International Management PDF

International Management The role of globalization Definition “the shift towards a more integrated and interdependent world economy” - Hill the whole world as an entire market “globalization means convergence among nations and companies toward common ways of doing things” - Kog...

International Management The role of globalization Definition “the shift towards a more integrated and interdependent world economy” - Hill the whole world as an entire market “globalization means convergence among nations and companies toward common ways of doing things” - Kogut “a process leading to greater interdependence and mutual awareness among economic, political, and social units in the world, and among actors in general” 3 areas of globalization, 3 levels: political, economic, and social/cultural. Drivers Declining trade barriers led to an increase in exports/imports among countries. Declining trade and investment barriers “The lowering of barriers to international trade enables firms to view the world, rather than a single country, as their market.” (Hill, p. 11) Technological change Accelerated spread of information processing and communication technology Satellite technology, optical fiber, wireless technologies, internet… Development of transportation in technology Commercial jet aircraft and super-freighters Container shipping (symbols of globalization) When companies receive government subsidies, it is easier for them to produce and export to another country. Areas/levels of globalization Political ○ Increasing importance of international institutions (IMF, OECD, WTO, World Bank, EU) ○ Governmental institutions and NGOs Economic ○ Disproportionate increase in trade ○ Foreign Direct Investment ○ Financial transactions and information exchange Social/cultural ○ Assimilation of cultures, societies, and behaviors  ○ Thesis of McDonaldization Globalization and the World’s Poor Critics argue that globalization has not helped the poor ○ 1870 → per capita income of the 17 richest nations was 2.4x that of all of the other countries ○ 1990 → it was 4.5x larger Other factors may have influenced the gap ○ totalitarian governments ○ wars ○ economic policies that destroyed wealth creation ○ little protection of property rights ○ expanding populations The global economic pyramid the top of the pyramid (usually developed countries) is a saturated market bottom of the pyramid → not much consumer spending, “reverse innovation” Activity: positive aspects of globalization Customers → wider range of products, more information available, “empowered” customers, lower prices, “higher quality products” (because we can share technology and become better and improve quality) (could also be a disadvantage)  Employees → worldwide job opportunities, skill development, higher salaries, diverse work environments, knowledge transfer Companies (large and small) → outsourcing regarding all types of resources ○ small companies can benefit from importing higher quality raw materials, and differentiate from other small companies ○ large companies benefit from entering new markets that otherwise would not have been reached Society as a whole → more interconnected, cultural exchange, economic growth, and job opportunities. Benefits Costs Consumers More information available Loss of diversity Broader range of Dependence on supply products/services chains Lower prices (Overconsumption) Sometimes higher quality Quality (low?) Higher transparency (social Prices affected by world media) developments Lower transparency because of the standardization of the product Companies Higher competition Supply chain disruption facilitates innovation and Higher competition lower prices Destroying local, smaller Outsourcing production to companies lower the cost Competition on the global Higher revenues (larger level markets) & profits Higher risk of managing a More cooperation large company opportunities Dependence of financial Higher competition crisis increases innovativeness Access to talents Employees Job creation Job reduction in the home Job mobility country Personal development Poor working conditions in Diverse work environments developing countries (cultural exchange) Discrimination More career opportunities, Child labor job mobility Loss of bargaining power of Higher wages in comparison unions  to the local comp. Lost of jobs in home country Exchange of (often) ideas/knowledge, learning Labor drain effects Environment Increasing environmental Overconsumption awareness Inequality New environmentally Increasing population friendly technologies Migration pressure Global collaboration to solve Trade of waste (toxic waste) environmental problems The uniqueness of culture is a loss Society Stimulation of economic Power of international growth companies (destroys local More cultural awareness culture/identity) Global Institutions Against Possible conflict potential War Spread of diseases Collaboration to solve global problems Increasing innovations in LDC Multinational Corporations and Foreign Direct Investment Internalization process International strategy: “strategy throughout which the firm sells its goods or services outside its domestic market” Internationalization: „the process of increasing involvement in international operations” What are “multinational corporations” “A company that has a worldwide approach to markets and production is known as a Multinational Enterprise (MNE) or transnational corporation (TNC) → It is usually involved in nearly every type of international business practice. Daniels “Multinational company/corporation (MNC) → any company that engages in business functions beyond its domestic borders“  Problems to coordinate: to communicate and control of subsidiaries Internationalization and strategic management The key is to combine the strategies → example: diversification in an international company/level using mergers and acquisitions. Motives for Internationalization  Market-seeking → looking for a new market and new products; my domestic market is already saturated, or I am not able to increase my market share. New resources for my production → natural resources, talent, cheaper resources Strategic asset → instead of developing new technology, you can acquire it (for example: Microsoft acquired Skype) Efficiency seeking → outsourcing Follow-the-leader → we play the second player moves. AKA “follow the customer” in a b- 2-b relation, not c-2-c. Measuring the degree of internationalization Firm-level 1. Absolute value → subsidiaries, number of countries, benchmarking, global market share, employees (comparing companies from the same industry) ○ flow data ○ stock data 2. Relative value → foreign assets about total assets (example) 3. The UNCTAD Transnationality Index (TNI) 4. Internationalization profiles Macroeconomic level Measuring FDI The UNCTAD Transnationality Index TNI, the Transnationality Index, is calculated as the average of the following three ratios: foreign assets to total assets foreign sales to total sales  foreign employment to total employment Foreign Direct Investment An investment made outside the home country, but inside the investing company. Control over the use of the resources transferred remains with the investor. Dunning (1993), p. 5 Directly investing in, controlling, and managing value-added activities in other countries. Peng (2013), p. 4 Definitions Direct investment is a category of international investment made by a resident entity in one economy (direct investor) to establish a lasting interest in an enterprise resident in an economy other than that of the investor (direct investment enterprise). “Lasting interest” implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the direct investment enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. Horizontal FDI One manufacturer acquires another manufacturer. M&A of the same level Vertical FDI  I am a manufacturer, then move to another country to acquire a supplier. FDI vs. Portfolio Investment Foreign Direct Investment Portfolio Investment cross-border capital flows cross-border capital flows objective: control over investment objective: optimization of return and project risk (diversification) significant ownership (e.g. joint influence on the management of the venture) or full ownership (fully-owned investment project is not intended subsidiary) usually short-term perspective influence on the management long-term perspective Motives for FDI 1. Market-expansion investments ○ High transportation costs ○ Economies of scale ○ Trade restrictions (government imposed) ○ Consumer-imposed restrictions ○ Following customers ○ Following competitors 2. Resource-seeking investments ○ Access to (cheaper) production factors Raw materials Labor Capital Knowledge Product Life Cycle Theory  Governmental incentives When you get to LEDCs, you don't find targets, you don't find companies that can’t be acquired, and they don’t exist → that is the main reason why companies invested more in greenfield than FDI. Measuring FDI in Germany: flows statistics. Balance of payments statistics “The German balance of payments is a systematic presentation of all economic transactions between residents and non-residents in a given period.” The balance of payments statistics are published at monthly intervals by the Deutsche Bundesbank, Frankfurt am Main. Important sub-accounts are: ○ current account (e.g. flow of goods and services - exports and imports) ○ capital account (acquisition or disposal of non-financial assets, e.g. land) ○ financial account (e.g. investment in business, real estate, bonds, and stock, FDI) Measuring FDI: problems of international comparison existence and reliability of data completeness of data method of data gathering legal basis for data periodicity of data quantitative threshold for FDI (absolute, relative) components of FDI timing-differences concerning recognition valuation (fair value vs. initial value) currency conversion  MNEs Invest Human Techno Trade Environm ment Resourc logy -Export ent -Links es -R&D expansi -Access to to local -Training - on clean compan - Industri -Lower- technologi ies Employ al es - -Pollution Increas abatement Theories of Internationalization The Theory of Absolute Advantage (Smith 1776) A country has an absolute advantage in the production of a product when it can produce it more efficiently than other countries. The theory of Comparative Advantage (Ricardo 1817) A country will gain if it specializes in those products it can produce most efficiently. Even if a country has an absolute advantage in the production of all goods, it makes sense to specialize in the production of those goods that it produces most efficiently and to import goods it produces relatively less efficiently. The pattern of international trade is determined by differences in productivity. Key assumptions of the classical trade theories  Full employment No transport costs No exchange rates Free movement of resources domestically but not internationally Countries pursue economic efficiency objective Theories deal with commodities rather than services Factor Proportio Theory (Heckscher/Ohlin 1933) The comparative advantage arises from differences in national factor endowments. Factors (land, labor, capital) in relative abundance are cheaper than factors in relative scarcity. Countries will export those goods that are produced using abundant factors and import goods manufactured using scarce factors. The pattern of international trade is determined by differences in factor endowments. Product Life Cycle The production location for many products moves from one country to another depending on the stage in the product’s life cycle. New Trade Theory  Economies of Scale Reduction of unit cost by producing a large volume of output. Sources: ○ ability to spread costs ○ higher productivity of large producers due to specialized equipment and employees Typical industries: automotive, pharmaceuticals, computer software Trade allows countries to specialize in the production of certain goods (achieving economies of scale) and to buy other goods from countries that are similarly specialized! Porter’s Diamond of National Advantage (1990) Factor conditions: ○ Basic factors, advanced factors ○ Advanced factors most significant for competitive advantage ○ Disadvantages in basic factors force innovation and create pressure to invest in advanced factors ○ Example: Japan’s high number of engineering graduates per capita (but lack of arable land and raw materials) Demand conditions: ○ A more demanding local market leads to a national advantage ○ Strong pressure for high quality and innovation ○ Example: Japanese knowledgeable and demanding customers helped stimulate the Japanese camera industry Related and supporting industries: Investments in advanced factors of production by suppliers or related industries have spillover effects and thus positive influence on the industry’s competitive position  Clusters of related industries (-> encourage knowledge flows between companies) Example: U.S. success in personal computers and other electronic hardware as a result of technological leadership in the semiconductor industry. Firm strategy, structure, and rivalry Different management ideologies in different countries Example: More engineers in top management in German and Japanese firms while more top managers with finance backgrounds in the U.S. companies Strong domestic rivalry puts pressure on firms to innovate and improve efficiency. (-> companies can better compete internationally) Example: Nokia in Finland The O.L.I eclectic paradigm (Dunning 1980) The internationalization strategy of the company depends on the following factors: Ownership advantages (O) ○ material or immaterial ○ examples: brand, patents, human capital, specific know-how ○ can be transferred between countries within the firm without high transaction costs Location-specific advantages (L) ○ key in determining where to invest ○ examples: natural resources, special taxes, low wages Internalization advantages (I) ○ own production rather than a partnership arrangement (e.g. licensing) ○ avoidance of transaction costs The political, legal, and economic environment of international business PEST(EL) Analysis Political Environment Political system ○ Individualistic vs. collectivist way ○ Political ideology Political stability Foreign policy Trade restrictions Role of state companies Role of military Terrorism Political ideology  Political risk → The risk that political decisions or events in a country will negatively affect the profitability or sustainability of an investment. Map of Freedom Free countries Partly free countries Not free countries freedom of limited political rights basic rights and civil expression, and civil liberties liberties repressed or association, political corruption, denied education, and terrorism, one-party political system ruled religion dominance, military by autocrats, military elected officials and influence on politics, juntas, one-party competitive parties discrimination against dictatorships, or with an important role minorities religious hierarchies and power of unfair elections, minimal or no opposition government practices exercise of political censorship, and rights political terror rule of man as the basis of law strictly limited religious and social freedoms government controls most if not all business activity  Impact on MNCs Expropriation or nationalization International war or civil conflicts Unilateral breach of contract Destructive government actions Harmful action against people Restrictions on repatriation of profit Differing points of view Discriminatory taxation policies Characteristics of political risk Legal environment Legal system ○ common law ○ civil law ○ theocratic law Prevailing international laws ○ e.g. European Union law (regulations and directives) Tax laws Industry regulations Property rights Legal systems in the world  Legal issues in MNCs Operating (day-to-day issues) Strategic (long-term issues) Starting a business in foreign Marketplace behavior countries Product safety and liability Hiring and firing local employees Product Origin Entering contracts Local content regulations Closing down the business Legal jurisdiction CE marking CE stands for Conformité Européenne = European Conformity mandatory conformity marking for certain products sold within the European Economic Area (EEA) manufacturer's declaration that the product meets the requirements of the applicable EC directives regardless of where manufactured ○ e.g. Low Voltage Directive for electrical products ○ Toy Safety Directive for toys CE marking is mandatory for certain product groups within the European Economic Area plus Switzerland and Turkey EEA: 28 member states of the EU plus EFTA countries Iceland, Norway and Liechtenstein Intellectual property rights (IPRs) Intellectual property rights are ownership rights over intellectual property: ○ Music ○ Literary works ○ Artistic works ○ Inventions ○ Innovation expertise ○ Creative ideas  Common types of IPRs: ○ Copyrights ○ Patents ○ Trademarks ○ Industrial designs ○ Trade secrets Corruption as a risk in international business Economic environment The economic system and its stability ○ market/command / mixed economy Economic development and potential ○ Market size and growth ○ GDP ○ Per capita income ○ Purchasing power ○ Inflation ○ Unemployment rate ○ Debt The existence and role of capital markets The presence of factor endowments ○ Natural resources ○ Human resources ○ Capital Knowledge ○ Infrastructure  World Inflation rate, average consumer prices Relationships between the control of economic activity and the ownership of production factors Economic Freedom Index “Economic freedom is the fundamental right of every human to control his or her labor and property”. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from constraint of liberty beyond the extent necessary to protect and maintain liberty itself.” Measuring economic freedom (12 quantitative and qualitative factors): 1. Rule of Law (property rights, government integrity, judicial effectiveness) 2. Government Size (government spending, tax burden, fiscal health) 3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom)  4. Open Markets (trade freedom, investment freedom, financial freedom) Compare the economic freedom index and human development index. Human Development Index HDI Dimensions and Indicators Technological environment Global Competitiveness Index Covering 141 economies, the Global Competitiveness Index measures national competitiveness - defined as the set of institutions, policies, and factors that determine the level of productivity.y Global Competitiveness Index Framework Summary: impact on management decisions The political, legal, economic, and technological environments of a host country have implications for the practice of MNCs. Market Entry Strategies Strategies on the Corporate Level Four Basic Strategies Pressures for cost reductions are greatest. In industries producing standardized products where price is the main competitive weapon When competitors are based in low-cost locations In industries with persistent excess capacity When consumers are powerful and face low switching costs Firms facing pressures for cost reductions must try to lower the costs of value creation by mass-producing a standard product at the optimal locations worldwide! Pressures for local responsiveness arise from Differences in consumer tastes and preferences Differences in local practices and infrastructure Differences in distribution channels Different economic and political demands imposed by host country governments Moving from global to local strategy: MTV Global vs Local Strategy - Impact on a company’s value chain What makes an industry global? Markets similar customer needs global customers transferable marketing Costs scale economies global sourcing of low-cost raw materials cheaper labor Governments trade policies technical standards host government policies Competition competitor’s global strategies volume of exports and imports in the industry Market Entry Modes Evaluation of foreign operation modes Factors affecting market entry mode decision: → Timing and speed of market entry →Political risk → Exchange rate risk → Involvement of resources → Factor costs advantages → Transport costs → Efficiency of know-how transfer →Export subsidies in the home country  → Subsidies in the host country → Firm size → International experience → Risk-averse → Control → Flexibility Selecting an Entry Mode Technological know-how A wholly-owned subsidiary, except: ○ The venture is structured to reduce the risk of loss of technology ○ Technology advantage is temporary → then licensing or Joint Venture Management know-how A wholly-owned subsidiary, except: ○ The venture is structured to reduce the risk of loss of technology ○ Technology advantage is temporary → then licensing or Joint Venture Pressure for cost reduction Combination of exporting and wholly-owned subsidiary Country Attractiveness - Company Strength Matrix Timing of Entry Early market entry  First-mover advantages: ○ Capture market share by establishing a strong brand name ○ Build up sales volume ○ Exploit experience curve effects ○ Achieve cost advantage over later competitors ○ Create switching costs First-mover disadvantage ○ Pioneering cost Timing strategies: “Sprinkler” approach Scale of entry The large scale of entry Strategic commitments ○ decision with a long-term impact  ○ difficult to reverse This may lead to changes in a competitive environment This may cause competitors to rethink market entry Small-scale entry Time to learn about foreign market Risk reduction Strategy selection 1. DCF Method 2. Cost Benefit Analysis Goal: Selecting the right strategy when balancing benefits and costs Approach: ○ Define and weight criteria ○ Calculate and compare the cost/benefit ratio Problem: Subjectivity when defining and weighing criteria. Country evaluation and selection process Tools for comparing countries Scanning based on broad variables that identify both opportunities and risks helps to ensure that firms consider neither too many nor too few alternative countries requires information that is available, inexpensive, and fairly comparable Detailed examination on-site visits to collect and analyze specific information that increasingly contributes to the final location decision process feasibility study incl. clear-cut decision points to guide managers in the decision-making process “The more time and money a firm invests in examining an alternative, the more likely it is to accept it -regardless of its merits.” Country comparison grid Opportunity-Risk Matrix Determinants of international location decision Market size (e.g. population, per capita income) Expected market growth Geographic proximity Language Operating conditions (e.g. permissions to operate and produce, labor conditions, taxes, environmental compliance) Costs (e.g. labor costs, raw material inputs, capital) of productivity Availability of resources (e.g. raw material, technology) Country risk Country Risk BERI - Business Environment Risk Information Index BERI S.A. - private source for comprehensive ratings and forecasts for over 140 countries Clients: banks and companies conducting international business A panel of 105 international experts rated 15 criteria for the current and medium-term business horizon 3 components of country risk: 1. business climate → Operation Risk Index 2. political stability → Political Risk Index 3. currency and repayment risk → Remittance and Repatriation - Factor International Mergers&Acquisitions and Strategic Alliances Market Entry Modes “The purchase or sale of a business enterprise …... is one of the most complex transactions a person or a firm can undertake. It has proved to be a make-or-break decision for leaders of many major corporations. And for many small business owners, the sale of a business is a once-in-a-lifetime thing. They must know what they are doing” In the news… Daimler-Benz AG acquired Chrysler in 1998 and sold the company in 2007 Exxon acquired Mobil Oil for USD 85bn in 1998 Vodafone acquired Mannesmann for USD 190bn in 2000 Glaxo Wellcome and SmithKline Beecham merged to form. GlaxoSmithKline in 2000Oracle acquires Peoplesoft for USD 10.3bn in 2004 Bayer AG acquired Schering AG in a USD 17bn deal in 2006 Microsoft acquired Skype for USD 8.5bn in 2011 and the mobile hardware division of Nokia in 2013 O2 acquired E-Plus for EUR 8.6bn in 2014 Bayer acquired Monsanto for USD 66bn in 2016 Microsoft acquires LinkedIn in 2016 (deal value: USD 26bn) The PSA Group purchases Opel and Vauxhall brands in 2017 (deal value: £ 1.9bn) Global M&A waves (worldwide 1985-2023) Horizontal, vertical, or conglomerate M&A? 1985: Daimler acquired a majority stake in AEG (electrical equipment) 2009: VW acquired the Mahag dealer group 2016: AB InBev acquired SABMiller 2015: Ikea is buying up forests in Romania to keep tighter control over the wood. 2010: IBM acquired an independent software vendor BigFix which used to sell IBM products to niche markets. 2014: Google acquired Nest Labs, the maker of high-tech thermostats and smoke detectors, for $3.2 billion. 2016: Daimler Financial Services acquired Athlon Car Lease for EUR 1.1bn 2011: Google acquired Motorola Mobility (meanwhile sold to Lenovo) Conglomerate acquisition: when you acquire sth in which you don’t share the value chain or is completely different from the current business operations/activities M&A advisory companies (examples) Investment Banks Big 4 Goldman Sachs PWC JP Morgan Ernst & Young Morgan Stanley KPMG Bank of America / Merrill Lynch Deloitte Citi Credit Suisse & UBS Deutsche Bank M&A / Corporate Finance boutiques Greenhill & Co Lincoln International  Mayerhöfer & Co IEG - Investment Banking Group Variety of cross-border M&As Motivations for conducting cross-border M&As Strategic reasons: ○ Market expansion (higher market share) ○ Resource seeking ○ Acquisition of strategic assets (know-how) ○ Diversification (spreading of risks) ○ Realization of synergies (e.g. cost synergies) Motivations for conducting cross- border M&As Financial reasons: ○ Better access to capital ○ Reduction of capital costs ○ Acquisition of undervalued companies ○ Tax optimization Other reasons: ○ Personal motivations of management ○ Defensive acquisitions Barriers to cross-border M&As Structural Barriers ○ Statutory ○ Regulatory ○ Infrastructure Technical Barriers ○ Management Information Barriers ○ Accounting ○ Shareholders ○ Regulation Culture and Tradition ○ Attitude ○ Value system Causes of failure and success in cross-border M&As b Acquisition Process Phase 1: Process in detail - strategy & approach  To Do’s ○ Understand the positioning and strategic aims of the acquiring company (investor) ○ Define acquisition concept (criteria for target selection, minority vs. majority shareholding, etc.) Identify potential targets and contacts (Long List and Short List) ○ Initial approach of targets (Teaser / Short company profile) Phase 2: Selection To Do’s Follow-up on initial contact Initiate first talks between the parties Confirm interest in further discussions Confidentiality agreement and exchange of information – NDA (non-disclosure agreement) Indicative Valuation and Potential Transaction Structure Agreement of indicative offer / LOI Preliminary legal documents Nondisclosure Agreement (NDA), also Confidentiality Agreement Agreement between seller and buyer that outlines confidential information that the parties wish to share for the transaction purposes Covers information that is not publicly available The parties agree not to disclose information covered by the agreement Types: mutual agreements, unilateral agreements Letter of Intent (LoI) Clarifies key points of a transaction and identifies areas of agreement and disagreement at an early stage of the transaction process Contents: ○ Reason for the agreement ○ Major terms and conditions (brief outline of the transaction structure, purchase price: range, terms of payment, etc.) ○ Responsibilities of parties (information and date to be exchanged between parties, duration of DD) ○ Expiration date, fees associated with the transaction Usually not legally binding Phase 3: Due Diligence To Do’s Discuss and agree scope of Due Diligence Execution and evaluation of Due Diligence (Commercial, Financial, Personnel, Organizational, IT, Legal, Tax, Environmental, Cultural) Valuation/modeling Revision and adjustment of the offer Draft contract (SPA - share purchase agreement) Forms of Due Diligence Buyer Due Diligence Performed by the buyer on a target company Validate assumptions underlying the target’s valuation Identify potential sources of value Identify and confirm potential synergies Identify fatal flaws that reduce value / mitigate real or potential liability. Seller Due Diligence Performed by the seller on the buyer To determine whether the buyer has the financial resources to finance the purchase Vendor Due Diligence Performed by the seller (Vendor) on the target company The Vendor can use Vendor DD to provide information on the business to many different potential purchasers at the same time, helping to increase the efficiency of the sales process Enables Vendors to anticipate potential buyer’s issues and decide how to deal with them at an early stage of the sales process Vendor DD Report helps the Vendor have more control over the sale process by setting a more detailed timetable Can help Vendors increase/defend the value of the transaction by providing potential purchasers with information on the business which has been diligence by an independent party. Phase 4: Negotiations To Do’s Determine negotiation strategy ○ purchase price  ○ terms of payment ○ guarantees Contract negotiations and signing Closing of the transaction Acquisition process / specific issues in cross-border M&As Post Merger Integration - form and intensity of integration _limited integration _full integration _there is no dominant partner _minimum: integration _ the target firm has to _the new firm tries to integrate of reporting systems adopt systems and cultures the best elements of both partner of the acquiring firm firms _The new culture should also reflect this approach Key Areas Strategic integration ○ Determining future strategy concerning leadership, innovation, competitive positioning, etc. ○ Integration of strategic business units (SBU)  Organizational and administrative integration ○ Integration of two different accounting systems (internal and external) ○ Standardization of management planning and control systems ○ Centralization of cash flow management HR Integration ○ Integration of human resources ○ Employee retention strategy ○ Integration of personnel planning and development systems (e.g. motivation and reward system) ○ Intensive information and communication management to avoid conflicts. Cultural integration ○ Integration of organizational cultures concerning values, attitudes, and behavior of employees, management style, company’s vision and mission, etc. Operational integration ○ Consolidation of product technologies and manufacturing locations ○ Integration of logistics, distribution, and customer services ○ Optimization of capacity utilization (-> cost synergies) External integration Determining communication policy with all stakeholders Announcement of the transaction to employees, customers, suppliers, creditors, media, industry analysts PMI - Forms of Acculturation (perspective of target) Strategic Alliances Market Entry Modes A strategic alliance is: ○ “a coalition of two or more organizations to achieve strategically significant goals that are mutually beneficial” Kotabe / Helsen (2008), p. 305 ○ “an agreement between two or more separate companies in which there is shared risk, returns, and control, as well as some operational integration and mutual dependence” Ernst / Bamford (2005), p. 134 ○ “a cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage” Differentiating between alliances and M&A “… the necessity of courtship, co- evolution, and sensitive termination frequently makes the strategic alliance process a much more delicate one than simple acquisition.” Buy, Ally, or DIY Matrix Basic Types of Alliances Formal Structure Non-contractual alliances → handshake alliances ○ usually for a short period, with no long-term commitments ○ Contractual alliances ○ Non-equity alliances (e.g. licensing, franchising) ○ Equity alliances (cross-shareholding, equity joint ventures) Closing gap alliance Linking Value Chain in Alliances Organizational Structure of Strategic Alliances Implementing a Successful Alliance The three key success factors The Process Advantages & disadvantages of cross-border alliances Why form cross-border alliances? Sharing costs and risks (e.g. R&D costs of developing new products or processes) Achieve necessary scale (economies of scale - reduction of purchasing costs of raw materials) Helps to establish technological standards for the industry that will benefit the firm Cross-border alliances: ○ Facilitate entry into a foreign market Local partners market know-how and experience Politically acceptable ○ Access to capabilities of another company Knowledge, expertise Distribution network Capital, management, etc. Drawbacks of cross-border alliances Technological dependence from external partners and potential erosion of core competencies Danger of knowledge dissemination to the partner or others Risk of losing a competitive advantage Narrowing of own decision power and individual flexibility Distribution of profits between partners Cross-border alliances: ○ High negotiation costs (partner search, contract negotiation) ○ Difficult to coordinate globally ○ Problems in transferring knowledge across borders ○ Cultural incompatibility of partners When may an alliance be an unplanned sale? „We're better off partnering with X than competing against it in our core business.” „By joining forces with another second-tier company, we can create a strong company while fixing our problems together.” „We need a strong partner to improve our skills.” „By partnering with another company in our industry, we can access its new products and technologies while minimizing our investments in core products and technologies.” „We can use an alliance to raise capital without giving up management control.” To be avoided: ○ alliances between strong direct competitors with overlapping product and market positions ○ alliances between weak companies Usually most successful and enduring: alliances between strong and complementary partners (e.g. Fuji Xerox 1962-2001; Dow Corning 1943-2016; Pepsi Lipton 1991) Acquisition vs Alliances Although alliances and acquisitions are alternatives, many firms seem to plunge straight into “merger mania” Alliances cost less than acquisitions! Need for Alliances in Automotive Industry How to grow internationally: acquire or ally? You are the manager of one of the leading German automotive manufacturers in the car premium sector. Your company generates revenues in Europe (75%), Asia (15%), and the U.S. (10%). Due to the increasing competitive rivalry in the automotive industry, high pressures for cost savings, and stagnating demand in the European market, your CEO decided to expand market coverage in the U.S. Today you serve this market via exports using local distributors who sell for you on commission. Your choices on how to expand in the U.S. market are given below: 1. Joint Venture: Your products would be designed and manufactured in the U.S. by a 50/50 joint venture with a leading U.S. automotive manufacturer and marketed by the JV partner. 2. Acquisition: One of the leading U.S. car manufacturers is facing financial problems and is planning to sell about one-third of its manufacturing facilities in Detroit. The acquisition of production plants and personnel from this company will allow you to set up a wholly owned manufacturing subsidiary in Detroit. Evaluate the pros and cons of each alternative. If these are the firm’s only options, which one would you advise it to choose? Organization of Global Operations Organizational structure and multinational company Organizational structure and company strategy “Structure follows strategy“ (Alfred Chandler) Structure is the design of the organization through which strategy is administered Changes in company’s strategy lead to new administrative problems and inefficiencies which, in turn, require a new or adjusted structure for the implementation of the new strategy Organizational structure of MNCs 1. Unspecific organization (direct reporting structure) 2. International division 3. Integrated one-dimensional organization Functional structure Divisional structure Products Regions Customers Projects 4. Integrated multidimensional organization Matrix structure Tensor structure Matrix structure Tensor structure International division Integrated one-dimensional organization: functional structure Strengths Weaknesses Intensive knowledge transfer Knowledge transfer concerning other concerning the function fields rather low Focus on key functions functional ○ specific requirements of expertise certain product groups, Centralization/standardisation helps regions, customer groups often to “unify” the corporation neglected One line of responsibility Potentially low motivation due to Avoidance of double work centralisation Slow reaction to changes in certain countries due to standardisation and formalisation High requirements for information processing at the top management Potentially lack of market orientation Integrated one-dimensional organization: divisional/product structure  Strengths Weaknesses Intensive knowledge transfer Duplication of functions concerning the product/product Knowledge transfer concerning other groups fields (e.g. functions, regions) rather Focus on differences between low products Coordination and cooperation Expertise for specific products between different product divisions Usually high market orientation of more complicated product divisions Risk of divisional egoism difficult for Coordination in companies with foreign subsidiaries with more than heterogeneous products facilitated one product line Promotion of entrepreneurial Lack of economies of scope behaviour Economies of scale easily exploited Flexible response to changes in product requirements Integrated one-dimensional organization: regional structure  Strengths Weaknesses Intensive knowledge transfer Duplication of functions concerning the region Coordination and knowledge transfer Focus on differences between regions across regions might be difficult and regional expertise slow risk of regional egoism Communication and coordination Risk of overemphasis on regional advantages: personal communication differences as coordination instrument easy to Risk of low cost efficiency and low use due to geographic proximity economies of scale due to local Uniform company image in the region adaptation Flexible response to changes in local Diffusion of technology might be environment (local responsiveness slowed down easy “not invented here” syndrome Mix of structural types Coca Cola - hybrid structure Integrated Multidimensional organization: matrix structure (region-division)  Strengths Weaknesses Provides access to advantages of the Complex and costly high other organisational structures requirements for information and Combination of two or more areas of communication behaviour expertise High requirements for cooperative Good knowledge transfer throughout behaviour the organisation Potential ambiguity of orders Simultaneous consideration of Decisions may take longer, often product, region and/or function extensive meeting culture Better allocation of resources due to Risk of power struggles forced consideration of multiple Appropriate for firms with many aspects simultaneously products and unstable environments Good opportunity to decentralise the decision process Integrated multidimensional organization: tensor Determinants of the organizational structure Internal Size of the company Type of product / service portfolio Intercompany relations Degree of internationalization Strategy (global, transnational, international, multidomestic) Management philosophy / management style Legal and shareholder structure External Political and legal restrictions External environment (e.g. competitors, suppliers, customers) Technology (IT and communication infrastructure) Degree of internationalization The international structural stages model Strategy and organizational structure Changes in organizational structure Main reasons: ○ Strategy change ○ Expansion of international operations ○ Product diversification ○ Profit allocation ○ Transparency ○ Portfolio adjustment Centralization and decentralization Arguments for centralization Easier coordination of the value chain Consistency between decisions and company’s strategic objectives Easier to implement major organizational changes Can avoid duplication of activities Reduces risk of costly, wrong, lowerlevel decisions Arguments for decentralization Top management is not overburdened with decision-making Motivation of employees Greater flexibility -> quick response to environmental changes Better decisions (lower-level managers are usually better informed about dayto-day business) Increased control ○ Creation of relatively autonomous subunits  ○ Subsidiary managers are held more accountable for subunit performance Global vs. local strategy Impact on company’s value chain Culture and International Management Definition of culture Hofstede’s manifestation of culture at different levels of depth Determinants of culture Hofstede’s research: five cultural dimensions Power distance → “the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally” Uncertainty avoidance → “to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations” Individualism vs collectivism → “the degree to which individuals are integrated into groups” Masculinity vs femininity → “refers to the distribution of roles between the genders” Long-term orientation → the degree the society embraces, or does not embrace, long- term devotion to traditional, forward thinking values. Differences between nations with small and large power distances (family, school, workplace) Small power distance Large power distance Inequalities among people should be Inequalities among people are both minimized. expected and desired. There should be, and to some extent, Less powerful people are polarized interdependence between less and between dependence and more powerful people. counterdependence. Parents treat children as equals. Parents teach children obedience. Teachers expect initiative from Children treat their parents with students in class. respect.  Teachers are experts who transfer Teachers are expected to take all impersonal truths. initiatives in class. Students treat teachers as equals. Teachers are gurus who transfer More educated persons hold less personal wisdom. authoritarian values than less Students treat teachers with respect. educated persons. Both more and less educated persons Hierarchy in organizations means an show almost equally authoritarian inequality of roles, established for values. convenience. Hierarchy in organization reflects the Decentralization is popular. existential inequality between higher- Narrow salary range between top and ups and lower-downs. bottom of the organization. Centralization s popular. Subordinates expect to be consulted. Wide salary range between top and The ideal boss is a resourceful bottom of organization. democrat. Subordinates expected to be told what Privileges and status symbols are to do. frowned upon. The ideal boss is benevolent autocrat or good father. Privileges and status symbols for managers are both expected and popular. Differences between nations with small and large power distance (politics, society) Small power distance Large power distance The use of power should be legitimate Might prevails over right: whoever and is subject to criteria of good and holds the power is right and good. evil. Skills, wealth, power and status Skills, wealth, power, and status need should go together. not to go together. The middle class is small. The middle class is large. The powerful have privileges. All should have equal rights. Powerful people try to look as Powerful people try to look less impressive as possible. powerful than they are. Power is based on family or friends, Power is based on formal position, charisma and ability to use force. expertise, and ability to give rewards. The way to change the political The way to change a political system system is by changing the people at is by changing the rules (evolution). the top (revolution). The use of violence in domestic Domestic political conflicts frequently politics is rare. lead to violence. Pluralist governments based on Autocratic or oligarch governments outcome of majority votes. based on cooperation. Political spectrum shows strong center Political spectrum, if allowed to be and weak right and left wings. manifested, shows weak center and Small income differentials in society, strong wings. further reduced by the tax system. Large income differentials in society,  Prevailing religions and philosophical further increased by the tax system. systems stress equality. Prevailing religions and philosophical Prevailing political ideologies stress systems stress hierarchy and and practice power sharing. stratification. Native management theories focus on Prevailing political ideologies stress role of employees. and practice power struggle. Native management theories focus on role of managers. Comparing Cultures Competitive advantages of different cultural profiles Cultural dimensions of doing business in Arab countries Avoid sitting so that the sole of one’s shoe is shown. The left hand is viewed as “unclean”. Foreign business representatives should not inquire about the wives of Arab business representatives. Do not be overly praise the possessions of Arab hosts, as this could create a perception that you expect your hosts to give them to you. Arab business representatives will probably be reluctant to do business with women. If a woman is accepted, modest dress is appropriate. Arab business representatives may frequently divert from the topic initially discussed, then return to it. Cultural dimensions of doing business in Japan Upon meeting a Japanese executive, a slight bow and handshake are appropriate. Business card etiquette is important. On one side, the information should be in English; the other side should have the same information in Japanese. It is not appropriate to look directly into the eyes of your Japanese hosts. It is important for your Japanese hosts to know your title and rank. They prefer to do business with high-ranking individuals. Japanese business has a group orientation, rather than an individualistic one. “The peg that stands out gets hammered down” is a Japanese saying. Japanese executives expect foreign business representatives to arrive prepared and to have decision-making authority. New potential business partners must have been referred to Japanese business representatives through a third party. Organizational Culture „(…) the pattern of basic assumptions that a given group has invented, discovered, or developed in learning to cope with its problems of external adaptation and internal integration, and that have worked well enough to be considered valid, and therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problems. Levels of organizational culture - E. Schein Types of organizational cultures Implications for Managers Culture affects: management styles, product development and management, advertising companies, and communication. Power Distance Uncertainty avoidance Individualism Masculinity Long-term orientation Cultural diversity: advantages and disadvantages Strategies to change and strengthen organizational culture Actions of founders and leaders Symbolize the new culture (or need for one) through memorable events Model the new culture through subtle decisions and actions Culturally consistent rewards Reward employees for culturally consistent behaviors Reward managers who help employees understand the culture Selecting and socializing employees Hire people whose values are consistent with the culture Inform and indoctrinate new staff about what the culture means Aligning artifacts Share stories supporting the culture Celebrate goals/milestones to support the culture Inhabit buildings that reflect the culture Strategies to merge different organizational cultures Assimilation: Acquired company embrace acquiring firm’s culture Deculturation: Acquiring firm imposes its culture on unwilling acquired firm Integration: Combining two or more cultures into a new composite culture Separation: Merging companies remain distinct entities with minimal exchange of culture or organizational practices Cultural differences in measurement and disclosure for accounting systems Corporate Social Responsibility and Ethics in MNEs Stakeholders of MNCs The challenge is not only to balance between shareholders and other stakeholders but between different groups of stakeholders. Stakeholders of MNCs Primary Secondary Customers Media Shareholders Trade Associations Employees Governments / local communities Suppliers Environmental groups Distributors Special interest groups Society in general Definitions Corporate Social Responsibility (CSR) “The firm’s consideration of, and response to, issues beyond the narrow economic, technical and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks.” Source: Davis K. (1973) “Corporate social responsibility involves the conduct of a business so that it is economically profitable, law abiding, ethical and socially supportive (…)” Source: Carroll (1983) Acting both efficiently and ethically, meeting and exceeding legal requirements and considering their impact on people and the environment Making positive contributions to society that are voluntary and not solely driven by economic interests or complying with the law- Meeting the needs of the present without compromising the ability of future generations to meet their needs: - environmental issues, such as biodiversity and climate change - social issues, such as poverty and social inequality Respecting universally recognized and shared ethical-moral values International Business Ethics “Unique ethical problems faced by managers conducting business operations across national boundaries.” Source: Parboteeah / Cullen (2011) Pyramid of Corporate Social Responsibility Different faces of CSR Animal testing Discrimination: race, gender, sex Fair wages Working conditions Bribes Environmental pollution Tax heavens Child labour CSR starts at top management! If a top manager is unethical, then he/she sets a lead that others follow. When managers behave unethically, employees can be demoralized, lose faith in the organization, and even leave their jobs. Others might followthe-leader themselves and engage in unethical behaviors. Enron scandal: ○ High demands for performance and profitability led Enron employees first to cut ethical corners and finally to break laws as well. According to one Enron controller, the logic was as follows:  ○ "If your boss was [fudging] and you have never worked anywhere else, you just assume that everybody fudges earnings. Once you get there and you realized how it was, do you stand up and lose your job? It was scary. It was easy to get into 'Well, everybody else is doing it, so maybe it isn't so bad.'" CSR in MNCs (examples) The Ethical Corporation Institute has identified such companies as Johnson & Johnson, Coca-Cola, Intel, and IKEA as leaders in ethical water management. Companies such as Cadbury Schweppes, Dell, Nestle, P&G, Pepsi, and Tesco are working closely with their suppliers to identify sources of carbon emissions in their supply chain. In 2008, Accenture changed its location from Bermuda to Dublin. A code of conduct for the MNC Respect basic human rights and freedoms Maintain high standards of local political involvement ○ Avoid illegal involvement in local politics ○ Don’t pay bribes Transfer technology ○ Enhance technology transfer to developing nations ○ Conduct local R&D when possible Protect the environment Follow local consumer-protection laws Employment practices, e.g.: ○ Follow relevant policies and employment laws of host nations ○ Help create jobs in needed areas ○ Respect local collective-bargaining laws ○ Give notice of plant closings ○ Provide income protection to terminated workers Decision Process for Ethical Decision-Making Strategic Responses to Ethical Challenges National Differences in Business Ethics and Social Responsibility Examples of cultural variations regarding acceptance of ethically suspect behaviour:  U.S. students consider it morally wrong for employees of an auto repair shop to lie to customers about repairs done. However, the practice is seen as more morally acceptable to Russian students. Most Westerners violate copyright laws even though they recognize that violation of such laws is wrong. Requesting money to smooth out business transactions is standard practice in many countries such as Mexico, Russia, Thailand, and Haiti. In the United States, such practices are frowned upon. In a study comparing whistle-blowing forms, students from the UK had a much higher preference for internal forms of whistle-blowing relative to students from Turkey and South Korea Pressures for Ethical Convergence Toward transnational ethics: The growth of international trade and trading blocks (NAFTA, EU) creates pressures to have common ethical practices that go beyond national cultures and institutional differences. MNEs have employees from different cultural backgrounds who need common standards and rules regarding how to behave. -> Corporate culture to provide consistent norms and values! An increasing number of business watchdogs (ethical investment companies, NGOs) also are encouraging MNEs to be ethical. Functional Strategies in Multinational Corporations Sourcing and Production Strategy MNE’s Outsourcing Options Sourcing Location Decision Criteria Paradigm Shift in Supply Chain Management Supplier Pyramid Changing Value Chain in the Automotive Industry Make or Buy Decision Advantages of Make-Decision Lower costs (if most efficient producer!) Facilitating specialized investments ○ Avoiding dependence “manufacturersupplier” when specialized assets/equipment are needed that can be used only for one purpose Protection of product technology ○ Unique technology that gives the company competitive advantage Improved scheduling ○ Planning and coordination of processes easier ○ Important in companies with Just-In-Time inventory system Advantages of Buy Decision Strategic flexibility in sourcing components ○ Possibility to switch between supplier according to circumstances (price development, political risks, etc.) Lower firm’s cost structure Offsets ○ Outsourcing to suppliers in other countries helps the company to capture more orders in that country Typical in commercial aerospace industry (Boeing) Strategic alliances with essential suppliers ○ Benefits of vertical integration without the associated organizational problems Concentration vs Decentralization of Production Activities Concentration Cost reductions due to economies of scale and scope as well as experience curve effects. Easier and less costly coordination of production process and R&D.  Better bundling of procurement volume ○ price negotiation for large volumes of inputs delivered to one location. “Country of origin” effect ○ image and quality advantages, skilled labor Decentralization Overcoming tariffs and non-tariff barriers Increased sensibility for local market needs Reduced delivery costs Increased flexibility (possibility to exploit market imperfections: cheap labor, resource access, differences in tax systems or interest rates, etc.) Better access to local resources Better relations with local suppliers Acceptance by local governments (incentives, positive effects for the labor market, trade balance, etc.) Multi-Stage Production Process Multi-Stage Production Process as Cross-Border Production Process Global Supply Chain in MNCsb Simple Supply Chain “Your cost structure, quality of manufacturing, and the way you compete in the next decade is through your supply chain.” “The best-run companies usually have the best supply chain” Differences between domestic and international logistics: Distance Transportation modes Currency Packaging and labeling requirements Infrastructure Additional intermediaries (border-crossing process) Selecting mode of transport: Cost Transit time Predictability Non economic factors Trends and challenges in supply chain management: Increased cross border sourcing due to globalization  Global operations require increasingly global planning and coordination of logistics system Importance of Just-In-Time inventory (-> cost savings resulting from reduced warehousing) Increasing role of information technology and internet Role of environmental laws and regulations Anatomy of an ERP System International Finance and Accounting International Financial Management Multilateral Netting Cash flows in the absence of netting Cash flows after multilateral netting Net positions of subsidiaries Management of Foreign Exchange Risk Foreign exchange risk: risk resulting from changes in currency exchange rates Types of exposure that can result from foreign exchange fluctuations: ○ Transaction exposure ○ Translation exposure ○ Economic (operating) exposure Exposure management strategies Operational: ○ use of local debt to balance local assets ○ lead strategies and lag strategies -> to reduce transaction and translation exposure ○ distributing productive assets to different locations -> to reduce economic exposure Financial: forward contracts, currency options International Accounting  enerally Accepted Accounting Principles (GAAPs) GAAPs - accounting standards typical for each country Must be followed by companies when generating financial statements Financial statements differ in each country ○ Format ○ Content (substance) ○ Language, currency Standard-setting organizations: Financial Accounting Standards Board (FASB): ○ private sector body ○ establishes accounting standards in the United States (US GAAP) International Accounting Standards Board (IASB) in London International private sector organization ○ establishes financial accounting standards for world-wide use: International Financial Reporting Standards (IFRS) Differences in Accounting Standards Cultural Differences in Measurement and Disclosure for Accounting Systems Differences in Accounting Systems - Provisions Recognition Criteria IFRS HGB US-GAAP Provisions are recorded for Provisions are based more Same as IFRs legal/contractual obligations on the principle of prudent or constructive obligations accounting Probability of outlofw of Not addressed by HGB Minimum probability is not resources must be > 50% (probability is often quantified in FAS 5 - in substantially lower than 50%) practice considered to be approx. 70% - 80% A liability must exist to a third HGB allows provisions where Same as IFRS party at the balance-sheet no third-party liability exists date (planned repairs, expense accruals, internal costs of the year-end closing) Measurement Criteria IFRS HGB US-GAAP Amunt of provisions is based HGB allows greater flexibility Same as IFRS on best estimate. - accruals could be substantially higher than under IFRS/US GAAP Where a range of equally Not addressed by HGB Where a range of equally probable value exists, the probabñe value exists, the middle value in the range is lowest value in the range is used. used All provisions are to be Only provisions that contain Generally, no discounting pf discounted, when the effect an inherent interest provisions except where of discounting is material. component are discounted specific rules apply (eg, provisions for anniversary payments) Convergence of Accounting Standards Factors encouraging the harmonization of national accounting standards: Integration of capital markets Investor orientation Increasing foreign financing of MNEs and pressure for more standardized accounting rinciples in order to reduce costs of reporting Regional economic integration -> FASB and the IASB are trying to eliminate existing differences and establish common standards. -> Harmonization efforts in the EU: member countries directed to adopt IFRS all listed companies must follow standards issued by the International Accounting Standards Board (IASB) in their consolidated financial statements International Marketing International Product Strategies Straight extension → the firm adopts the same policy used in its home market Product adaptation → the company caters to the needs and wants of its foreign customers Product innovation → the firm designs a product from scratch for foreign customers Product Policy: Standardization vs Adaptation Standardization: ○ Economies of scale (e.g. production, R&D, marketing) ○ More effective coordination and control ○ Unified product image leads to increased brand equity ○ Two approaches: Sell “domestic” product globally Develop a “world” product proactively Adaptation: ○ Government regulations on products, packaging, labels ○ Differences in technological standards (e.g. different standards in power supply) ○ Differences in consumer tastes and habits ○ Differences in education and skill levels ○ Language factors ○ Different income levels Branding Global brands ○ Consistent image worldwide ○ Stronger visibility / brand awareness ○ Scale economies in brand development and promotion Local brands ○ Easier to understand (-> language factors) ○ Avoid negative associations ○ Local branding appropriate when other elements of marketing mix are adapted to local conditions ○ Price differentiation easier with different brands names Managing an International Brand Portfolio Pricing Strategy 1. Ethnocentric pricing  2. Polycentric pricing (price adaptation) 3. Geocentric pricing Distribution Retail Concentration → Concentrated versus fragmented retail system Channel Length → Number of intermediaries between the producer and the consumer Channel Exclusivity → Easy or difficult to get access to the distribution channel? Channel Quality → Expertise, competencies, and skills of established retailers in a country. Retailer’s ability to sell and support the products of international company International Human Resource Management Staffing Policies Internal recruiting: Implies promoting or relocating employees Easy evaluation of abilities and personality of the candidate Candidate knows company’s culture and strategy Relatively low cost and effort to introduce the employee into the new position Internal candidate selection as a part of long-term career planning and personal development Increases loyalty and employee's motivation when international assignment is used as performance rewards External recruiting: Reasonable when internal pool of candidates is limited or employees with the needed qualification are not available internally Head-hunter, job offers in newspapers, etc. Identification and evaluation of candidates is more difficult Training and Development Training for all employees: Improvement of employees’ technical and managerial skills Intercultural training for employees working in international teams in home country Role of “Knowledge Management” in MNEs: ○ Creating, leveraging and providing easy access of all company’s knowledge to employees ○ Knowledge-sharing across geographies, business units, subsidiaries Training for expatriates: Practical training Cultural training Language training Performance Appraisal and Compensation Performance appraisal systems: Global model ○ Standardized approach worldwide ○ The same performance indicators for managers from each subsidiary -> coherence improvement within the MNC Multinational model ○ Performance measurement and appraisal adapted to the country-specific conditions ○ Reason: difficult to compare manager’s performance across countries -> external factors (market growth etc.) and specific situation of the subsidiary (e.g. size, different tasks) influence subsidiary’s results ○ Different motivational structures in different countries can result in divergence in the MNC Elements of expatriates compensation package: Base salary Foreign service premium ○ e.g. hardship premium Allowances ○ Cost-of-living allowances ○ Housing allowances ○ Education allowances Tax differentials Benefits ○ e.g. medical and pension benefits Cultural Adjustment Global Manager Main competencies: Interpersonal skills Linguistic ability Motivation to live abroad Tolerance for uncertainty and ambiguity Patience and respect Cultural empathy Strong sense of self (or ego strength) Sense of humor