original equipment manufactures OEMS a rm that executes design blueprints provided by other rms and manufactures such products Original design manufacturers ODMS a rm that both designs and manufactures products Original brand manufacturers OBMS a rm that designs manufactures and markets branded products Economically critics contend that they are not sure whether developed economies on the whole actually gain more Politically critics argue that many large US rms claim that they are global companies and consequently that they should neither represent nor be bound by American values any more Accused of being unethical destroying jobs at home ignoring CSR violating customer privacy For rms in developed economies the choice is not really offshoring vs not offshoring but where to draw the line on offshoring Implications for action 1 Managers need to build rm strengths based on the VRIO framework 2 Relentless imitation or benchmarking while important is not likely to be a successful strategy 3 Managers need to build up resources and capabilities for future competition 4 Students need to make yourself into an untouchable whose job cannot be outsourced Lesson for all rms including current market leader is to develop strategic foresight over the horizion radar is a good metaphor Closing Case Why Amazon s Kindle cannot be made in the US After decades of outsourcing production to low cost countries US rms have not only lost millions of low skill jobs but also the ability to make the next generation of high tech high value goods Some CEOs calling for industrial policy govt intervention by picking Winner Obama administration is being dragged into industrial policy Without much of a clear long term policy How to beef up the manufacturing and other capabilities of US rms in order to enhance US competitiveness is key IBUS300 Notes 113 Ch5 Trading Internationally Case Why are German Exports so competitive Cars BMW Mercedes NIVEA SAP headphones etc Renowned for excellent engineering superb craftsmanship and obsession for perfection German exports are often not cheap but they are often Worth it Forman and informal rules in Germany that are behind its export prowess Formally govt has sought to avoid large scale deindustrialization and encouraged rms to produce at home Trimmed unemployment bene ts German managers holding down Wage increases more or less frozen since mid 1990s 200809 crisis hit top 10 countries that bought German exports cut back on spending GDP for Germany Exporting selling abroad Importing buying from abroad 2 main factors merchandise and services Merchandise tangible products being traded Services intangible services being traded Nations don t trade rms from different nations trade most of the time Trade de cit an economic condition in Which a nation imports more than it exports Trade surplus an economic condition in Which a nation exports more than it imports Balance of trade the aggregation of importing and exporting that leads to the country level trade surplus or de cit 6 major theories of international trade 1 Mercantilism 2 Absolute advantage 3 Comparative advantage 4 product life cycle 5 strategic trade 6 National competitive advantage of industries Classical trade theories the major theories of international trade that were advanced before the 20th century 1 Mercantilism 2 Absolute advantage 3 Comparative advantage Modern trade theories the major theories of international trade that were advanced in the 20th century Which consist of 1 Product life cycle 2 Strategic trade and 3 National competitive advantage of industries Theory of mercantilism suggests that the Wealth of the World is xed and that a nation that exports more and imports less will be richer Protectionism the idea that governments should actively protect domestic industries from imports and vigorously promote exports Free trade the idea that free market forces should determine how much to trade W little or no government intervention Theory of absolute advantage suggests that under a free trade a nation gains by specializing in economic activities in Which it has an absolute advantage 1 Can produce more 2 Both can bene t more by trading Adam Smith Absolute advantage the economic advantage one nation enjoys that is absolutely superior to other nations Theory of comparative advantage a theory that focuses on the relative advantage in one economic activity that one nation enjoys in comparison With other nations David Ricardo Comparative advantage relative advantage in one economic activity that one nation enjoys in comparison With other nation Opportunity cost cost of pursuing one activity at the expense of another activity given the alternatives other opportunities Factor endowment the extent to Which different countries possess various factors of production such as labor land and technology Factor endowment theory HeckscherOhlin theory a theory that suggests that nations Will develop comparative advantages based on their locally abundant factors Modern theory Product life cycle theory a theory that accounts for changes in the patterns of trade over time by focusing on product life cycles Criticized on 2 accounts 1 Assumes that US will always be the lead innovation for new products 2 Assumes a stage by stage migration of production rms now launch new products simultaneously around the globe Strategic trade theory a theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success The industries tend to be highly capital intensive industries with high barriers to entry where domestic rms may have little chance of entering and succeeding wout government assistance Strategic trade policy govt policy that provides companies a strategic advantage in international trade through subsidies and other supports Criticized on 2 accounts 1 Many scholarspolicy makers uncomfortable w govt intervention 2 Many industries claim they are strategically important Theory of national competitive advantage of industries diamond theory a theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a diamond Factor endowments rm strategy structure and rivalry domestic demand conditions related and supporting industries Resource mobility assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry Tariff barrier trade barrier that relies on tariffs to discourage imports Import tariff a tax imposed on imports Deadweight costs net losses that occur in an economy as a result of tariffs Nontariff barrier trade barrier that relies on nontariff means to discourage imports subsidies import quotas export restraints local content requirements administrative policies and antidumping duties etc Import quota restriction on the quantity of imports Voluntary export restraints VERS an international agreement that shows that exporting countries voluntarily agree to restrict their exports Local content requirement a requirement stipulating that a certain proportion of the value of the goods made in one country must originate from that country Administrative policy bureaucratic rules that make it harder to import foreign goods Antidumping duties tariffs levied on imports that have been dumped selling below costs to unfairly drive domestic rms out of business 2 prominent economic arguments against free trade 1 The need to protect domestic industries 2 The need to shield infant industries Infant industry argument if domestic rms are as young as infants in the absence of government intervention they stand no chances of surviving and will be crushed by mature foreign rivals Political arguments against free trade 1 National security 2 Consumer protection 3 Foreign policy 4 Environmental and social responsibility Trade embargo politically motivated trade sanctions against foreign countries to signal displeasure 2 leading debates on international trade 1 Trade de cit vs Surplus and 2 Classic theories vs new realities Classical theories vs New Realities Service trade India can innovate in area such as IT where the US traditionally enjoys comparative advantage can reduce the price of US software exports and curtail the wage of US IT workers What determines the success and failure of rms exports around the globe 1 Resource based view and institution based view Implications for action 1 Discover and leverage comparative advantage of world class locations 2 Monitor and nurture the current comparative advantage of certain locations and take advantage of new locations 3 Be politically active to demonstrate safeguard and advance the gains from international trade IBUS3OO Notes 128 Integrative Case Iceland s Financial Crisis Iceland one of the wealthiest nations of Europe Collapse of its economy and currency as a result of a fatally over leveraged banking sector Exotic landscape Exclusive territorial rights to large portions of the North Atlantic Ocean sheries but yet to be explored for oil Highly literate population and rich maritime resources Key industries shing and renewable energy resources a Export driven shing industry b Geothermal based hydro fuel sector Deregulation and privatization in the banking industry took place gradually throughout the 1990s and was completed in 2003 Relatively newly established banks competed with dominant Landsbanki using aggressive international expansion Landsbanki used own branches p able to offer its foreign customers Icelandic interest rates on the accounts a Icelandic deposit insurance was expected to cover the foreign depositors Banks were dependent on borrowing aggressively in international capital markets Crisis Downgrade in sovereign debt rating 9 capital ight British govt froze assets of Icelandic banks and companies in the UK p off from international credit card and ATM systems Best prospect for immediate help New coalition Faced the task of negotiating the repayment of the Iceasave account government guarantee to the British and Dutch govts Join EU Last resort However Icelandic shing territory and shing quotas as well as the right to exploration for oil in the Atlantic Ocean will be dif cult issues to resolve H nationalize the 3 major banks Icelandic banks were cut Integrative Case 22 Soybeans in China China world s largest producer of non genetically modi ed soybeans China from export to importing soybeans Subsidies on wheat and corn 1 crucial reason that domestic soybeans are not as competitive as imports is because soybeans are primarily grown in China s Northeast whereas soybean oil processing companies concentrate along the coast Transportation storage and capital requirements domestic pricier bc of economies of scale industrialized production foreign government subsidies and topographical and climatic conditions import is cheaper Shift to research Upstream production GM based or Non GM based requirement can this in uence Integrative Case 23 DP WORLD Sale of Peninsular amp Oriental Steam Navigation Co of London operations in 5 US ports also came under DP World s purview No income taxes in Dubai Tourisms Regional HQ of nancial institutions Neutral in Wars or at least try to ex fuel base for US but also used by terrorists Our port security is too important to place in the hands of foreign governments Received security commitments from DP World before giving its clearance Large ports have multiple terminals are operated by different companies Most ports are owned by port authorities that are set up by local governments 4 an individual company which is responsible for port mgmt and operations such as moving the containers from the ships to the warehouses H mgmt of port lease a terminal to Inspection of containers responsibility of federal agencies such as the US Coast Guard and the US customs and border protection Integrative Case 24 Competing in China s Automobile Industry W plenty of growth opportunites 10 vehicles 1000 residents in China O3 Wholly owned subisidary NG N joint venture 2 distinctive phases of FDI activities in China s automobile industry 1 1980 1990s 3 early JV 2 Mid 1990s p present FDI flows to this industry accelerated sharply from 1992 ex VW Volkswagen established a solid market position Market share of over 70 for passenger cars for over a decade By the late 1990s market became a more competitive buyer s market General Motors Huge investment GM mgmt reiterated that China was expected to become the biggest automotive market in the world win 2 decades GM not saddled with billions in pensions and healthcare costs like in US Peugeot One of the 13 3 entrants along with VW and American Motors Selling large amounts of CKD Kits and parts but it did not reinvest pro ts like VW 2003 came back Honda Good reputation from its Accord Emerging Domestic Players Original thinking behind the Open Door Policy in China s auto market by forming JVs with multinationals 2 access capital and technology and to develop Chinese domestic partners into self sustaining independent players a FAILED It also led to over dependence on foreign technology and inadequate capacity for independent innovations Chinese players coming up Use of acquisition starting to open overseas factories Effort on green vehicles BYD batteries 30 of global market share China is not behind in the new technology unlike the internal combustion engines Road Ahead Chinese must be able to offer their own products that are competitive in the global market 2 competing scenarios confronting executives contemplating a move into China or expand in China 1 At the current rate of rapid foreign and domestic investment the Chinese industry Will rapidly develop overcapacity 2 Given the low penetration of cars among the vast Chinese population Whose income is steadily on the rise such a rising tide will be able to list all boats or Wheels for a long While at least IBUS3OO Notes 22 CH 9 Growing and Internationalizing the Entrepreneurial Firm Opening Case Azul takes off from Brazil Brazil s middle class is swelling 97 million ppl rich enough to contemplate getting on an airplane David Neelman J etBlue Brazil airfares 70 higher than America in a country that is considerably poorer TAM and Gol combined share of 85 Neelman makes Azul 3 biggest carrier Lots of things that companies need capital to telephone lines and computing expertise more expensive in Brazil than in America Costly but there s lots more opportunities of growth in Brazil Entrepreneurship the identi cation and exploitation of previously unexplored opportunities Concerned with the sources of opportunities the process of discovery evaluation and exploitation of opportunities and the set of individuals who discover evaluate and exploit them Entrepreneurs founders andor owners of new business or managers of existing rms who identify and exploit new opportunities International entrepreneurship a combination of innovative proactive and risk seeking behavior that crosses national borders and is intended to create wealth in organizations SME not the exclusive domain of entrepreneurship 500 or more employees in the US amp 250 or more in EU large rms 60 of starts up in the US will fail within 6 yrs Entrepreneurship Growth Innovation Financing Internationalization Formal institutions either help or hinder Top 10 countries making signi cant entrepreneur friendly reforms were all developing economies led by for rst time by South African country Rwanda Singapore is top at the ease of doing business Informal institutions also matter risk taker individualistic and low uncertainty avoidance societies tend to foster relatively more entrepreneurs Resources and Entrepreneurship VRIO 1 Entrepreneurial resources must create value ex networks and contacts unless they are channeled to create economic value they are only potential resources 2 Resources must be rare recession wonderful opportunity for a rare breed of entrepreneurs known as liquidators 3 Resources must be inimitable it is Amazon s best in the breed physical inventories not its online presence that are more challenging to imitate 4 Resources must be organizationally embedded only in modern times have private military companies become a global industry thrive on their organizational capapblites to provide military and security services in dangerous con ict and post con ict environments Iraq 3 major characteristics 1 Growth 2 Innovation 3 Financing 4 Internatinalization These strategies are not mutually exclusive and they are often pursued in combination by entrepreneurial rms Growth An attempt to more fully utilize currently under utilized resources and capabilities Hallmark of entrepreneurial growth dynamic exible guerrilla strategy Innovation Innovation heart of entrepreneurship Goo gle Many SMEs are founded by former employees of large rms Who were frustrated by their inability to translate innovative ideas into realities at the large rms Innovators at entrepreneurial rms are better able to reap the nancial gains associated W innovations thus fueling their motivation to charge ahead Financing 3 of 4F sources of entrepreneurial nancing founders family and friends 4th fools Strategic investors often demand some assurance examine business plans and require a strong mgmt team China low on formal venture capital investment but leads the World With the highest level of informal investment as a percentage of GDP Micro nance a practice to provide micro loans 50 300 used to start small businesses With the intention of ultimately lifting the entrepreneurs out of poverty Teach a man to sh and he ll eat for a lifetime but he has to buy a shing rod Small amount of money can be big in poorer countries Lend to Women more likely to use their earnings to support family needs than men This might be a problem in this gender equality days Born global start up companies that attempt to do business abroad from inception International transaction costs qualitatively higher than domestic transaction costs Ex suing another rm in another country Internationalization strategies for entrepreneurial rms Entering foreign markets a Direct exports b Franchisinglicensing c FDI through strategic alliances green eld Wholly owned subsidiaries andor foreign acquisitions Staying in domestic markets a Indirect exports through export intermediaries b Supplier of foreign rms c Franchiseelicensee of foreign brands d Alliance partner of foreign direct investors e Harvest and exit through sell off to and acquisition by foreign entrants Direct exports the sale of products made by rms in their home country to customers in other countries Concern how to overcome the lack of trust between exporters and importers Letter of credit LC a nancial contract that states that the importer s bank will pay a speci c sum of money to the exporter upon delivery of the merchandise reduces transaction cost Licensing rms A s agreement to give Firm B the rights to use A s proprietary technology or trademark for a royalty fee paid to A by B This is typically done in manufacturing industries Franchising Firm A s agreement to give Firm B the rights to use A s proprietary assets for a royalty fee paid to A by B This is typically done in service industries If foreign licensees produce substandard products that damage the brand and refuse to improve quality licensors are left With dif cult choices 1 Sue licensees in an unfamiliar foreign court 2 Discontinue the relationship Either choices is complicated and costly FDI Advantage rm becomes more committed to serving foreign markets physically and psychologically close to foreign customers better able to control how its proprietary technology and brand name are used drawback cost and complexity stage model model of internationalization that portrays the slow step by step stage by stage process an SME must go through to internationalize its business instant worldwide reach to most Internet born globals challenge stage models IT advancements P rms internationalize rapidly key differentiator between rapidly and slowlyno internationalizing SME international experience of entrepreneurs International Strategies for Staying in Domestic Markets Indirect exports a way to reach overseas customers by exporting through domestic based export intermediaries 1 Export intermediaries a rm that performs an important middleman function by linking domestic sellers and foreign buyers that otherwise would not have been connected 2 SME suppliers may be able to internationalize by piggybacking on the larger foreign entrants ex Subway and Northern Ireland bakery Licensees or franchise 3 Becoming licensees or franchisees of foreign brands do not have t be permanently under the control of licensors and franchisors 4 Become alliance partners of a foreign direct investor 5 Harvest and exit strategy may sell an equity stake or the entire rm to foreign entrants ex Seattle Coffee sold to starbucks for 84 million Debates and Extensions 1 Traits vs Institutions 2 Slow vs rapid internationalization Traits vs Institutions What motivates entrepreneurs to establish new rms whereas most others are simply content to work for bosses Diversity among entrepreneurs make any attempt to develop a standard psychological or personality pro le futile J institutions matter Ex China Micro institutions also matter family background and educational attainment have been found to correlate with entrepreneurship parents who own business Slow Internationalizers vs Born Global startups 1 Can SME internationalize faster than what has been suggested by traditional stage models 2 Should they rapidly internationalize this is what is currently being debated Whether it is better for entrepreneurs to start the internationalization or to postpone until the rms has accumulated signi cant resources ex IKEA Contrary to the inherent disadvantages for SMEs in internationalization as suggested by the stage model being smaller while venturing abroad may have inherent advantages Opponents foreign sales during the rst few years of the new venture may reduce its chances for survival being bold but not being too bold Management Savvy Implications for action 1 Push for institutions that facilitate entrepreneurship development both formal and informal 2 When internationalizing be bold but not too bold Closing Case Boom in Busts Good or Bad What can we do to prevent widespread bankruptcies Bankrupt good for society Bankruptcy laws need to be reformed to become more entrepreneur friendly by making it easier for entrepreneurs to declare bankruptcies and to move on First bankruptcy law passed in England in 1542 considered a bankrupt individual a criminal and penalties ranged from incarceration to death Harsh bankruptcy laws Germany and Japan 0 many failed entrepnerus try to avoid business exit despite escalating losses so societal and individual resources cannot be channeled to more productive uses lot of them suicide Can also create signi cant entry barriers Approximately 50 of US entrepreneur Who led bankruptcy resumed a new venture in 4 yrs failed entrepreneurs accumulated a great deal of experience and lessons on how to avoid their mistakes Societal level entrepreneurial failures may be bene cial since it is through a large of entrepreneurial experimentations that Winning solution will emerge and that economies will develop 2 boom in bust is not necessarily bad IBUS3OO Notes 127 Ch7 Dealing With Foreign Exchange Opening Case A Strong Dollar vs a Weak Dollar 65 fo the world For ex holdings are in dollars US exports did rise but US trade de cits grew even more Cheap dollar policy 2 back re pvI a China s policy to peg its yuan to the dollar which made the yuan also cheap went to subprime mortgages China proposed to use Special Drawing Rights to replace dollar as a global reserve currency China deeply worried that cheapening dollar will be a nasty hit to Chinese holdings of US treasury bonds dollar a Policy of keeping the yuan low vs the dollar to promote exports and then to recycle export earnings to buy US treasury bonds has back red US every interest to keep the dollar s status quo as a reserve currency around the world so that China and other surplus countries will keep buying T BILLS for lack of a better alternative A Strong Dollar vs Weak Dollar SRONG DOLLAR Advantages 1 US consumers bene t from low prices on imports 2 Lower prices on foreign goods help keep US price level and in ation level low 3 US tourists enjoy lower prices abroad 4 US rms nd it easier to acquire foreign targets Disadvantages 1 US exporters have a hard time to compete on price abroad 2 US rms in import competing industries have a hard time competing with low cost imports 3 Foreign tourists nd it more expensive when visiting the US WEAK DOLLAR Advantages 1 US exporters nd it easier to compete on price abroad 2 US rms face less competitive pressure to keep prices low 3 Foreign tourists enjoy lower prices in the US 4 Foreign rms nd it easier to acquire US targets 5 The US can print more dollars to export its problems to the rest of the world Disadvantages 1 US consumers face higher prices on imports 2 Higher prices on imports contribute to higher price level and in ation level in the US 3 US tourists nd it more expensive when traveling abroad 4 Governments rms and individuals outside the US holding dollar denominated assets suffer from value loss of their assets International Monetary Fund IMF an international organization that was established to promote international monetary cooperation exchange stability and orderly exchange arrangements A foreign exchange rate the price of one currency in terms of another Ppl prefer to hold US dollars P z high demand yz appreciation 65 dollar 26 euros 4 ponds 3 yen The Role of the US Dollar outside the US 1 Common reference most international statistics reported by national govts and international organizations are expressed in US dollars 2 Intervention currency most central banks buy and sell US dollars in their respective foreign exchange markets to in uence their exchange rates Many countries peg their currencies to the dollar 3 Reserve currency most central banks hold US dollars as of cial reserves to intervene in their respective markets The US Federal Reserve System maintains its foreign currency reserves in euros and yens 4 Vehicle currency transaction between 2 less commonly used currencies such as between the Brazilian real and the Czech koruna is often through dollars There is always an active market for dollars in every country What determines ForEX rates Relative price differences and PPP Interest rates amp money supply Productivity amp balance of payments Exchange rate policies Investor psychology U1I L Jgt t Relative Price Differences and Purchasing Power Parity Purchasing power parity PPP conversion that determines the equivalent amount of goods and services in different currencies can purchase Big Mac Index Yuan and Hong Kong dollar undervalued 3 observations 1 The big max index con rms that prices in some European countries are very expensive 2 Prices in developing countries are cheaper nontraded inputs labor and real estate are cheaper in developing countries 3 The Big Mac is not a traded product no one would go buy Big Mac to China and bring it back SupplyampDemand Bc in ows of foreign funds usually need to be converted to the home currency y a high interest rate will increase the demand for the home currency p Print more money depreciate currency Rise in productivity appreciation of currency Balance of payments a country s international transaction statement which includes merchandise trade service trade and capital movement 1 Current Account 7 Exports of goods f Imports of goods CD Balance on Goods 397 Exports of services 11 Imports of services CD Balance on Services Balance on Goods and Services 7j Income receipts on US owned assets abroad 73 Income payments on foreign owned assets in the US 3 Government grants and private remittances CD Balance on Current Account II Financial Account 77 US owned private asset abroad f Foreign owned private assets in the US enhancing its exchange value CD Balance on nancial account Overall Balance of Payments Country experiencing a current account surplus M currency appreciate Value of country s currency embodiment of its economic strengths as re ected in its productivity and balance of payments positions Exchange Rate Policies 2 major exchange rate policies 1 Floating rate and 2 Fixed rate Floating exible exchange rate policy a government policy to let supply and demand conditions determine exchange rates Clean free oat a pure market solution to determine exchange rates few countries do this Dirty managed oat using selective government intervention to determine exchange rates Target exchange rates crawling bands speci ed upper or lower bounds within which an exchange rate is allowed to uctuate termed snake in a tube will intervene only when the snake exchange rate crawls out of the tube the upper or lower bounds Fixed exchange rate policy a government policy to set the exchange rate of a currency relative to other countries Ex East and West Germany 11 p west paid more for uni cation process but it made things go smoother Peg a stabilizing policy of linking a developing country s currency to a key currency 2 bene ts of peg 1 Peg stabilizes the import and export prices for developing countries 2 Many countries with high in ation have pegged their currencies to the dollar in order to restrain domestic in ation because the US has relatively low in ation Bandwagon effect the effect of investors moving in the same direction at the same time like a herd Capital ight a phenomenon in which a large number of individuals and companies exchange domestic currency for a foreign currency Evolution of the International Monetary System 3 eras 1 The gold standard 2 Breton Woods system 3 Post Bretton Woods system The Gold Standard Gold standard a system in which the value of most major currencies was maintained by xing their prices in terms of gold Common denominator a currency or commodity to which the value of all currencies are pegged The Bretton woods System Bretton Woods system a system in which all currencies were pegged at a xed rate to the US dollar a Only the dollar the of cial reserve currency was convertible into gold at 35ounce b Re ected higher US productivity level and the large trade surplus the US had w the rest of the world I the rst 2 postwar decades The Post Bretton Woods System 1973 present Combination of rising productivity elsewhere amp uS in ationary policies P Woods demise of Bretton a Print money for Vietnam War and Great Society welfare programs b US ran its rst post 1945 trade de cit in 1971 as Germany and other countries caught up to the US in productivity and increased their exports German Mark to appreciate Nixon dollar was no longer convertible into gold in order to stop the ow of gold out of the US Treasury Bretton Woods built on 2 conditions 1 The US in ation rate had to be low 2 The US could not run a trade de cit Post Bretton Woods system a system of exible exchange rate regimes with no of cial common denominator Strength exibility and diversity of exchange rate regimes various oating systems and xed rates Drawbacks turbulence and uncertainty International Monetary Fund IMF Lender of last resort to help member countries should they get into nancial dif culty IMF collects funds from member countries Each member assigned quota the weight a member country carries within the IMF which determines the amount of its nancial contribution subscription its capacity to borrow from the IMF and its voting power Broadly based on country s relative size in the global economy IMF makes loans not free grants Long term policy reforms that recipient countries must undertake as conditions of receiving the loan Typical IMF conditions on Loan Recipient Countries from IMF 10 IMF10 0 Balance Budgets by slashing government spending often cutting social welfare 0 Raise interest rates to slow monetary growth and in ation IMF 20 0 Expand scal spending by stimulating more economic activity 0 Ease money supply and reduce interest rates to combat de ation and recession Criticisms on IMF 1 Moral Hazard Turkey rescued by 18 IMF loans between 1958 and 2001 2 IMF s lack of accountability 77 IMF of cials not democratically elected and many do not have deep knowledge of host country crisis like Indonesia cut on food subsidy for the poor 3 IMF s one size ts all strategy may be inappropriate 7 Balancing budgets by slashing spending not a good idea Strategic Responses to Foreign Exchange Movements Strategies for Financial Companies 1 of goals 2 pro t from the Forex market Foreign exchange market the market where individuals rms govts and banks buy and sell UT truly global and transparent Frankfurt 0GC 3S H London New foreign currencies has no central physical location i W Opens in Tokyo P Hong Kong and Singapore gB Chicago Z San Francisco 2 functions 1 To service the needs of trade and FDI 2 To trade in its own commodity namely foreign exchange Primary types of Forex 1 Spot transaction 2 Forward transaction 3 Swaps Spot transaction the classic single shot exchange of one currency for another Settlement done in 2 biz days immediate delivery 2 spot transaction Forward transactions a forex transaction in which participants buy and sell currencies now for future delivery protect from eing exposed to the uctuations of the spot rate currency hedging Currency hedging a transaction that protects tradersinvestors from exposure to the uctuations of the spot rate Forward discount a condition under which the forward rate of one currency relative to another currency is higher than the spot rate Forward premium a condition under which the forward rate of one currency relative to another currency is lower than the spot rate Currency hedging requires rms to have expectationsforecast of future spot rates relative to forward rates Currency swap a forex transaction between 2 rms in which one currency is converted to another in TIME 1 with an agreement to revert it back to the original currency at a speci ed TIME 2 in the future Make money by capturing the difference between their offer rate and bid rate Offer rate price to sell a currency Bid rate the price to buy a currency Bid rate ALWAYS lt Offer Rate Spread the difference between the offer price and the bid price Instantaneous and transparent nature of electronically linked forex market 1 A razor thin spread 2 Quick decision on buying and selling 3 Ever increasing volume in order to make pro ts daily volume of 2trillion Strategies for Non nancial Companies Currency risk the potential for loss associated with uctuations in the foreign exchange market 2 primary strategies 1 Currency hedging 2 Strategic hedging Currency hedging risky bc you could be all wrong in your bets ex airline and fuel Strategic hedging spreading out activities in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions currency diversi cation Strategy hedging refers to geographically dispersing operations through sourcing or FDI in multiple currency zones Currency movement art or highly imprecise science k rms able to pro t from unfavorable currency movements will posses some valuable rare and hard to imitate capabilities that are the envy of rivals Debate and Extensions 1 Fixed versus oating exchange rates 2 Hedging vs not hedging Fixed vs Floating Exchange Rates a Fixed exchange rates impose monetary discipline by preventing governments from engaging in in ationary monetary policies printing more money b Reduce uncertainty and thus encourage trade and FDI not only bene tting the particular economy but also the global economy Proponents a Market forces should take care of supply demand and thus price of any currency b Flexible exchange rates may help avoid the crises that occur under xed exchange rates when expectations of an impending devaluation arise c Floating exchange rates allow each country to make its own monetary policy Currency board a monetary authority that issues notes and coins convertible into a key foreign currency at a xed exchange rate Interest rates in Hong Kong essentially determined by the US Fed H peg exchange rate at HK78 US 1 Hong Kong confusion O con dence Argentina didn t work Currency Heding vs Not Hedging Only 13 of large US rms hedge For hedging Increased stability of CF and earnings Against hedging currency hedging eats into pro ts simple forward contract may cost up to 12 point year the revenue being hedged Irish Exporters Cope with Currency Fluctuation Straightforward mechanism insist on pmt in euros no worry of currency uctuation for Irish exporters rising popularity of euro as major currency for international trade around the world MGMT SAVVY 1 Institution based the changing rules of game economic political and psychological enable or constrain rms 2 Resource based View how rms develop value unique and hard to imitate capabilities in currency m gmt may make or break them Implications for Action 1 Fostering foreign exchange literacy is a must 2 Risk analysis of any country must include an analysis of its currency risks 3 A currency risk mgmt strategy is necessary via currency hedging strategic hedging or both Closing Case Wal Mart and the Yuan Debate Chinese govt kept the value of the yuan arti cially low advantage Wal Mart would not like it US runs trade de cit with China Over 60 of Chinese exports are not produced by Chinese owned companies but by foreign invested enterprises producing in China A strong yuan potentially wipe out Wal Mart s entire pro t margin almost overnight 1 Wal Mart will lobby against efforts to push the yuan to appreciate sharply 2 Chinese govt admits that some appreciation of the yuan seems inevitable for China s own good China s exports cheaper and unfair IBUS3OO Notes 22 Ch1O Entering Foreign Markets Opening Case Pearl River Goes Abroad Exports Green elds Acquisitions Pearl River world s largest piano maker that you have never heard of Recently dethroned Yamaha to become the world champion by volume 1 child policy made families willing to invest in their only child s education Chinese now buy 12 of the pianos produced in the world Rising demand g new entrants yg look for overseas opportunities FDI in America Green subsidiaries but efforts to penetrate the high end market still frustrated suffer from all the usual trappings associated with Chinese brands Acquired Ritmuller of Germany re ects lack of con dence in the Pearl River Brand Or is it a realistic step Overcoming the liability of foreignness Inherent disadvantage of being foreigness liability 1 Numerous formal and informal institutions govern the rule sof the game in different countries 2 Although customers in this age of globalization supposedly no longer discriminate against foreign rms the reality is that foreign rms are often still discriminated against sometimes formally and other times informally buy national is often required Institution based view Regulatory risks Trade and investment barriers Differences in cultures norms and values Resource based view VRIO Case Russian Firms Spread Their Wings Abroad Consistently high prices of oil and gas MNE to world 3 categories 1 One group targets acquisition targets in Western Europe and North America in an effort to access technological innovation and advance mgmt know how 2 Another group focuses on the near abroad the commonwealth of independent states whose member countries were all formerly a part of the soviet union 3 The last group channels funds through offshore nancial centers such as Cyprus and British Virgin Islands and reinvests back in Russia capital rounding Concern that they may represent the long arm of the Kremlin Where to enter Spatial perspective doing business outside of one s home country 1 Strategic goals and 2 Cultural and institutional distances Location speci c adVantages the bene ts a rm reaps from the features speci c to a place Stems from 1 Knowledge spillovers among closely located rms that attempt to hire individuals from competitors 2 Industry demand that creates a skilled labor force whose members may work for different rms wout having to move out of the region 3 Industry demand that facilitates a pool of specialized suppliers and buyers to also locate in the region Matching strategic goals with locations 1 Natural resource seeking possession of natural resources and related transport and communication infrastructure Ex oil in the middle east Russia and Venezuela 2 Market seeking abundance of strong market demand and customers willing to pay Ex seafood in Japan 3 Ef ciency seeking economies of scale and abundance of low cost factors Ex manufacturing in China 4 Innovation seeking abundance of innovative individuals rms and universities Ex IT in Silicon Valley and Bangalore nancial services in New York and London aerospace in Russia These are not mutually exclusive Case Rotterdam Gateway to the World CulturalInstitutional Distances and Foreign Entry Locations Cultural distance the difference between 2 cultures along identi able dimensions such as individualism subset of institutional distance Institutional distance the extent of similarity or dissimilarity between the regulatory normative and cognitive institutions of 2 countries 2 schools of thought 1 Stage model rms will enter culturally similar countries during their rst stage of internationalization and will then gain more con dence to enter culturally distant countries in later stages 2 More important to consider strategic goals such as market and ef ciency rather than culture and institutions When to Enter First mover advantages bene ts that accrue to rms that enter the market rst and that late entrants do not enjoy Late mover advantage bene ts that accrue to rms that enter the market later and that early entrants do not enjoy First Mover vs Late Mover Advantages 1 Properietary technological leadership Yahoo In Japan 2 Preemption of scarce resources Japanese MNEs in Southeast Asia 3 Establishing entry barriers for late entrants Huggies and Pampers diapers for the rst born Poland s F16 ghter jet contract 4 Avoidance of clash with dominant rms at home Sony Honda and Epson went to the US market ahead of their Japanese rivals 5 Relationships with key stakeholders such as customers and governments Motorola s technology became China s national paging standard Late Mover Advantages 1 Opportunity to free ride on rst mover investments Ericsson won big contracts in Saudi Arabia free riding on Cisco s efforts 2 Resolution of technological and market uncertainty IBM and Matsushita have patience to wait 3 First mover s dif culty to adapt to market changes Kodak and Fuji lm are pushed aside by Canon Samsung and Sony It is through interaction with other strategic variables that entry timing has an impact on performance How to Enter Scale of entry Commitment and Experience Scale of entry the amount of resources committed to entering a foreign market Drawbacks of hard to reverse strategic commitment 1 Limited strategic flexibility elsewhere and 2 Huge losses if these large scale bets turn out to be wrong Drawback of small entries lack of strong commitment x market share and capturing rst mover advantages Modes of Entry The rst step on Equity vs Nonequity modes Modes of entry method used to enter a foreign market Managers prioritize and consider only a few key variables rst and then consider others later given the complexity of entry decisions Nonequity mode a mode of entry exports and contractual agreements that tends to re ect relatively smaller commitments to overseas markets Equity mode a mode of entry JV and Wholly owned subsidiaries WOS that indicates a relatively larger harder to reverse commitment call for the establishment of independent organizations overseas partially or wholly controlled MNE enters foreign markets via equity modes through FDI a rm that merely exportsimports usually not regarded as MNE MNE advantage over non MNE ownership location and internalization OLI advantages Modes of Entry Advantages and Disadvantages PG337 Modes of Entry The 2nd Step on Making Actual Selections Contractual agreement non equity entry modes 1 Licensing or franchising 2 Turnkey projects 3 RampD contracts 4 Co marketing Turnkey projects a project in which clients pay contractors to design and construct new facilities and train personnel Allows rms to earn returns from process technology such as power generation in countries where FDI is restricted Drawbacks 1 If foreign clients are competitors selling them state of the art technology through turnkey projects may boost their competitiveness 2 Turnkey projects do not allow for a long term presence after the key is handed to clients Build operate transfer BOT agreement nonequity mode of entry used to build a longer term presence by building and then operating a facility for a period of time before transferring operations to a domestic agency or rm RampD Contracts outsourcing agreement in RampD between 2 rms Co marketing efforts among a number of rms to jointly market their products and services Joint Venture a new corporate entity created and jointly owned by 2 or more parent companies corporate child Minority JV lt50 equty 5050 JV Majority JV Wholly owned subsidiary WOS a subsidiary located in a foreign country that is entirely owned by the parent multinational Green eld operations building factories and of ces from scratch may lead to dif culties in building Debates and Extensions 1 Liability vs asset of foreignness 2 Global vs regional geographic diversi cation 3 Old line vs emerging multinationals Liability vs Asset of foreignness Good to be foreign Japanese and German cars Country of origin effect the positive or negative perception of rms and products from a certain country Liability or asset Tricky T ex Disneyland in Tokyo vs Paris BUT changes are possible Global vs Regional Geographic Diversi cation Total of only 9 MNEs to be global Majority is home region oriented MNEs Should most MNEs further globalize 1 Most MNEs know what they are doing and their current geographic scope is the maximum they can manage others may have already over diversi ed and will need to narrow their geographic scope 2 These data only capture a snapshot and some MNEs may become more globalized over time Old line vs Emerging Multinationals OLI versus LLL Linkage Leverage and Learning Linkage emerging MNEs ability to identify and bridge gaps Leverage ability to take advantage of their unique resources and capabilities which are typically based on a deep understanding of customer needs and wants Learning go abroad to learn instead of I will tell you what to do mentality typical of old line MNEs from developed economies MGMT Savvy Implications for action 1 Understand the rules of the game both formal and informal governing competition in foreign markets 2 Develop overwhelming resources and capabilities to offset the liability of foreignness 3 Match efforts in market entry with strategic goals Closing Case Google in Asia South Korea Google lt Naver It s portal like Yahoo Pioneered the idea of presenting search results from several categories web pages images videos book something that Google later adopted Knowledge search enables people to ask questions El ZIK 5 55 E Google better chance in China Baidu hit by a series of Scandals Japan Yahoo Is the top and Naver is coming in too IBUS3OO Notes 23 Chll Managing Global Competitive Dynamics Opening Case Cisco vs Huawei War and Peace Huawei success in China overseas drive Offer comparable performance at a 30 lower price Penetrated developed economies like Japan but N America remained toughest nut to crack 2002 went to US Blind performance at the trade show Cisco sue Huawei on unlawful copying and misappropriated Cisco s software and documentation Huawei JV w Cisco s rival 3Com not us vs them anymore Court media attention P r CEOs shook hands as if nothing had happened to them Competitive dynamics actions and responses undertaken by competing rms Competitor analysis the process of anticipating rivals actions in order to both revise a rm s plan and prepare to deal with rivals response Key word interaction Competition Cooperation and Collusion War and Peace Business simultaneously war and peace Collusion collective attempts between competing rms to reduce competition Tacit collusion rms indirectly coordinate actions by signaling their intention to reduce output and maintain pricing above competitive levels Explicit collusion rms directly negotiate output and pricing and divide markets Cartel trust an output and price xing entity involving multiple competitors Antitrust laws laws in various countries that outlaw cartels trusts Recent globalization by fostering competition in many formerly protected markets H some rms incentive to collude Collusion often collapses under the weight of its own incentive problems Prisoners dilemma I game theory a type of game in which the outcome depends on 2 parties deciding whether to cooperate or to defect Game theory a theory that studies the interactions between 2 parties that compete andor cooperate with each other Case The Global Vitamin Cartel Conspirators actually held annual meetings to x prices and to carve up world markets Good that tapping into powerful incentives to defect in this real prisoner s dilemma but bad that failed to recover more than 12 of the cartel s illegal pro ts Concentration ratio the percentage of total industry sales accounted for by the top 4 8 or 20 rms Price leader a rm that has a dominant market share and sets acceptable prices and margins in the industry Capacity to punish suf cient resources possessed by a price leader to deter and combat defection Industry characteristics and possibility of collusion vis avis competition Collusion possible a Few rms high concentration b Existence of an industry price leader c Homogeneous products d High barriers to entry 0 increased e High market commonality mutual forbearance Collusion dif cult competition likely a Many rms low concentration b No industry price leader c Heterogeneous products d Low barriers to entry e Lack of market commonality no mutual forbearance Market commonality the overlap between 2 rivals markets Multimarket competition rms engage the same rivals in multiple markets Mutual forbearance multimarket rms respect their rivals spheres of in uence in certain markets and their rivals reciprocate leading to tacit collusion Cross market retaliation retaliatory attacks on a competitor s other markets if this competitor attacks a rm s original market Formal Institutions Governing Domestic Competition A Focus on Antitrust Competition policy government policy governing the rules of the game in competition Antitrust policy government policy designed to combat monopolies and cartels What is fair what Americans approvingly describe as market dynamism is negatively labeled by Japanese as market turbulence Competition and antitrust policy focuses on 1 Collusive price setting and 2 Predatory pricing Collusive price setting price setting by monopolist or collusion parties at a level higher than the competitive level Predatory pricing an attempt to monopolize a market by 1 Setting prices below cost and 2 Intending to raise prices to cover losses in the long run after eliminating rivals 1 Not clear what constitutes cost 2 Even when rms are found to be selling below cost US courts have ruled that if rivals are too numerous to eliminate one rm cannot recoup the losses incurred due to charging low prices by later jacking up prices pricing cannot be labeled predatory extremely dif cult to win a domestic predation case in the US Formal Institutions Governing International Competition A Focus on Antidumping Dumping 1An exporter selling below cost abroad and 2 Planning to raise prices after eliminating local rivals Domestic competitionantitrust laws offer no hope for protection Antidumping laws laws that make it illegal for an exporter to sell goods below cost abroad with the intent to raise prices after eliminating local rivals Foreign rms are discriminated against by the formal rules of the game International Trade Administration and International Trade Commission send lengthy questionnaires Investigation can have 1 of the 4 following outcomes 1 No data coming from abroad a estimated data provided by the accusing rm become the evidence and the accusing rm can easily win 2 If data do come n accusing rm can still argue that these unfair foreigners have lied 3 Even if the low cost data are veri ed US antidumping laws allow the complaint to argue that these data are not fair 4 Defendant wins the case rare and happens to only 5 of the antidumping cases in the US Resources and Capabilities In uencing Competitive Dynamics Value Firm resources must create value when engaging rivals ex Gillette launching razors in 23 countries simultaneously Patenting 1 patent cost 12 M dollars in RampD but only 5 end up having economic value Firm with strong patents can challenge rivals for infringement S making it easier to reach some understanding or mutual forbearance Rarity Nature or nurture or both Saudi Arabia s oil reserve Singapore airline combination of reputation and geography 131 to y Airbus38O Imitability Fast moving rivals tend to perform better Organization Some rms are better organized for competitive actions Centrally coordinated rms may be better mutual forbearers than rms whose units are loosely controlled Conversely if a rm has competitive reward systems and structures managers may be unwilling to give up market gains for the greater bene ts of other units and the whole rm undermining mutual forbearance Resource Similarity Resource similarity the extent to which a given competitor possesses strategic endowment comparable in terms of both type and amount to those of the focal rm Attack Counterattack and Signaling Attack an initial set of actions to gain competitive advantage Counterattack a set of actions in response to attack 3 drivers of counterattacks 1 Awareness 2 Motivation 3 Capabilities Awareness prerequisite for any counterattack Blue ocean strategy strategy that focuses on developing new markets blue ocean and avoids attacking core markets defended by rivals which is likely to result in a bloody price war or a red ocean Motivation EX Haier and compact refrigerator GE and Whirlpool dismissed it as peripheral and low of marginal value Capabilities Microsoft charging only 15 for windows than normal 70 to PC makers to drive out Apple and Linux Corporation and Signaling You can t directly talk to rivals illegal You can signal wink at them 1 Firms may enter new markets not necessarily to challenge incumbents but to seek mutual forbearance by establishing multimarket contact 2 Firms can send an open signal for a truce 3 Enlisting the help of governments Holding direct negotiations is legal under the auspices of government invesetigations 7 Filing an antidumping petition or suing a rival does not necessarily mean a totally hostile intent intends time to talk 4 Organize strategic alliances with rivals for cost reduction 7 Reduce cost by 10 through an alliance legal same impact on the nancial bottom line as collusively raising prices by 10 Local Firms vs Multinational Enterprises Local rms can adopt 1 of 4 strategic postures depending on 1 The industry conditions and 2 The nature of competitive assets Defender strategy that centers on local assets in areas in which MNEs are weak Ex Ahava s Dead sea mud Extender strategy that centers on leveraging homegrown competencies abroad Ex Asia paint suitable for low income consumers Dodger strategy that centers on cooperating through JV with MNEs and sell offs to MNEs If you can t beat them join them Contender strategy that centers on a rm engaging in rapid learning and then expand overseas When facing the onslaught of MNEs local rms are not necessarily sitting ducks guaranteed to lose Ex Huawei Debates and Extensions 1 Competition vs antidumping 2 Managers vs antitrust policy makers Competition vs Antidumping 1 bc dumping requires selling below cost it is often dif cult to prove the case given the ambiguity concerning cost 2 Does it matter if foreign rms are indeed selling below cost this is commonly used competitive action domestic cases are perfectly legal Counterargument 1 What if through unfair dumping foreign rivals drive out domestic rms and then jack up prices It is often impossible to driveout all competitiors 2 often exaggerated by special interest groups who bene t at the expense of consumers in the domestic economy One solution to phase out antidumping laws and use the same standards as applied to domestic predatory pricing I dumping legalized c very dif cult to make a domestic predation case Competitive strategy vs Antitrust policy Policy makers trained in economics and law but little sense of how real companies make decisions o4 end up deciding and enforcing the rules governing competition 4 arguments made by mgmt scholars 1 Antitrust laws were often created in response to the old realities of mostly domestic competition However the largely global competition today means that a large dominant rm in one country does not automatically translate into a dangerous monopoly 2 The very actiosn accused of being anticompetitive may actually be highly competitive or hypercompetitive Ex Microsoft charged with anticompetitive behavior WHAT 3 US antitrust laws create strategic confusion inability to talk straight creates confusion among lower level managers and employees in US rms 4 These laws discriminate against US rms GM and Ford cannot jointly manufacture but GM and Toyota can American antitrust helped Toyota but not Ford or GM Case From Tradewars to Antitrust wars Overall EU antitrust authorities rather than the US authorities appear to more vigorously pursue leading US rms suggesting a potential protectionist undertone China also protectionism MGMT SAVVY Implications for action 1 Understand the rules of the game governing domestic and international competition around the World 77 Walmart not charged as predatory pricing bc after rivals drop out Wal Mart does not raise prices 2 Strengthen resources and capabilities that more effectively compete andor cooperate 77 In attacks and counterattacks subtlety frequency complexity and unpredictability are helpful f In cooperation market similarity and mutual forbearance may be better 3 Develop skills in competitor analysis that guide decision making on attacks counterattacks and cooperation 77 Look ahead reason back Tips on competitive intelligence and counterintelligence 1 If you are bidding against a major local rival in foreign country expect aggressive efforts to gather your information If you leave your laptop in a hotel room expect the hard drive to be copied 2 Be careful about cell phones bc signals can be intercepted If you lose your cell phone for 30 seconds your opponents may be able to put in a lookalike battery W a chip that will record and transmit your calls This chip can also secretly turn your phone on and use it as a microphone 3 Be careful about the high speed internet service at your hotel Go to the of ce of your local subsidiary If there isn t a such safe local of ce a random WiFi spot may be safer than the hotel internet service 4 If your negotiation counterparts offer to book you into a luxurious suite or hotel turn it down Book your own Closing Case The US antidumping case against Chinese Apple Juice Concentrate Producers 35 punitive tariff on Chinese made cars PWM immediate reaction from China K launched a pair of antidumping investigations against US autos and chicken products Nonfrozen apple juice concentrate case in 2004 rst time Chinese agricultural products rm ever Won China not market economy Commerce chose India and other surrogate factors of production for valuation purpose Appeal International Trade did not support Commerce s decision Use of India as proper surrogate country not adequate info Final tax 8 15 relatively Major victory IBUS3OO Notes 128 Ch8 Capitalizing on Global and Regional Integration Opening Case A Closer Continent Low cost airlines opening up places that used to be beyond most people s comfort zones EX Brit commuting to Lithuania Discount on airlines Millions of Europeans started to cross borders Breakdown cultural barriers revitalizing local economies opening up new business opportunities Brussels deregulated the aviation industry discounters to get airborne Ryanair y to smaller out of the way airports cheap Southwest Idea of 2nd home Deserted place becomes popular real estate rise Reason Economic integration Regional economic integration efforts to reduce trade and investment barriers within one region such as EU EU the of cial title of European economic integration since 1993 Global economic integration efforts to reduce trade and investment barriers around the globe General Agreement on Tariffs and Trade GATT a multilateral agreement governing the international trade of goods merchandise World Trade Organization the of cial title of the multilateral trading system and the organization underpinning this system since 2005 Economic integration in Europe EU Reasons for global economic integration Global economic integration is political in nature 2 for peace and build con dence 3 economic reasons for economic integration 1 Handle disputes constructively 2 Makes life easier for all participants Multilateral trading system the global system that governs international trade among countries otherwise known as the GATTWTO system it includes all participating countries not just 2 countries Crucial principle nondiscrimination a principle that a country cannot discriminate among its trading partners 3 Raises incomes generate jobs and stimulates economic growth Problems environmental impact and distribution of the bene ts from more trade and investment among the haves and have nots in the world BUT pros gt cons GATT 19481994 Technically an agreement but NOT an organization During the GATT era trade growth consistently outpaced GDP growth 3 concerns 1 bc of the declared focus on merchandise trade neither trade in services nor intellectual property protection was covered 2 Many loopholes in merchandise trade needed reforming famous one Multi bre Arrangement designed to limit free trade in textiles 3 Global recession in the 1970s and 1980s led many govts to invoke nontariff barriers such as subsidies and local content requirements more subtle but more pervasive than tariff barriers pc triggering trade disputes WTO 1995 present Ad hoc secretariat 0 Six main areas full edged international organization Additional bene ts larger market simpler standards reduced distribution costs and economies of scales for rms based in that region Regional integration can discriminate rms outside a region undermine global integration Loss of sovereignty p EU adopting the euro no longer implement independent monetary policies Types of regional economic integration Free trade area FTA group of countries that remove trade barriers among themselves Ex NAFTA Customs union one step beyond a FTA a customs union imposes common external policies on nonparticipatin g countries Common market combining everything a custom union has a common market in addition permits the free movement of goods and people Economic union having all the features of a common market members also coordinate and harmonize economic policies in areas such as monetary scal and taxation to blend their economies into a single economic entity a One possible dimension of an economic union H group of countries that use a common currency Political union the integration of political and economic affairs of a region b establish monetary union a Regional Economic Integration in Europe Origin and Evolution Origin political in nature Pd to stop vicious cycle of hatred and violence Coal and Steel Community ECSC 7 Community EC EU Today Economic union Schengen a passport free travel zone Win the EU EU 15 free to live and Work throughout the EU Euro the currency currently used in the 16 EU countries Bene ts and costs of adopting the EURO Bene ts 1 Reduce currency conversion costs E signed the European European Economic Community EEC 0 European 2 Facilitate direct price comparison 3 Impose monetary disciplines on governments abolish monetary policy exchange rates printing money etc PE economic stability Costs 1 Unable to implement independent monetary policy 2 Limit the exibility in scal policy in areas such as de cit spending free riders some may not feel the need to x their own scal problems bc other more responsible members will shoulder the burden Stability and Growth Pact committed to limiting their budget de cits to no more than 3 of GDP undermined though ex France Germany etc Case Boom and Bust in Spain Euro lowered costs of servicing govt debt foreign investment Spending spree current account de cit rising property prices 0 housing bubble burst Safe long term employee people OK but not the short term employees The EU s Challenges four freedoms of movement people goods services and capital Economic union or Political Union Lisbon Treaty more quali ed majority voting in EU Wide decision making and the creation of a long term president of the European Council and a High Representative of the Union for Foreign Affairs and Security Policy to present a united position of EU policies etc Gaining new members political triumph but economic burden Turkey low avg income Muslim high birth rates d concern q EU a la carte different members pick and choose certain mechanisms to join and opt out of other mechanisms Subprime countries EU enlargement fatigue W Regional Economic Integration in the Americas North America NAFTA free trade agreement among Canada Mexico and the US Success Trade grew Mexico s GDP capita grew maquiladora export assembly Shift to India and China problem for Mexico 1 other reforms in infrastructure and education need to keep up South America Andea Community Mercosur FTAA USANUNASUR and CAFTA Andean Community a customs union in South America launched in 1969 Mercosur a customs union in South America launched in 1991 Regional initiatives not effective bc only 5 of member countries trade is win the Andean Community and 20 in Mercosur Latin American countries W W Free Trade Area of the Americas FTAA a propsed free trade area for the entire Western Hephere Brazil Paraguay Uruguay and Venezuela changed their minds opposed FTAA Andean Community and Mercosur countries p Union of South American Nations USAN UNASUR regional integration mechanism integrating 2 existing customs unions in South America United StatesDominican RepublicCentral America Free Trade Agreement CAFTA free trade agreement between the US and 5 central American countries and the dominical republic 2nd largest market in Latin America Regional Economic Integration in the Asia Paci c AustraliaNew Zealand Closer Economic Relations Trade Agreement ANZCERTA or CER a free trade agreement between Australia and New Zealand that was launched in 1983 Mostly due to the relatively high level of geographic proximity and cultural homogeneity very successful ETA Association of Southeast Asian Nations ASEAN organization underpinning regional economic integration in Southeast Asia Suffer from similar problem that Latin American countries face main trading partners t US EU Japan and China are all outside the region ASEAN China Free Trade Agreement to be launched in the early 2010s Asia Paci c Economic Cooperation APEC Japan happily agreed to join but ASEAN and CER countries also feared Japan dominance create a de facto yen bloc 8 US wanted to join Mexico Canada etc APEC too big goal of free trade by industrialized members no later than 2010 and by developing members no later than 2020 NOT BINDING APEC A perfect excuse to chat Regional Economic Integration in Africa both numerous and ineffective spaghetti bowl country often has memberships in multiple regional deals Debates and Extensions 1 Building blocks vs stumbling blocks 2 Impact of the WTO Building Blocks or Stumbling Blocks Regional block preferential treatment to members and discriminates against non members NAFTAACFTA etc p we have wound up on all fours crawling with slow progress IBUS3OO Notes 24 Chl2 Making Alliances and Acquisitions Work Opening Case Danone and Wahaha From Alliance to Divorce French Danone and Chinese Wahaha El Success Danone also bought stakes in more than 7 Chinese food and dairy rms j largest beverage maker by volume in China Danone wants to buy Wahaha s other subsidiaries rejected Heart of the dispute mater JV agreement between Danone and Wahaha granted the subsidiary JVs exclusive rights to produce distribute and sell food and beverage products under the Wahaha non JV subsidiaries illegally selling product using Wahaha brand Divorce caused by opportunism from the start or by changed circumstances Danone became the Strategic alliance a voluntary agreement between rms involving exchange sharing or co developing of products technologies or services degrees of compromise between pure market transactions and acquisitions Contractual nonequity based alliances alliances between rms that are based on contracts and do not involve the sharing of ownership co marketing RampD contracts turnkey projects strategic suppliers strategic distributors and licensingfranchising Equity based alliances alliances based on ownership or nancial interest between rms a Strategic investment one rm invests in another as a strategic investor b Crossshareholding Both rms invest in each other to become cross shareholders c JV Not all alliances are JV Non JV equity based alliance 2 rms getting married but not having children ex Renault and Nissan Acquisition transfer of the control of operations and mgmt from one rm target to another acquirer the former becoming a unit of the latter Merger combination of operations and mgmt of 2 rms to establish a new legal entity In reality only 3 are mergers Crossborder MampA 1 30 of all MampA 2 High percentage of MampAs among FDI ows Institutions Alliances and Acquisitions Impact 1Antitrust concerns and 2 Entry mode reqruiements Since integration win alliances is usually not as tight as acquisitions antitrust authorities are more likely to approve alliances as opposed to acquisitions Ex American Airline and British Airways Govts discourage or simply ban acquisitions to establish wholly owned subsidiaries WOS sort of alliance w local rms as the only choice 1 General trend toward more liberal policies 2 Many govts still impose considerable requirements especially when foreign rmsa acquire domestic assets Although not every alliance or acquisition decision is driven by imitation this motivation seems to explain a lot of the activities Value 0 Alliance must create value 0 Alliances allow rms to tap into partners complementary assets and facilitate learning 0 Value as real options Real option an investment in real operations as opposed to nancial capital a An investor makes a small initial investment to buy an option H right to future investment wout being obligated to do so b The investor then holds the option until a decision point arrives in the 2nd phase and then decides between exercising the option or abandoning it Strategic alliances Advantages and Disadvantages Advantages 0 Reducing costs risks and uncertainties 0 Accessing complementary assets and learning opportunities 0 Possibilities to use alliances as real options Disadvantages 0 Choosing wrong partners 0 Potential partner opportunism 0 Risks of helping nurture competitors learning race Alliances permit rms to sequentially increase their investment should they decide to pursue acquisitions exibility to scale the investment up or down Case Russsia s MiG and Sukhoi Join hands ultimately merger due to competition Rarity Relational collaborative capabilities capability to successfully manage inter rm relationships may be rare Sound relational capabilities necessary to successfully manage alliances are in short supply Imitability Occurs at 2 levels in alliances 1 Firm level and 2 Alliance level A learning race a situation in which alliance partners aim to outrun each other by learning the tricks from the other side as fast as possible Another issue trust and understanding among partners Organization All happy families are alike each unhappy family is unhappy in its own way Resources and Acquisitions Value 70 of acquisitions reportedly fail target rms often perform worse Only identi able group of winners shareholders of target rms may experience on avg a 24 increase in their stock value during the transaction Acquisition premium the difference between the acquisition price and the market value of target rms Shareholders of acquiring rms experience a 4 loss in their stock value during the same period Rarity One or all of the rms involved must have rare skills that enhance the overall strategy Lenovo acquiring IBM s PC division and top American executives Imitability Ex Northrop s acquisition must conform to a carefully orchestrated plan of nearly 400 items from how to issue press releases to which accounting software to use Organization Depends how rms are organized to take advantage of the bene ts while minimizing the costs Strategic t the effective matching of complementary strategic capabilities between rms Organizational t the similarity in cultures systems and structures between rms Ex Daimler Chrysler R mass exodus of American managers from Chrysler Case Making MampA y in China 1 Chinese SOEs are rife with organizational slack make the SOEs more attractive MampA targets for foreign rms Certain slacks unabsorbed CF in the form of depreciation funds reserve funds and retained earnings may indicate the potential for increased performance enhancing targets attractiveness 2 Chinese SOE 3 sets of books 1 Exaggerate performance 2 Underreports performance 3 Accurate one for managers 3 Chinese managers hired by Western companies to run the businesses are on avg less effective than their non Chinese counterparts Formation of Alliances 1 Can growth achieved thorugh market transactions through acquisitions or thorugh cooperative alliances 77 Demanding to grow by pure market transactions f Acquisitions have some unique drawbakcks 397 Alliance the way to go 2 Whether to take a contractual or an equity approach 77 More tacit the capabilities equity involvement Toyota Production System f Direct monitoring and control 397 Real options thinking 11 Institutional constraints required by govt etc Equity based vs Non Equity based alliances Equity based 0 Nature of shared resources and capabilities degree of tacitness high 0 Importance of direct organizational monitoring and control High 0 Potential as real options High MampA 0 In uence of formal institutions High when requiredencouraged by regulations Nonequity based 0 Nature of shared resources and capabilities degree of tacitness Low 0 Importance of direct organizational monitoring and control Low 0 Potential as real options High upgrade to equity based 0 In uence of formal institutions High when requiredencouraged by regulations Evolution and Dissolution of Alliances 1 Combating opportunism and 2 Evolving from corporate marriage to divorce Combating opportunism Possible to eliminate threat by 1 Walling off critical capabilities 77 Contractual agreement 2 Swapping critical capabilities through credible commitments 77 Hostage taking From corporate manage to divorce Initiator the party who begins the process of ending the alliance 1 Initiation 2 Going public 77 Party that breaks the news rst has a rst mover advantage likely initiator 3 Uncoupling 77 Dissolution can either be friendly or hostile 4 Aftermath 77 New alliance is often negotiated more extensively Performance of Alliances 4 factors may in uence alliance performance 1 Equity 2 Learning and experience 3 Nationality 77 Many international alliances tend to have more problems than domestic ones 4 Relational capabilities They may have correlations with performance It is their combination that jointly increase the odds for the success of strategic alliances Motives for Acquisitions 1 Synergistic 77 Respond to formal institutional constraints and transition institution based f Leverage superior resources 397 Enhance market power 11 Gain access to complementary resources 2 Hubristic 77 Hubris over con dence in one s capabilities f Hard behavior following norms and chasing fads of MampAs Institution based 397 Manager s over con dence in their capabilities 3 Managerial 77 Managerial motives manager s desire for power prestige and money which may lead to decisions that do not bene t the rm overall in the long run f Self interested actions such as empire building guided by informal norms and cognitions Performance of Acquisitions Pre acquisitions overpayment for targets Problems for all MampAs 0 Managers overestimate their ability to crate value 0 Inadequate pre acquisition screening 0 Poor strategic t Particular problems for Cross border MampAs 0 Lack of familiarity with foreign cultures institutions and business systems 0 Nationalist concerns against foreign takeovers political and media levels Post acquisition Failure in integration 0 Poor organizational t 0 Failure to address multiple stakeholder groups concerns Particular problems for cross border MampAs 0 Clashes of organizational cultures compounded by clashes of national cultures 0 Nationalistic concerns against foreign takeovers rm and employee level Stakeholders concerns during MampA Investors a Will synergy bene ts be downscaled Optimistic view of ROI c Will ef ciency amp Short term revenues fall Top mgmt a Synergies dif cult to attain b Internal con icts fractious mgmt groups key staff leave c Unrealistic euphoria Middle mgmt a Concern over job security b Expect to do MampA day jobs at the same time c Overwhelmed by scale and scope Front line employees a What should I tell my customers b Whendo lay offs begin c Who is setting my priorities and objectives Customers a So what b Service quality dips relationship suffers c No one is listening to me Do I still matter Debates and Extensions 1 MampA Alliances 2 Majority JVs vs minority JVs MampA Alliances MampA groups refer to CFO Separate unit headed by the VP or director for business development deals with alliances MampA and alliances are often undertaken in isolation Many acquisitions better to have alliances rst Majority JV as control mechanisms vs Minority J Vs as Real Options A 5050 share of mgmt control if often advised even when the MNE has majority equity Minority J Vs are recommended toehold investments they provide possible stepping stones for future scaling up if necessary while limiting the risks MGMT SAVVY Implications for action 1 Understand and master the rules of the game governing alliances and acquisitions around the world 2 When managing alliances pay attention to the soft relationship aspects 3 When managing acquisitions do not overpay focus on both strategic and organizational t and thoroughly address integration concerns Improving the odds for alliance success Contract vs chemistry no contract can cover all elements of the relationship Relying on a detailed contract does not guarantee a successful relationship It may indicate a lack of trust Warning signs identify symptoms of frequent criticism defensivenessblaming others for problems and stonewalling withdrawal during a ght Invest in the relationship require continuous nurturing Dif cult to turn back the dissolution process Conflict resolution mechanisms nd mechanisms to avoid unwarranted escalation fo con icts Improving the oods for acquisition success Pre acquisition a Do not overpay for targets and avoid a bidding war when premiums are too high b Engage in thorough due diligence concerning both strategic and organizational t Post acquisition a Address the concerns of multiple stakeholders and try to keep the best talents b Be prepared to deal with roadblocks thrown up by people whose jobs and power may be jeopardized Case Clawed by Jaguar and Land Rover Tata Jaguar and Land Rover headache too much expense Closing Case Nomura integrates Lehman Brothers in Asia and Europe Lehman Worth it No shares down by 70 Guaranteed pay and jobs to Lehman employees employees Performance based pay for Japanese Worker Rotating manager clash With Western norms major problem among Nomura s Japanese IBUS3OO Notes 24 Ch13 Strategizing Structuring and Learning around the World Opening Case Kikkoman s Sauce of Success Kikkoman go worldwide Kikkoman among the most recognizable Japanese names in a list otherwise dominated by carmakers and electronics rms Biggest wholesaler of Asian foodstuffs in America with similar operations in Europe China and Australia Foreign sales account for 30 of revenue but 55 of operating pro t Customize products soy sauce for America Europe etc Multinational Strategies and Structures Pressures for Cost Reductions and Local Responsiveness 2 sets of pressures cost reduction and local responsiveness Integration responsiveness framework a framework of MNE management on how to simultaneously deal with 2 sets of pressures for global integration and local responsiveness Local responsiveness the necessity to be responsive to different customer preferences around the world Local responsiveness costly 4 strategic choices for MNEs 1 Home replication 2 Localization 3 Global standardization 4 Transnational Home replication strategy a strategy that emphasizes the replication of home country based competencies in foreign countries Advantages a Leverages home country based advantages b Relatively easy to implement Disadvantages a Lack fo local responsiveness b May result in foreign customer alienation Localization multidomestic strategy a strategy that focuses on a number of foreign countries regions each of which is regarded as a stand alone local domestic market worthy of signi cant attention and adaptation Advantages a Maximizes local responsiveness Disadvantages a High costs due to duplication of efforts in multiple countries b Too much local autonomy Global standardization strategy a Strategy that focuses on development and distribution of standardized products worldwide in order to reap the maximum bene ts from low cost advantages Advantages a Leverages low cost advantages Disadvantages a Lack of local responsiveness b Too much centralized control Centers of excellence an MNE subsidiary explicitly recognized a source of important capabilities with the intention that these capabilities be leveraged by andor disseminated to other subsidiaries Worldwide global mandate a charter to be responsible for one MNE function throughout the world Transnational strategy a strategy that endeavors to be cost ef cient locally responsive and learning driven simultaneously around the world Advantages a Cost ef cient while being locally responsive b Engages in global learning and diffusion of innovations Disadvantages a Organizationally complex b Dif cult to implement 4 organizational structures 1 International division 2 Geographic area 3 Global product division 4 Global matrix International division an organizational structure that is typically setup when rms initially expand abroad often engaging in a home replication strategy 2 problems 1 Foreign subsidiary managers not given suf cient voice relative to the heads of domestic divisions 2 International division serves as a silo whose activities are not coordinated w the rest of the rm which his focusing on domestic activities Geographic area structure an organizational structure that organizes the MNE according to different geographic areas countries and region Country regional manager manager of a geographic area either a country ror a region a Carry a great deal of weight in geographic area structure b Both strength and weakness lies in local responsiveness can be a virtue but also encourages the fragmentation of the MNE into efdoms Global product division structure an organizational structure that assigns global responsibilities to each product division a Treats each product division as a stand alone entity with full worldwide responsibilities b Highly responsive to pressures for cost ef ciencies c Local responsiveness suffers Global matrix an organizational structure often used to alleviate the disadvantages associated with both geographic area and global product division structures especially for MNEs adopting a transnational strategy a Dif cult to deliver dealing with 1 boss already headache 2 Not every MNE experiences all these structural stages and the movement is not necessarily in one direction The Reciprocal Relationship between Multinational Strategy and Structure Relationship between strategy and structure is reciprocal 1 Strategy usually drives structure 2 Relationship is not a one way street structure also drives strategy 3 Neither strategies nor structures are static often necessary to change strategy structure or both Institution based considerations 1 External relationships and 2 Internal relationships Externally Host countries govts often use a combination of carrots tax incentives and free infrastructure upgrades and sticks such as threat to block market access to attract MNE investments in higher value added areas Internally Given the lack of formal regulations MNEs essentially can have 3 choices 0 Home country national as the head of subsidiary such as an American for a subsidiary for a US headquartered MNE in India 0 A host country national such as Indian for the same subsidiary above 0 A third country national such as an Australian for the same subsidiary above Depends on goal of globally coordinated and controlled action or localization Nationality of top executives at the highest level almost always home country nationals Value Innovator vs pro table innovator latter has not only plenty of good ideas but also lots of complementary assets to add value to innovation ex Philips vs Sony Rarity ERP package no rm speci c advantage for the adopting rm Imitability Formal structure easier to imitate than informal structures Organization Organizational culture collective programming of the mind that distinguishes the members of 399 66 one organization from another Ex Huawe1 s wolf culture Worldwide learning innovation and knowledge mgmt Knowledge management the structures processes and systems that actively develop leverage and transfer knowledge not just installation of IT 1 Explicit knowledge knowledge that is codi able can be written down and transferred with little loss of richness can be transmitted by IT 2 Tacit knowledge knowledge that is non codi able and its acquisition and transfer require hands on practice Differences in knowledge mgmt among 4 types of MNEs fundamentally stem from interdependence between 1 Between the HQ and foreign subsidiaries and 2 Among various subsidiaries Interdependence a Home replication moderate b Localization low c Global standardization moderate d Transnational high Complete chart on PG 426 Knowledge MGMT in 4 types of MNE Globalizing RampD Case Shiseido smells at Innovations in France Established its Europe TechnoCentre in France but failed I had to have some of its people work Beaute Prestige International side by side with the French masters of the trade Problems and Solutions in Knowledge Mgmt Open innovation relies on more collaborative research among various internal units external rms and university labs Global Virtue teams a team whose members are physically dispersed in multiple locations in the world and often operate on a virtual basis Absorptive capacity the ability to recognize the value of new information assimilate it and apply it Corporate HQ can manipulate the formal rules of the game 1 Tie bonuses with measurable knowledge out ows and in ows 2 Use high powered corporate based or business unit based incentives 3 Invest in codifying tacit knowledge These boil down to the very challenging task of how to accurately measure in ows and out ows of tacit knowledge 0 l rely on great deal of informal integrating mechanisms Social capital the informal bene ts individuals and organizations derive from their social structures and networks Micromacro link the micro informal interpersonal relationships among managers of various units that may greatly facilitate macro intersubsidiary cooperation among these units Problems in knowledge mgmt 0 Knowledge acquisition failure to share and integrate external knowledge 0 Knowledge retention employee turnover and knowledge leakage 0 Knowledge out ow how does it help me Syndrome and knowledge is power mentality 0 Knowledge transmission inappropriate channels 0 Knowledge in ow not invented here syndrome and absorptive capacity Debates and Extensions 1 Corporate control vs subsidiary initiatives 2 Customer focused dimensions vs integration responsiveness and learning Corporate control vs Subsidiary initiatives Centralized or decentralized Subsidiary initiatives the proactive and deliberate pursuit of new opportunities by a subsidiary to expand its scope of responsibility may inject a much needed spirit of entrepreneurship throughout the larger more bureaucratic corporation Need to check if the tendencies are consistent with the MNE s corporate wide goals Customer Focused Dimensions vs Integration Responsiveness and Learning 2 primary customer focused dimensions 1 Global account structure a customer focused dimension that supplies customers often other MNES in a coordinated and consistent way across various countries Mostly used by most original equipment manufacturers contract manufacturers that produce good snot carrying their own brands 2 Solutions based structure a customer focused solution in which a provider sells whatever combination of goods and services in the customers prefer including rivals offerings Informal or temporary solutions in place 2 typical starting point lead to out of control gt bureaucracy One solution simplify MGMT SAVVY Implications for action 1 Understand and master the external rules of the game governing MNES and homehost country environments 2 Understand and be prepared to change the internal rules of the game governing MNE mgmt 3 Develop learning and innovation capabilities to leverage multinational presence as an asset think global act local Case One Multinational vs Many National Companies MNE bunch of national rms GE gt America help out NAmerica division but can t help other ones Can t sue PWC international Clsoing Case Moving HQ overseas Business unit HQ and corporate HQ Business unit HQ numerous Corporate not so much Business unit center of gravity of the activities of a business unit may pull its HQ toward a host country Corporate level 1 39gtquot Leading symbolic value is an unambiguous statement to various stakeholders that the rm is global rather than domestic or local player There may be signi cant inef ciency gains Firms may bene t from their visible commitment to the laws of the new host country Clearly indicates a commitment to that country s market By moving or threanting to move HQ locations rms enhance their bargaining power vis a vis that of their original home country governments Proposals to offer tax incentives for those footloose MNEs to keep their HQ at home otherwise they go out and other high services go out BUT some argue why these wealthy MNEs need to be subsidized whereas other sectors and individuals are struggling IBUS3OO Notes 219 Ch14 Competing on Marketing and Supply Chain Management Opening Case Zara 1 Origin of a fashin house usually carries some Cachet however Zara is from small town in Spain Avoid stock outs occasional shortages contribute to an urge to buy now Bombarding shoppers with ads is a must only 3 sales for Ads Outsource everything is in house Strive for ef ciency through large batches Zara intentionally deals with small batches exibility 39gtquot Marketing efforts to create develop and defend markets that satisfy the needs and wants of individual and business customers Supply chain ow of products services nances and information that passes through a set of entities from a source to the customer Supply chain management activities to plan organize lead and control the supply chain Marketing mix the 4 underlying components of marketing 1 Product 2 Price 3 Promotion and 4 Place Product offerings that customers purchase Localization vs standardization no one size ts all but costly to create products and services for just one group of customers You can have a product that appears to be locally adapted ex Economist vs Businessweek Market segmentation identifying segments of consumers who differ from others in purchasing behavior One globally useful way of segmentation 0 Global citizens favor buying global brands that signal prestige and cachet Global dreamers may not be able to afford to buy global brands but admire them nevertheless Antiglobals are skeptical about whether global brands deliver higher quality goods 0 Global agnostics are most likely to lead antiglobalization demonstrations Brazil China and Indonesia have higher percentage of global citizens compared to the US and the UK Segmentation in recession 0 Slam on the brakes hardest hit nancially 0 Pained but patient majority not con dent about maintaining standard of living in short term and economize in all areas but less aggressively 0 Comfortably well off often in the top 5 income bracket 0 Live for today typically urban and young unlikely to change their consumption behavior unless they become unemployed Ppl like global brands but also resist globally standardized brands 0 better craft their products and services Price the expenditures that customers are willing to pay for a product Price elasticity how demand changes when price changes When price drops consumers will buy more and thus generate stronger demand In general lower consumers income the more price sensitive they are Total cost of ownership total cost needed to own a product consisting of initial purchase cost and follow up maintenanceservice cost ex printer After sales products and services are less price sensitive and thus have higher margin compete on winning the initial sale w a lower price with the aim to capture more revenue through both MNE and locals can after sales products and services BUT can be dumping when done internationally Promotion communications that marketers insert into the marketplace Countryoforigin effect the positive or negative perception of rms and products from a certain country Place the location where products and services are provided Distribution channel the set of rms that facilitates the movement of goods from producers to consumers Supply chain inbound logistics Traditional distribution channel outbound logistics 3 As of Supply Chain Management Agility the ability to react quickly to unexpected shifts in supply and demand Adaptability the ability to change supply chain con gurations in response to longer term changes in the environment and technology Make or buy decisions the decision on whether to produce in house or to outsource Requires rms to continuously monitor major geopolitical social and technological trends in the world make sense of them and recon gure the supply chain accordingly Failing to assess and respond to trends may not lead to immediate visible damage but over time could drive a rm out of the market ex Lucent and Alcatel Alignment alignment of interest of various players 2 elements key to achieve alignment Power and Trust More powerful players naturally exercise higher bargaining power facilitates legitimacy and ef ciency of the whole supply chain Trust ex 7 Eleven in Japan Third party logistics 3PL a neutral third party intermediary in the supply chain Both sides suppliers and buyers may distrust each other Ex NIKE sweatshops forecast demand etc Case Ocean shipping on decline insurance cost high due to pirates etc Institution based view Germany could not run ads in US in Germany Case India forthcoming retail revolution and Supply Chain Revolution Informal rules also affect marketing SCM moving corporate HQ like IBM VRIO Focus on the disloyal not loyal customers Ex Starbucks Western MNE s often cope by 1 Being careful about what they outsource and 2 Strengthening customer loyalty to their brands to fend off contract manufacturers Debates and Extensions Manufacturing vs services and market orientation vs relationship orientation Manufacturing vs Services Today integrating manufacturing and services is both a reality and a necessity Market orientation vs Relationship Orientation Market orientation a philosophy or way of thinking that places the highest priority on the creation of superior customer value in the market place Relationship orientation a focus to establish maintain and enhance relationships with customers 1 Relationship oriented assets do add value wining and dining 2 For truly outstanding performance relationships are necessary but not suf cient market oriented capabilities contribute MORE toward performance Market orientation functions more effectively in a market economy IBUS3OO Notes 220 Chl5 Managing Human Resources Globally Opening Case Managing Human Resources in Recession US severance pay is strictly a matter of agreement between US employers and employees it is not a law Whistle blowers protected Pla le Laid off as Alumni opportunities in network and possible future rehiring boomerangs end up becoming an in uential group among the surviving rank and Human resources management HRM activities that attract select and manage employees 1 Staf ng 2 Training and development 3 Compensation and performance appraisal 4 Labor relations Staf ng Staf ng HRM activities associated with hiring employees an ling positions Host country nationals an individual from the host country who works for an MNE Parent country nationals an individual who comes from the parent country of the MNE and works at its local subsidiary Third country national an individual who is from neither the parent country nor the host country of the MNE Ethnocentric approach an emphasis on the norms and practices of the parent company and the parent country of the MNE by relying on PCNs Polycentric approach an emphasis on the norms and practices of the host country Geocentric approach a focus on nding the most suitable managers who can be PCNs HCNs or TCN Expatriation the process of selecting managing and motivating expatriates to work abroad 1 Strategists representing the interests of the MNE s HQ 2 Daily managers run operations and build local capabilities 3 Ambassadors representing HQ s interests they build relationships w host country stakeholders such as local managers employees suppliers customers and government of cials also ambassador of subsidiaries as well 4 Trainers for their replacements Home replication ethnocentric PCN Localization polycentric HCN Global standardization geocentric a mix Transnational geocentric a mix Case Foreign Born Bosses ex Nissan Expatriate Failure and Selection Failure 2 1 Premature return 2 Unmet business objectives and 3 Unful lled career development objectives Usually combination of work related and family related problems that leads to expatriate failures Factors in Expatriate Selection Corporate HQ preferences Host countrysubsidiary preferences Language Spouse and family preferences Cross cultural adaptability technical ability and expertise Training and Development Training speci c preparation to do a particular job Development long term broader preparation to improve managerial skills for a better career Not enough preparation for Expatriates Ideally training length and rigor should correspond to the expatriate s expected length of stay Repatriate returning expatriate Repatriation the process of facilitating the exaptriate s return Problems associated with repatriation 0 Career anxiety what kind of position will I have when I return 0 Work adjustment from a big sh in small pond to a small sh in a big pond 0 Loss of status and pay expatriate premiums are gond 0 Dif cult for the spouses and children to adjust Training and Development for HCN Kodak Four Greats 1 Great hires 2 Great moves 3 Great assignments 4 Great Feedback Compensation and Performance Appraisal Compensation the determination of salary and bene ts Performance appraisal the evaluation of employee performance for promotion retention or termination process Compensation for Expatriates Going rate approach a compensation approach that pays expatriates the prevailing going rate for comparable positions in a host country fosters equality among PCNs TCNs and HCNs within the same subsidiary Also makes location where pay is higher than the home country a more attractive place to work for PCNs and TCNs Hard time adjusting back ex Lenovo expatriates used to NY level salaries Balance sheet approach a compensation approach that balances the cost of living differences relative to parent country levels and adds a nancial inducement to make the package attractive Advantages 1 There is equity between assignments for the same employee whose compensation is always anchored to the going rate in the parent country 2 Facilitates repatriation because there is relatively little uctuation between overseas and parent country pay despite the cost of living differences around the world Disadvantages 1 Cost 2 Great disparities in pay between expatriates and HCNs causing resentment among HCNs 3 Organizationally complex to administer Compensation for HCN Not surprising that high caliber HCNs b c of their scarcity will fetch more pay MNEs may eventually have to pay international rates for quali ed individuals in top positions regardless of nationality Performance Appraisal Hard to evaluate expatriate bc they are senior managers there evaluated fairly Cultural difference can create problem Asia don t express yourself many expatriates think they are not Labor relations Labor relation a rm s relations with organized labor unions in both home and host countries Unemployment Act Employee Free Choice Act NO SECRET BALLOTS When MNEs have to deal With unions abroad they often rely on experienced HCNs instead of locally inexperienced PCNs or TCNs France hard to re full time Workers 9d part tie Workers Overall the norms and images associated With the expatriate are changing rapidly VRIO Training often justi ed Debates and Extensions 1 Best t vs best practice 2 Expatriation vs inpatriation 3 Across the board pay cut vs reduction in force Best t vs Best Practice Best t rsm need to search for HRM practices that are both the best external and internal t This continuously changes Best practice should adopt best practices irrespective of context Expatriation vs Inpatriation Inpatriation relocating employees of a foreign subsidiary to the MNE s HQ for the purposes of lling skill shortages at HQ and developing a global mind set for such inpatriates Across the board pay cut vs reduction in force Reduction in force often used in US and UK Portman Ritz Carlton in Shanghai across the board cut Management Savvy Implications for Action 0 Be curious know forma and informal rules of the game governing HRM in all regions of operations 0 Be competent develop organizational capabilities that drive business success 0 Be courageous and caring 0 Be proactive in managing your international career Closing Case Cut Salaries or Cut Jobs Yamawaka Japan subsidiary in US reduction in force or across the board pay cut IBUS3OO Notes 34 Ch16 Financing and Governing the Corporation Globally Opening Case GE Capital Borrow from credit markets taking advantage of GE s prized AAA credit rating U nancial markets took a nasty turn in 2008 GE reduce dividends structure long term borrowing Too big to fail bail out the nancial services division at the expense of GE s other units and shareholders Financing how a rm s money banking investments and credit are managed Corporate governance relationship among various participants in determining the direction and performance of corporations 1 Owners 2 Managers 3 Boards of directors Known as tripod Equity stock in a rm usually expressed in shares which represents the owner s rights Shareholder rm owner Debt a loan that the rm needs to pay back at a given time with an interest Bond loan issued by the rm and held by creditors Bondholder buyer of bonds Default a rm s failure to satisfy the terms of a loan obligation Bondholders face a lower level of uncertainty Cost of capital rate of return that a rm needs to pay to capital providers For equity cost of capital 2 dividend For bond cost of capital 2 interest Cross listing listing shares on a foreign stock exchange Cross listing can be costly but its lower cost of capital makes it attracting 3 broad patterns of ownership 1 Concentrated vs diffused ownership 2 Family ownership 3 State ownership Concentrated vs Diffused Ownership Concentrated ownership and control founders start up rms and completely own and control them on an individual or family basis Diffused ownership publicly traded corporations owned by numerous small shareholders but none with a dominant level of control Separation of ownership and control the dispersal of ownership among many small shareholders in which control is largely concentrated in the hands of salaried professional managers who own little or no equity If all shareholders don t care end up with signi cant de facto control and power Rise of institutional investors has signi cantly changed this picture selling out depresses the share price and harms the seller Outside the Anglo American world most large rms are typically owned and controlled either by families or by the state with relatively little separation of ownership and control Family Ownership Vast majority of large rms throughout continental Europe Asia Latin America and Africa Positive focus on long run performance minimize con icts between owners and professional managers disastrous when Negative may lead to the selection of less quali ed managers the destruction of value bc of family con icts and the expropriation of minority shareholders No conclusive evidence on either the positive or negative role of family ownership and control on the performance of large rms Dual Class shares can have voting power even not own more than 50 State Ownership Problem all citizens are owners but neither rights to enjoy dividends nor rights to transfer or sell their property de facto owned and controlled by govt agencies no motivation SOE shares declined until 2008 Reversal Managers Top management team TMT the team consisting of the highest level of executives of a rm led by the CEO Chief executive of cer CEO the main executive manager in charge of the rm Agency relationship the relationship between principals such as sh and agents such as professional managers Principal a person such as owner delegating authority Agent a person such as manager to whom authority is delegated Agency theory a theory that focuses on principal agent relationships Principal agent con icts con icts between principals and agents Agency costs the costs associated with principal agent relationships 1 Principals costs of monitoring and controlling agents 2 Agents costs of bonding signaling that they are trustworthy Excessive compensation on the job consumption and empire building are examples Directly measuring costs dif cult however ex sudden death Information asymmetries asymmetric distribution and possession of information between 2 sides Principal Principal Con icts Principalprincipal con icts con icts between 2 classes of principals controlling shareholders and minority shareholders Expropriation activities that enrich controlling shareholders at the expense of minority shareholders Tunneling a form of corporate theft that diverts resources from the rm for personal or family use illegal Related transactions controlling sh sell rm assets to another rm they own at below market prices or spin off the most pro table part of public rma and merge it w another private rm they own Case Satyam family owned cooked books Board of Directors Intermediary between owners and managers Rati es strategic decisions and evaluates rewards and if necessary penalizes top managers Board composition the insideroutsider mix on a board of directors Inside directors a member of the board who is a top executive of the rm Outside director a nonmanagement member of the board Academic research has failed to empirically establish a link between the outsiderinsider ratio and rm performance Outside directors not necessarily independent ex Japanese boards CEO duality the CEO doubles as a chairman of the board Majority of UK rm separates but most large US rms combine them Academic research inconclusive on CEO duality is effective BUT pressure to split the 2 jobs Board of directors responsible for Control Independence deterrence norms Service advising CEO Resource acquisition functions outside directors from buyers suppliers etc Voicebased mechanisms corporate governance mechanisms that focus on sh s willingness to work with managers usually through the board by voicing their concerns Exitbased mechanisms corporate governance mechanisms that focus on exit indicating that sh no longer have patience and are willing to exit by selling their shares 2 internal governance mechanisms carrots and sticks Carrots pay for performance Recent boards seem to be quicker to dismiss CEOs To offset the risk of being red new CEOs naturally demand generous compensation 0 rising levels of executive compensation External governance mechanisms 1 The market for product competition 2 Market for corporate control 3 Market for private equity Market for product competition complements the market for corporate control and market for private equity Market for corporate control logic when managers engage in self interested actions and internal governance mechanisms fail a rm s stock will be undervalued by investors other mgmt teams will bid for the rights to manage the rm 0 On avg sh of target rms earn sizable acquisition premiums 0 sh of acquiring rms experience slight but insigni cant losses 0 a substantially higher level of top mgmt turnover follows MampAs Net impact at least in the short run seems to be positive 2 threat of takeover keep managers focused on sh wealth maximization Market for private equity Private equity equity capital invested in private companies that by de nition are not publicly traded Leveraged buyouts LBOs a means by which investors often in partnership with incumbent managers issue bonds and use the cash raised to buy the rm s stock LBO based PE transactions are associated w 3 major changes in corporate governance LBOs change the incentives of managers by providing them w substantial equity stakes The high amount of debt imposes strong nancial discipline LBO sponsors closely monitor the rms in which they have invested Michael Jensen Trick Questions Shareholder capitalism a view of capitalism that suggest that the most fundamental purpose for rms to exist is to serve the economic interests of sh also known as capitalists Corporations in the US and UK Anglo American corporate governance models market oriented high tension systems gt rely mostly on exit based external mechanisms P shareholder capitalism Corporations in Continental Europe and Japan 0 German Japanese corporate governance model bank oriented network based systems rely mostly on voice based internal mechanisms pd stakeholder capitalism CANADA has BOTH a relatively active market for corporate control and a large number of rms with concentrated ownership and control A fundamental difference in corporate nance and governance is between the separation of ownership and control in most Anglo American rms and the concentration of ownership and control in the rest of the world Weaker the formal legal and regulatory institutions protecting shareholders w ownership and control rights Common law countries generally have the strongest legal protection of investors and lowest concentration of corporate ownership 9 concentrated Shareholder capitalism spreading 1 the rise of capitalism 2 the impact of globalization 3 the global diffusion of best practices A lot of codes are advisory and not legally binding CODES on PG 548 Foreign rm on NYSE after SOX higher valuations Managerial human capital the skills and abilities acquired by top managers Debates and Extensions Opportunistic Agents vs Managerial Stewards May not be fair to characterize all managers as opportunistic agents Stewardship theory a pro management theory that suggest that most managers can be viewed as owners stewards interested in safeguarding shareholders interests Global Convergence vs Divergence Convergence advocate argue that globalization unleashes a survival of the ttest process by which rms ins search of the lowest cost of Capital will be forced to adopt globally best practices Anglo American Complete divergence is unrealistic at this point more likely cross vergence balancing the expectations of global investors and those of local stakeholders MGMT Savvy Implications for action 0 Understand the rules affecting corporate nance and governance anticipate changes and be aware of differences 0 Develop rm speci c capabilities to differentiate a rm on corporate nance and governance dimensions Closing Case David Webb A SH activist in Hong Kong minority sh have traditions of being abused by controlling sh Webb regularly attend sh meetings and demand formal votes on all proposals Recognizes primarly problem arise from the concentrated ownership and control of companies IBUS3OO Notes 35 Ch17 Managing Corporate Social Responsibility Globally Opening Case Which Side is Toyota on In the eyes of some environmentalists Toyota betrayed them by joining the bad boys GM Ford and Chrysler to lobby against efforts in the US to aggressively increase fuel economy standards Toyota s defense need to sell nonhybrids to sell prius which is pro tless Nevertheless Toyota s Prius is 3rd most popular model behind Camry and Corolla Corporate Social Responsibility CSR consideration of and response to issues beyond the narrow economic technical and legal requirements of the rm to accomplish social bene ts along with the traditional economic gains which the rms seeks Stakeholder any group or individual who can affect or is affected by the achievement of the organization s objectives Includes sh social groups customers communities employees environmental groups suppliers governments Global sustainability the ability to meet the needs of the present wout compromising the ability of future generations to meet their needs around the world Urgency of sustainability 1 Incrasing population poverty and inequity are associated w globalization and require new solutions 2 Relative power of national governments has eroded in the wake of globalization but the in uence of nongovernmental organizations NGOs and other civil society stakeholders have now become increasingly assertive around the world 3 Industrialization has created some irreversible effects on the environment Case Salmon Chicken of the Sea Everything sounds good but 1 Fouled the nearby sea 2 Spread diseases and sea lice 3 Led to a large number of escaped sh Key to prioritize Primary stakeholder groups constituents on which the rm relies for its continuous survival and prosperity Typically refer to sh managers employees suppliers customers governments and communities Secondary stakeholder groups those who in uence or affect or are in uenced or affected by the corporation but are not engaged in transactions with the rm and are not essential for its survival Include environmental groups Greenpeace labor practice groups Fair Labor Association Triple bottom line economic social and environmental performance that simultaneously satis es the demands of all stakeholder groups CSR for multinational Enterprises MNEs recommended by international organizations Free market advocates believe that the rm s rst and foremost stakeholder group are the shareholders and managers have a duciary dutry to look after shareholders interests If attain social goals rms will become socialist organizations CSR school of thought has slowly but surely become a more central part of management decisions 1 Even as free markets spread around the world the gap between the haves and have nots has widened 77 2 of world children in US but enjoy 50 of the world s toys 2 Disasters and scandals also drive the CSR movement Strategic response framework consists of 1 Reactive 2 Defensive 3 Accommodative 4 Proactive strategies Reactive strategy a strategy that would only respond to CSR causes when required by disasters and outcries Only formal regulatory pressures to compel rms to comply Defensive strategy a strategy that focuses on regulatory compliance but with little actual commitment to CSR by top management Firms admit responsibility but often ght it Al Gore and Michael Porter stringent environmental regulation may force rms to innovate however reluctantly thus bene tting the competitiveness of both the industry and country Accommodative strategy a strategy characterized by some support from top managers who may increasingly view CSR as a worthwhile endeavor From both normative and cognitive standpoints it becomes legitimate or a matter of social obligation to accept responsibility and do all that is required Negative view CSR as window dressing Instrumental view CSR activities to make good pro ts Positive view rms may be self motivated to do it right regardless of social pressures Proactive strategy a strategy that endeavors to do more than is required in CSR Proactive rms often engage in 3 areas of activity 1 Regional national and international policy discussions 2 Often build alliances with stakeholder groups 3 Proactive rms often engage in voluntary activities that go beyond what is required by regulations EX ISO Case Swiss Re Social issue participation rm s participation in social causes not directly related to the management of primary stakeholders CSR does not hurt performance but there is no concrete support to believe that it leads to supranormal returns Debates and Extensions 1 Domestic vs overseas social responsibility 2 Race to the bottom vs race to the top 3 Active vs inactive CSR engagement overseas Domestic vs Overseas Social Resposibility Developing base of pyramid at the expense of domestic employees and communities Race to the bottom Pollution Haven vs Race to the Top Developing countires may enter a race to the bottom by lowering environmental standards and some may become pollution havens MNEs do not necessarily add to the environmental burden in host countries Active vs inactive CSR engagement overseas MNE should interfere in the domestic political affairs of the host country MGMT savvy Implications for action Understand the rules of the game anticipate changes and seek to shape and in uence such changes Pick your CSR battles carefully don t blindly imitate other rms CSR activities Integrate CSR as part of the core activities and processes of the rm faking it does not last very long know yourself know your opponents you have to make money rst to give it away Closing Case From Kyoto to Copenhagen Cut Emissions or Cut Jobs Kyoto Protocol Developed countries pledged to cut emissions by 6 from 1990 levels by 2012 US did not comply India and China we have to develop rst Copenhagen thus became important Main problem coal red power plants Caps and trade called for polluters to pay for permits and buy and sell them stealth tax China cut jobs or emissions Developed economies reduce GHG emissions by 80 by 2050 Developing reduce but no target
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