mg4035-semester-notes.pdf

lOMoARcPSD|33425069 MG4035 Semester notes International Management (University of Limerick) Studocu is not sponsored or endorsed by any college or university Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 MG4035 Final Exam Week 1: Introduction to International Management ...

lOMoARcPSD|33425069 MG4035 Semester notes International Management (University of Limerick) Studocu is not sponsored or endorsed by any college or university Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 MG4035 Final Exam Week 1: Introduction to International Management  International management = concerned with managing a business outside of national boundaries.  Faced with different political and legal systems, and a host of cultural issues  Comparative international management = dedicated to exploring the landscape, contours, and national patterns of development. Focuses on national systems elements as the basis for legitimate comparison of economically dominant territories. o Eg. emergence of ethno theories – beliefs shared by members of a cultural groups  Cross cultural management = gives particular analytical significance to national culture as the key variable when examining acceptable management practice. Focuses on the explanatory power of culture. o Eg. Hofstede’s work  What is IM and what complexities arise when operating at the international level? o Political, legal, cultural, sociocultural  What is the most appropriate ways for firms to internationalize, and to manage and structure their activities? o Exporting, licencing, franchising, mergers, acquisitions, strategic alliances, joint ventures  How can we develop the managerial talents and capabilities to ensure that managers can be a success internationally? o International assignment cycle Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 Week 2: Globalisation  Coca Cola: a global brand. Approximately 205 beverage brands worldwide, and CC has the highest brand recognition globally.  The most global function of a company is advertising, so they avoid themes which might be controversial in local markets  Think globally, act locally: despite moves towards a more global market, there remain fundamental differences based on geography and culture. It also adapts taste as well as operations to local markets.  Levitt (1983): predicted there would be a single global market where standardized products would be sold everywhere. Tastes and preferences would be homogenised.  Freidmann (1999): described the world as being ties together into a single globalised marketplace and village driven by the spread of free market capitalism to virtually every country in the world.  Hyperglobalisation = convergence towards a global system.  The divergence proposition = some argue that globalisation has been exaggerated and that markets and organisations function more along national and regional lines. o More moderate approach: argues that global processes are taking place but proceeding more rapidly in some places than others and also differing in intensity and effects.  Globalization of markets: ongoing economic integration and growing interdependency of national economies. Declining trade barriers and rapid changes in communications allowing firms to internationalize more than ever before  Value chain = the sequence of value-adding activities the firm performs in the course of developing, producing, marketing, and servicing a product. Globalization allows companies to outsource value-chain activities.  Defining characteristics of globalisation: o Growth in capitalist market economies, reducing barriers to trade and investment o Growing interconnectedness between firms, governments, and individuals o Advances in I&CTs o Qualitative changes in firms and societies Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069  Phases of Globalization: o 1830 – 1880: growth in rain networks, efficient ocean transport, rise in manufacturing. Telegraph, and telephone enabled flow of information between nations. Use of water and steam power to mechanise production and power. International business grew due to growth if transport. o 1900 – 1930: rise of electricity and steel production, emergence and dominance of MNCs, mainly from Europe and North America. Mass production. Western Europe was most industrialized region. Colonization led to the first subsidiaries being created. o 1948 – 1970 (After WW2): increased demand for consumer products. Rise in MNCs from Japan. Rise in global brands. GATT (WTO) established. Reconstruction efforts after the war and dismantling of trade barriers. Pentup demand fuelled markets for consumer and industrial products to rebuild Europe and Japan, so industrialized countries sought to reduce international trade barriers to supply goods to meet this demand.  General Agreement on Tariffs and Trade (1947): reduced barriers to international trade and investment. Led to formation of WTO, includes 164 member nations. Aims to regulate and ensure fairness and efficiency in global markets. o 1980s: growth in cross-boarder trade and investments. Rise in the use of personal computers and the internet. Technological advances. Rise of SMEs. Use of IT to automate production. Collapse of the Soviet Union. Huge increases in FDI. Technological developments enabled globalisation of service sector – banking etc. o 2007: rise of digital technologies. AI, robotics, £d printing – blurring the lines between physical, digital, and biological spheres. Technologies are boosting the efficiency of international trade, especially in services. Growth of international trade of goods has slowed down, increasing the productivity of local manufacturing.  Drivers of globalization: o Worldwide reduction of barriers to trade and investment Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o Market liberalisation and adoption of free markets industrialisation, economic development and modernisation o Integration of world financial markets o Advances in technology  Dimensions/manifestations of globalisation: o Integration and interdependence of national economies. Economic integration = increased trade and other commercial activities among the nations of the world o Rise of regional economic integration blocks – groups of countries that facilitate reduced trade and investment barriers among themselves eg. NAFTA or APEC o Growth of global investment in financial flows – free movement of capital around the world o Convergence of buyer lifestyles and preferences o Globalisation of production activities + services  Firm level consequences: o Countless new business opportunities o New risks and intense rivalry from foreign competitors o More demanding buyers who source from suppliers worldwide o Greater emphasis on proactive internationalisation o Internationalisation of the firm’s value chain  Societal consequences: o Contagion = rapid spread of financial or monetary crises from one country to another. 2008 financial crisis triggered by unsuitably high prices in housing and commodities. Crisis began in US and spread around the world. o Loss of national sovereignty – sovereignty is the ability of a nation to govern its own affairs, normally one country’s cannot be applied or enforced in another country. Globalisation can threaten this. MNCs can interfere with a government’s ability to control its own economy, social structure, and political system. The largest firms are constrained by market forces. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o Offshoring and the flight of jobs: lay-offs happen in some countries as large MNCs outsource production to countries with cheaper labour. Offshoring = the relocation of manufacturing and other value-chain activities to costeffective locations abroad.  The globalization of markets: markets for consumer products in which tastes and preferences are influenced by culture have not become as homogenised.  The successful firm is able to source components globally and deliver finished products to diverse markets, providing customers in each with products adapted to their tastes at competitive prices  Globalisation of production: allows companies to break down the manufacturing process into separate stages, each in the most advantageous location. Eg. India’s IT capacity has attracted global companies outsourcing IT and related services eg. customer services, IT support. China -cheap labour has allowed mass produced manufacturing to flourish.  What does globalisation mean to the consumer?: more choices, lower prices, and increasingly blurred national identity for products and services, impacts on career choice and progression  The impact of globalization: o Economic: globalisation partially enhances the monopoly power of MNCs. Small firms remain viable players and have a role in the global economy. Globalised production has led to waves of industrialisation, creating manufacturing jobs and related development in regions and countries favoured by FDI and outsourcing. Less fortunate have been low skilled industrial workers in high-cost countries. o Diffusion of technology: spill-over effects – opportunities for local firms to benefit from FDI, gaining technological competence which generates new local businesses and technological capacities. o Global financial markets: o Culture change and globalisation: Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o Environment: environmentalists argue that firms relocate to avoid stricter pollution rules – the race to the bottom. Partially true – some such as Dow chemicals have been involved in huge clean up in Eastern Europe.  Social impact: o Host society benefits: new jobs, industrialisation, technology transfer, spillover effects. o Host society adverse effects: vulnerable to location shifts, environmental degradation. o Home society benefits: growth in outward FDI, increased corporate profits, increased shareholder value. o Home country adverse effects: income inequality, loss of low skilled jobs.  The most open economies are the most vulnerable to a global slowdown.  A balanced view of globalisation is that its one of many factors affecting the wellbeing of a population  The end of globalisation:? BREXT, Trump. In contrast to the unilateralism of Trump and the confusion of Brexit, Chinese president Mr Xi is viewed as a defender of the rules based global economic order. China has been the biggest beneficiary of the opening up of the global economy.  Technological advances and globalisation: o IT: the science and process of creating and using information resources. Creates competitive advantages by giving companies new ways to outperform rivals. Distant subsidiaries are now interconnected by intranets that facilitate instant sharing of data, info and experience across company operations worldwide. Allows smaller firms to design and produce customized products that can target narrow market niches. Supports managerial decision making. Allows firms to interact with foreign partners and value chain members. o Digitization: enabling or transforming business functions, operations and activities by leveraging digital technologies and digitized data. Possible because of advanced IT networks. Provide a global platform through which people and organisations can interact. E-commerce facilitates international buying and selling of goods and services online. Connecting locations, Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 products, services and data. Marginal cost of transmitting data and information worldwide is now essentially 0. reduced both the importance of geographic boundaries and the costs of international interactions and transactions. o Communications: intranets, extranets, social media and email connect billions of people and companies. Promote products and services, transmit data. Opens global marketplace to SMEs and other smaller firms that would normally lack the resources to do international business.  The internet of things = machine to machine connectivity online o Manufacturing: computer aided design CAD of products, robotics and production lines have transformed manufacturing by reducing production costs. o Transportation: recently the volume of international shipping has increased dramatically. Posed an increasing threat to the natural environment  MNE / MNC = a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries.  MNC = an enterprise that engages in FDI and owns or controls value adding activities in more than one country. – OECD  International Firm = a firm engaged in trade activities with no FDI component eg. Italian leather manufacturers who export goods internationally  MNCs benefit economies of scale and scope, giving opportunities for lower prices  MNCs have altered career progression, many people work for the same company throughout their career, across a number of geographical locations.  The national identity of brands has become increasingly blurred.  60,000 + MNCs with over 800,000 affiliates  They generate 50% of the world’s industrial output and 2/3 or world trade  50% of all MNC trade in intra-firm  MNCs = 70% of manufacturing output in Ireland.  MNCs in Ireland: ICT, social media, pharmaceuticals, and finance have made Ireland the hub of their European operations. Google, HP, Apple, IBM etc. Ireland continues Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 to attract a huge amount of FDI and is the second most attractive country globally for FDI, second to Singapore.  IDA Ireland: the agency responsible for the attraction and retention of inward FDI into Ireland.  Growth of service MNCs: media, education, information services, travel, tourism, health care and professional services. Why are they growing? – economic transformation, regulatory systems, communications advances  Competitive advantage of the MNC: with global scale and experience the MNC has a large capital, human, brand, and technological resource base that it can leverage in many countries.  Dynamic capability theory: MNCs cannot merely rely on existing resources but must develop dynamic capabilities to create, deploy and upgrade resource in pursuit of sustained competitive advantage.  If superior knowledge is source of CA then MNC must have organisation that extends and exploits its knowledge throughout its operations  Capabilities include: familiarity with national culture, industrial structure and government requirements, existing relationships with customers, suppliers and regulators.  Domestic firms will normally have an edge over the MNC so it must develop organisational capabilities to mitigate this disadvantage.  Deployment: its relatively easy to transfer capital and equipment to a new operation but more difficult to transfer knowledge, skill, and experience. MNC must disseminate knowledge to new operations and integrate information acquired from these sites. Effective knowledge transfer is the most important capability for the MNC to develop. Theories on International Trade and Investment  Free trade: relative absence of restrictions to the flow of goods and services between nations.  Comparative advantage = superior features of a nation that provide unique benefits in global competition. These features are typically derived from either natural Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 endowments or deliberate national practices. Includes labour, climate. Arable land, petroleum reserves and other inherited resources. o Also known as country-specific advantage  Competitive advantage = assets or capabilities of a firm that are difficult for competitors to imitate. Derived from specific knowledge, competencies, skills or superior strategies. Assets of a company o Also known as firm-specific advantage  Why do countries trade? – trade enables us to use their natural resources more efficiently through specialization and thus enables industries and workers to be more productive.  Mercantilism: the belief that national prosperity is the result of a positive balance of trade, achieved by maximising exports and minimizing imports. Run a trade surplus. Harms the firms that import RM and consumers due to reduced choice of products -> higher prices and inflation o Neo-mercantilism: believe that running a trade surplus is beneficial. Labour unions, farmers  Absolute advantage principle: a country benefits by producing only those products it can produce using fewer resources than any other country. If every nation follows this, each can consume more than it otherwise would at a lower cost.  Comparative advantage principle: *** it may be beneficial for 2 countries to trade with each other as long as one is relatively more efficient at producing a product needed by the other. Optimistic. A country needs to be only relatively capable in producing various types of goods.  Factor proportions theory: products differ in the types and quantities of factors required for their production, and countries differ in type and quantity of production factors that they possess. Each country should export products that intensively use relatively abundant factors of production and import goods that intensively use relatively scare factors of production.  International product lifecycle theory: each product and its manufacturing technologies go through 3 stages of evolution – introduction, maturity, and standardization. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069  New trade theory: increasing returns to scale, especially economies of sale are important for superior international performance in industries that succeed best as their production volume increases.  Competitive advantage of nations: depends on the collective CA of the nations firms.  National competition = comparative advantage + competitive advantage  Determinants of national competitiveness – Porter Diamond Model: o Demand conditions: nature of home market demand for specific products and services. Presence of demanding customers pressures firms to innovate faster and produce better products. o Firm, strategy, structure and rivalry: nature of domestic rivalry and conditions in a nation that determines how firms are created, organized and managed. o Factor conditions: labour, natural resources, capital, technology, entrepreneurship, advanced workforce skills and know-how o Related and supporting industries: the presence of clusters of suppliers, competitors and a skilled workforce.  Industrial cluster: a concentration of businesses, suppliers, and supporting firms in the same industry at a particular location, characterized by a critical mass of human talent, capital, or other factor endowments. Eg fashion industry in Italy o National industrial policy: a proactive economic development plan a government initiates to build or strengthen a particular industry. Tax incentives, monetary and fiscal policies, educational systems, infrastructure, legal and regulatory systems.  Internationalisation process of the firm: domestic focus -> pre-export stage -> experimental stage -> active involvement -> committed involvement  Born global firms: young firms that intently pursue customers in foreign markets. Innovative start-ups that initiate international business soon after their founding.  Monopolistic advantage theory: resources or capabilities a company holds that few other firms have. Firms that use FDI as an internationalisation strategy must own or control certain resources and capabilities not easily available to competitors. At least 2 conditions should be present: returns accessible in the foreign market should be Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 superior to those available in the home market, and, returns achievable in the foreign market should be superior to those earned by existing domestic competitors in the foreign market.  Internationalisation theory: an explanation of the process by which firms acquire and retain one or more value-chain activities inside the firm. This minimizes the disadvantages of dealing with external partners and allows for greater control over foreign operations. Ensures greater control over foreign operations, helping to maximise product quality, reliable manufacturing processes and sound marketing practices.  Dunning's Eclectic Paradigm: Professor John Dunning proposed the eclectic paradigm as a framework to explain the extent and pattern of the value chain operations that companies should own abroad. The eclectic paradigm specifies three conditions that determine whether a company will internationalize through FDI: o Ownership-specific advantages: The firm owns knowledge, skills, capabilities, processes, or physical assets o Location-specific advantages: Factors in individual countries provide specific benefits, such as natural resources, skilled labour, low-cost labour, and inexpensive capital. o Internationalisation advantages: The firm benefits from internalizing foreign manufacturing, distribution, or other value-chain activities Week 3: Political and Legal Context  Political systems: a set of formal institutions that constitute a government that include legislative bodies, political parties, lobbying groups and trade unions. Unique, constantly evolving to constituent demands. o Functions: protection from external threats, ensure stability based on laws, govern the allocation of valued resources among the members of a society, define how a society’s members interact with one another.  Legal system: a system for interpreting and enforcing laws. Laws, regulations and rules establish norms for conduct. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o Functions: ensure order, resolve disputed in civil and commercial activities, tax economic output, provide protections for private property, intellectual property and other company assets.  International businesses need to face demands of many environments  Politics effect businesses at all levels  Political constraints and political risk are part and parcel of conducting business across national boundaries  Facing multiple national constituencies, it is often difficult to meet the demands of them all  Foreign markets differ in terms of political and legal systems as well as business norms  Political and legal systems are both sources of country risk  Country risk = exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environment  Risks in international business – cross-cultural, country, currency/financial, commercial  Dimensions of country risk: harmful or unstable political system, laws and regulations unfavourable to foreign firms, inadequate or underdeveloped legal system, bureaucracy and red tape, corruption and other ethical blunders, governments intervention, protectionism and barriers to trade and investment, mismanagement or failure of the national economy  Political environment key players: government, political parties (including opposition), trade unions, interest groups and public opinion. o Governments increase tax rates, tariffs etc.  Constituents = the people and organisations that support the political system and receive government resources.  Authoritarianism: rule by which individuals who claim absolute power to govern a state, with no substantive accountability to its citizens. State attempts to regulate most aspects of public and private behaviour. North Korea, Afghanistan, Iran, Zimbabwe. Centralizes power in the government. Power maintained by secret police. Propaganda. Do not tolerate unions. Power determines law, few rights, restrictions, Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 few candidates little choice, administrative arm of government, press controlled by state.  Socialism: capital and wealth should be vested in the state and used primarily as a means of production rather than for profit. Collective ideology. Collective welfare of people > welfare of the individual. India, Russia, China. o Social democracy: supports economic and social intervention to promote social justice through a democratic means. High corporate tax rates.  Democracy: systems which at a minimum is based on accountability to the voting public through regular, fair and free elections. Characterized by 2 main features – private property rights and limited government. Associated with openness, or lack of excessive regulation or barrier to the entry od firms in foreign markets. Australia, Canada, Europe, most Latin American countries. Constitutional framework, equality, many rights, free speech, right to vote, stand for office, regular and free elections, independent judiciary courts, transparent process, editorial and reporting independence from state  Two party system: two broadly based parties dominate, alternating between government and opposition, reflecting electoral fortunes.  Multi-party system: many parties represent a wide spectrum of views, and where the government is likely to be a coalition of parties.  Political environment: government incentives, preferential subsidies and other political acts alter the transaction costs for the MNC and influence strategic decision making. E. g. high import tariffs may lead to MNC launching FDI. Being politically astute – having superior political intelligence and influence skills is a key skill for the MNC.  Historical landscape of political institutions and relations between countries is important e. g. French colonies still import a lot from France.  Linguistic, cultural links, personal relationships may lead to vast knowledge of local market.  Trade and investment dominance of Spain is a result of political pressure in the form of economic aid packages with trade conditions.  Relationship with host and home government is most important political challenge. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069  Governments affect eco-monetary & tax policies, price controls, intellectual property legislation and employment relations.  MNC political objectives in host country: establish favourable trade and investment climate; remove limits on foreign ownership and to open access to markets; remove obstacles to free trade and cumbersome regulations; gain legitimacy – acceptance as a local entity.  Legal environment: establishes the rules of the game. Can be traced back centuries.  Common law system = UK, USA. Independent judiciary relying on case precedents.  Civil law = Europe. Relies on legal code applied universally.  Theocratic law = relies on religious code – Iran and Saudi Arabia. Dictates politics, economy, banking, contracts, marriage. Interdependence of judiciary. Extent of enforcement of law, still low in emerging nations, reliance on court as primary conflict resolution mechanism. o Islamic law: also known as shariah, based on the Qur'an and the teachings pf the prophet Mohammed. Governs relationships among people, between people and state, between people and a supreme being. It spells out the norms of behaviour regarding policies, economics, banking, contracts, marriage, and many other social issues. Encompasses all possible human relationships. Seen as divinely ordained, relatively static, and absolute, evolves very little over time. Most Muslim countries currently maintain a dual system, in which both religious and secular courts coexist. Contemporary liberal movements within Islam oppose traditional views of religious law. Restricts the giving and receiving of interest on loans or investments. Financial institutions employ Islamic finance, they charge admin fees or take equity positions in the projects they finance instead of taking interest. Many issue sukuks, Islamic-compliant bonds that offer revenue from an asset rather than interest.  Mixed systems: consist of two or more legal systems operating together. The contrast between civil law and common law has become blurred as many countries combine them.  Legal jurisdiction – can be difficult to identify for the MNC. MNC is subject to laws of both home and host countries. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069  Jurisdictional levels – international, regional, and national.  Legal issues for MNCs: o rule of origin laws – requirement of trade and important for determining duties (EU 60%, USA almost 100%) o competition – anti-trust laws governing mergers, acquisitions, cartels, big variations globally. o Marketing and distribution: o Product liability laws: stringent in the US and EU but are lax or unenforceable in developing nations o Patents: nationality based. Must file separately in each country. First inventor to file Managing Political Risk  Political Risk = exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and or legal system. The two operate interdependently of each other. o The probability of disruption to MNC operations from political forces and events. Concerns political stability, economic and regulatory climate and policy continuity. Managing political risk involves researching potential risks beforehand, taking steps to minimize risk and ensuring you have legal recourse.  Risk narrows the decision-making span for MNCs  Internal political risks: corruption, fragmented alliances, weak elements of society, alienated groups, risk of terrorism, social unrest, fragile coalition, power centres.  International political risks: military invasion, global imbalances, trading partner disputes, spill over of regional conflict, risk of terrorism, disputes with neighbours, insecurity of resources, insecure borders.  Types of political risk: o Ownership risk = government could change governance structure or at extreme expropriation. Firms could be forced to reduce their stake by sharing ownership with local firm. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o Operational risk = change the rules of the game – new and arbitrary change to the tax system o Transfer risk = impediments to the transfer of factors of production such as capital  Managing political risk: o Minimize outright investment – lease not buy o Sign treaties to protect mutual investment o Avoid high visibility acquisitions o Use host country finance o Source locally o opt for strategic alliance with local partner o speed up profit repatriation o build political support o monitor political and economic developments  Political Determinants of IM: determines policies which affect business environment and investment context, thereby influencing MNC overall strategy for location and production. Political behaviours within given regions emphasize what is generally accepted practice eg. lobbying and interest groups, corruption and bribery, extent of political interference. o Nature of political risk – impact on MNC strategy and decision-making process. Attitudes to coalition building and negotiation. All of these will affect managerial practices within organisation.  Legal determinants of IM: determines the legislative framework & institutional arrangements. Laws in relation to intellectual property, tax, equality and discrimination, minimum wage, employment laws and union recognition, safety standards, environmental protection, waste management and all shape management practice within a given location. o National traditions for organising work and familiarity with concepts such as teamwork, ESOPs. Union policies and attitudes on key aspects of the employment relationship. Education system and management development, Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 recruitment – legal regulations, pressure to recruit locals. Rewards and performance appraisal, national norms. Week 4: Cultural Determinants of IM  Culture = the values, beliefs, customs, arts, and other products of human thought and work that characterize the people of a given society. Shapes our behaviour, affects common rituals of daily life. Captures how the members of a society live. Explains how we behave towards each other and with other groups. Defines our values and attitudes and the way we perceive the meaning of life. o Key elements = language, religion, values, attitudes and opinions of a particular group or society o Illusive and intangible o Way of life o Passed on by learning o Shared, confirmed by others o Almost all underpinned by religious beliefs  Cultural factors affecting IM: language, communication, courtesies, rituals, roles, customs, relationships, practices, expected behaviours, values, thoughts, manners of interacting.  As managers and organisations have embarked on new business ventures in other countries, they encounter different cultures. The increased pace of globalisation has heightened such exposure.  Understanding cultural differences and learning to manage them effectively is critically important for international business.  Hofstede (1980) = the collective programming of the human minds.  Trompenaars & Hampton Turner (1982) = the way in which people solve problems and recognise dilemmas  Peters and Waterman (1982) = a dominant and coherent set of shared values conveyed by such symbolic means as stories, myths, slogans, legends, and anecdotes  O’ Reilly (1983) = “strongly, widely shared core beliefs” Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069  Morrison (2008) = “culture is shared, learned values, norms of behaviour, means of communication and other outward expressions which distinguish one group of people from another”  Culture can be defined as “a system of values and norms that are shared among a group of people and that when taken together constitute a design for living” (Tiernan and Morley 2019)  Understanding the values and behaviours of potential customers, employees and the wider society of global business location is essential for any organisation.  Colours, objects, actions, phrases etc hold different meanings in different cultures. E. g. the colour red: o Western cultures: excitement, energy, passion, stop, love, danger o Asia: good luck, joy, prosperity, celebration, happiness, and a long life o India: purity, sensuality, spirituality o Africa & Turkey: death o Nigeria: aggression and vitality o Egypt: lucky charm o Iran: good fortune and courage  Culture is a key ingredient in the liability of forgiveness: a key MNC obstacle. All additional costs a firm operating in a market overseas incurs that a local firm would not incur.  Management can never change a national culture, it can only use and understand it  Employees will carry on their national culture into organisational environment  Organisations need to be responsive to national culture. To fully understand cross cultural differences, we need to consider the origins of different cultures and the factors have shaped them.  Origins of culture: shared national history & identity; social, ethnic & religion groups; language & communication  Nation = a group of people whose distinctive culture binds them together.  National culture = culture including a sense of common identity & belonging, language, shared history which distinguishes and unites, linking them to a shared homeland Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069  Subcultures = develop over time where minority groups in a country hold values which are different to the dominant national cultures. Accelerated by patterns of migration.  Ethnic grouping = people drawn together by a sense of common identity, sense of belonging, religion, or a belief in common descent  Idioms – can cause confusion when directly translated  Language exists in a cultural context  Non-verbal communication = facial expressions & gestures that convey meaning within a linguistic context  High-context cultures = where information is conveyed non-verbally, often relying on personal understanding of meaning. Asian countries. Establish social trust first. Personal relations and goodwill are valued. Agreements emphasize trust. Negotiations are slow and ritualistic.  Low-context cultures = information is conveyed predominantly by explicit expression, through words. Get down to business first. Expertise and performance are valued. Agreements emphasize specific, legalistic contrast. Negotiations are as efficient as possible.  Cross-cultural risk = a situation or event in which a cultural misunderstanding puts some human value at stake.  Socialization = the process of learning the rules and behavioural patterns appropriate for living in one’s own society. The way in which we learn norms  Acculturation = the process of adapting and adjusting to a culture other than one’s own  The nation is the most visible layer of culture to international managers  Developing cultural profiles: managers can gather considerable info on cultural variables from current research, personal observation and discussion with people; managers can develop cultural profiles of various countries; managers can use these profiles to anticipate drastic differences that may be encountered in a given country; it is difficult to pull together descriptive cultural profiles in other countries unless one has lived there and been intricately involved with those people.  Hofstede: studied 100,000+ IBM employees worldwide, identified 6 underlying cultural dimensions. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o Power distance: the extent to which hierarchical differences are accepted in society. Cultures with high PD score display a strong deference to authority. High PD  tall hierarchies, high centralization, more supervisory staff and larger wage differentials. Not the same as actual distribution of power and wealth. High PD = Philippines, Mexico, India, Brazil, Japan. Low PD = Austria, Israel, Sweden, Norway. o Individualism vs collectivism: the extent to which the self or group constitutes the centre point of identification for the person. High collectivism means that the pursuit is conducted within acceptable group frameworks with group norms guiding individual behaviour with group harmony. Collectivism  organisation as a family, defends employee interests, practices based on loyalty and group participation = Columbia, Mexico, Greece, Taiwan. Individualism  organisation is more impersonal, employees defend own rights, practices encourage individual initiative – USA, UK, Australia, Canada, Netherlands. o Masculinity vs femininity: the extent to which traditional masculine values such as aggressiveness and assertiveness are emphasized. MNCs from feminine cultures eg. Volvo and Saab tend to emphasize social rewards and benefits in the workplace. Masculine  Japan, Austria, Italy, Mexico – gender roles differentiated, organisations may interfere to protect interests, fewer women in jobs, aggression, competition, reward, work valued as central life interest. Feminine  Sweden, Denmark, Finland, Thailand – gender roles minimized, don’t interfere to protect interests, more women in jobs, soft, intuitive skills rewarded, social rewards are valued o Uncertainty avoidance: expresses the extent to which the members of a society tolerate uncertainty and ambiguity, and how society deals with the future, by either trying to control it or just letting it happen. High UA try to avoid uncertainty by standardizing behaviour and rules and are intolerant of unorthodox behaviours and rules. Low UA = Denmark, Sweden, UK, USA, India  less structuring, fewer rules, more generalists, variability, great willingness to take risk, less ritualistic behaviour. High UA = Greece, Portugal, Japan, France, Peru. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o Long vs short term orientation: cultural attitudes to time/ future, and how societies maintain some links with its own past, while dealing with the challenges of the present and the future. Low LTO – maintain time honoured traditions and norms, view societal changes with suspicion. High LTO – more pragmatic approach, encouraging thrift and education as a way to prepare for the future. More likely to adopt a longer planning horizon and defer on investment, delay gratification. Short term normative vs long term pragmatic. o Indulgence vs constraint: the extent to which people try to control their desires and impulses, based on the way they were raised. High indulgence = US, Canada, Australia. Willingness to realise their impulses and desires with regard to enjoying life and having fun. Positive attitude and optimism. higher importance on leisure time. High restraint – India, China, Russia. More likely to believe that such gratification needs to be curbed and regulated by strict norms. Do not put much emphasis on leisure time and control the gratification of their desires. Perception that actions are restrained by social norms and indulging themselves is wrong.  Criticisms of Hofstede: based on a single company’s data with a strong corporate culture. Collected during 1967 – 1973, much has changed since then. Based on selfreport data. Non-exhaustive list of dimensions. Western bias. Attitudinal rather than behavioural measures.  Trompenaars relational dimensions: 7 relationship orientations that address the way in which people deal with each other. Practical advice on how MNCs can do business in various countries. These dimensions are relative to the host environment. Relative rather than absolute. o Universalism vs particularism: How people live with respect to rules and relationships. universalism  people place high importance on laws, rules, values, and obligations. They try to deal fairly with people based on these rules, but rules come before relationships. Rules are something that shape and define ones behaviour in most situation. Switzerland, Canada, US. Particularism  people believe that each circumstance, and each relationship dictated the rules that they live by. Their response to a situation may change, Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 based on what’s happening in the moment, and who’s involved. Relationships and situations . rules. Korea, Russia, China. o Neutral vs emotional: how we express our emotions, inward vs outward. Neutral oriented  people make great effort to control their emotions. Reasons influences their actions far more than their feelings, people don’t reveal what they’re feeling. UK, Sweden, Netherlands, Finland, and Germany. Emotional based  people want to find ways to express their emotions, even spontaneously at work. In these cultures, its welcomed and accepted to show emotion. Italy, France, Spain, and Latin America. o Individualism vs communitarianismianism: individual vs group. Individualism oriented  people believe in personal freedom and achievement. They believe that you make your own decisions ,and that you must take care of yourself. People see themselves first and these cultures tend to ascribe success and blame to the individuals. US, Canada, UK, Scandinavia, NZ, Australia, and Switzerland. Communitarianism oriented  the group . the individual. The group provides help and safety in exchange for loyalty. The group always comes before the individual. Recognizes the group as superior and supports the actions which are fore the common good. Ascribe success and blame to the organisation. Latin America, Africa and Japan. o Specific vs diffuse: focus on contract vs whole person. Specific oriented  keep work and personal lives separate. Believe relationships don’t have much of an impact on work objectives, and although good relationships are important, they believe that people can work together without having a good relationship. The boss may be the boss at the office, but a friend at the pub, a college in some situations and even an inferior in others. UK, US, Sweden, Germany, Scandinavia. Diffuse oriented  people see an overlap between their work and personal life. Good relationships are vital to meeting business objectives and their relationships with others will be the same, whether they are at work or meeting socially. Spend time outside work with colleagues and clients. The boss is the boss in all relationships. Argentina, Spain, Russia, India and China. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o Achievement vs ascription: judged on achievement vs status and connections. Achievement oriented  you are what you do, base your worth accordingly. Value performance, no matter who you are. Status results from doing. US, Canada, Australia, Scandinavia. Ascription oriented  status is based on such things as social position, age etc. status results from being. France, Italy, Japan, Saudi Arabia. o Sequential vs synchronic: single tasks vs multi tasks. Sequential cultures  view time as sequential or linear, order comes from separating activities. Germany, UK, US. Synchronic  several events juggled at the same time. Japan, Argentina, Mexico. o Internal direction vs outward direction: the extent to which people believe they control the environment, or the environment controls them. Internal  focus on controlling the environment. How they work with teams and within organisations. Israel, US, Australia, NZ and UK. Outward  focus on living in harmony with nature. At work or in relationships, employees focus their actions on others, and they avoid conflict where possible. Need reassurance that you’re doing a good job. China, Russia, Saudi Arabia.  Cultural risk = a situation or event in which cultural misunderstandings puts some human value/activity at stake. whenever an organisation enters a new market it encounters cultural risk. Mistakes can ruin business deals, hurt sales and firm reputation.  Cultural distance = the degree to which a firm is unfamiliar with the culture of a foreign business location. The distance itself is worth investigating but its how the organisation reacts to these facts that largely determines success or failure on international markets.  Rooted in home cultures: many MNCs are steeped in home culture. Differing outlooks can be placed along a continuum from polycentric to ethnocentric. o A polycentric approach which is more flexible and adaptable to local differences is likely to have a competitive advantage over more ethnocentric firms.  Ethnocentrism: An approach focusing on the use by the organisation / manager of the home culture as the standard for interacting and judging other cultures. Referred Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 to as home country orientation. Using our won culture as the standard for judging other cultures. Entail the belief that one’s own race, religion, group etc is superior to another.  Polycentrism: An approach focusing on the use by the organisation / manager of the host country culture when conducting business thereby developing a strong affinity with the host country. Referred to host country orientation. A host country mindset in which the organisation/ manager develops a strong affinity with the country in which he/she conducts business. The nationals of the host country are recruited at the managerial positions to carry out the operations of the subsidiary company.  Geocentrism: An approach focusing on the use by the organisation / manager of a global mind set to understand a business or market without regard to country boundaries. Referred to as global cognitive orientation. A global mind set in which the organisation/ manager is able to understand a business or market without regard to country boundaries. A cognitive orientation that combines an openness to and an awareness for diversity across cultures. Managers will adopt new ways of thinking, learn how to analyse culture and avoid the temptation to judge different behaviours as being somehow inferior.  Cultural risk is heightened by ethnocentrism. Organisations with a geocentric orientation minimise cultural risk as they focus on efforts to develop skills for successful social behaviour with members of other cultures.  A geocentric approach which is more flexible and adaptable to local differences is likely to have a competitive advantage over the more inflexible approach of ethnocentric firms.  Psychic distance paradox = is that operations in physically close countries are not necessarily easy to manage. Eg. Ireland is not the same as the UK o On an individual level it can lead to culture shock and find it difficult to adjust.  Minimizing cultural risk: fact finding and knowledge interpretation; develop a keen interest in the target culture; avoid cultural bias.  Cultural homogeneity and heterogeneity are not mutually exclusive, they generally occur together. Week 6 – 9: Firm Internationalisation Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069  Organisations are increasingly conducting business internationally as they grow and increase their market presence.  Cultural differences need to be explored, understood, and appropriately managed.  The political and legal environment of the international business location needs to be considered and managed  SME: firms with 500 or less (or 250 or less) employees. Usually create most new jobs, constitutes the majority of firms worldwide. Characterized by limited resources which prevents them from internationalising via FDI. High degree of innovation, entrepreneurial mindset and a borderless mindset. Make up the fastest growing segment of exporters in most countries.  Born global firms: organisations that, from inception, seek to derive significant competitive advantage from the use of the resources and the sale of outputs in multiple countries. Entirely unique, born doing business abroad.  For many firms internationalisation is a slow and gradual journey.  Why internationalize?: increase sales and profits; increase innovation; economies of scale; government incentives; foreign investment opportunities; new market opportunities; diversification opportunities; access to talent and labour; competitive advantage.  Internationalisation motives: push and pull factors serve as initial triggers; initial international expansion can be accidental or unplanned; risk and return must be balanced; internationalisation is an ongoing learning experience; firms may evolve through stages of internationalisation.  The decision to expand abroad can be either proactive or reactive. o Proactive – tends to be future directed and occurs when an organisation identifies an opportunity for expansion and making a profit. Profit advantage, unique product, tech advantage, tax benefit, economies of scale. o Reactive – the organisation is responding to a deterioration in its competitive position possibly from declining sales and market saturation. Competitive pressures, overproduction, declining domestic sales, excess capacity, saturated domestic market.  Factors to consider before internationalisation: Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o Location: understand the market, market considerations, demand in the market, state of the economy, suitability of products, available substitutes. o Availability or resources: RM, talent, financial resources o Language and cultural differences o Standardization of products – global vs local o Investment needed o Know your market, know your location, have a strong business plan to back up your internationalisation strategy  Internationalisation strategy: where, when how (location, timing, mode of entry)  Where (location): locations differ in their business environments and their receptiveness to trans-border businesses. Begins with a PEST (PESTLE) analysis. This needs to be supplemented by other aspects of the host environment – such as markets  Factors for selecting locations for FDI: o HR factors: cost, availability, and productivity of labour; investment of labour unions; availability and quality of mgnt workforce; employment regulations o Infrastructural factors: availability and quality of local manufacturing; efficiency of physical distribution; cost, availability and quality of utilities and finance; quality of marketing and distribution. o Profit retention factors: types and level of taxes; tax rates for profit repatriation; complexity of tax system; rate of inflation. o Economic factors: cost of land and facilities; state of the local economy; stability of currency; extent of regional integration and free trade. o Legal and regulatory factors: regulation on FDI and technology transfer; nature of legal system and laws; intellectual property protection; extent of tariffs or other trade barriers. o Political and government factors: political stability; openness to foreign investment; extent of bureaucracy and red tape; transparency and corruption. o Market factors: size and growth on national market; size and growth of regional marker; proximity to key export markets Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069  When (Timing) : involves the sequence of an MNCs entry into an international market vis a vis other MNCs. Largely determines the risks, opportunities and environment that await it. Affects the firms market power, strategic options and preemptive opportunities each of which influences a firm’s ROI  First mover advantage: the benefit enjoyed by firms as a consequence of its early entry to a new market. Often attractive to entrepreneurs and investors because of the upside potential and the ability to capture and sustain market share. Eg. amazon or eBay. o Advantages:  Opportunity to build up strong market share  Opportunity to create barriers to entry (economies of scale)  Allows the firm to set the standards and norms of the market  Little international competition facing the firm  Allows cost advantages to develop such access to resources, patents, and employee expertise  Potential for developing consumer loyalty is higher  Greater pre-emptive opportunities  More strategic options are open to first movers. o Disadvantages:  Its risky and full of uncertainty  You don’t know – if customers will view your product as valuable; if its something that customers can/will buy; how to acquire customers; if its even a problem worth solving in the first place   Its expensive being first  Opportunities can be hard to capture and require immediate action  Protections over areas such as intellectual property can be weal  Environmental uncertainty Second Movers Advantage: eg. Facebook, Google, Amazon. The advantage that a company gets from following others into a market or mimicking an existing product. o Eg. Apple – not the first smartphones, but better and improved Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 o In short, the idea that while conventional wisdom might say the first company to nail an idea gets to enjoy the spoils, it usually isn’t the first but second company that gets an idea right that really enjoys that idea’s success. o Advantages:  Firm can learn from the mistakes of the more experiences mover number 1  Less risk is involved  More time to evaluate options  Possibility of free rider or coat tails momentum  Lower marketing and R&D costs o Disadvantages:  Potential to be late to market  Playing catch up  Higher entry barriers  Gaining market share through imitation is difficult & can increase costs if money is spent on designing a new product  On average, first movers have higher market shares than early followers who have higher market shares than later entrants. The question of whether balance a first mover advantage exists in any specific context depends on characteristics of the emerging market and the entering firm.  How (Entry Modes) : variety of different modes to entry and much will depend on costs, risk, expected returns, control and level of commitment the organisation is willing to invest. o Level of control, level of risk, cost issues o The focal firm should consider the following: the goals and objectives; degree of control wanted; resources and capabilities available; risk/ risk adverse; the characteristics of products or services offered; conditions of the target country; competition; Partners in the market. o As we move from trade related to FDI related, the levels of: resource commitment; organisational control; risks and expected returns – all increase for the firm. Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069  Trade Related Modes of entry: o Exporting: the most common and straight-forward way of conducting international business. Firm continues to produce its product in the domestic market but exports a proportion of this output to foreign markets. Leverages home country capabilities, innovations and products in foreign markets. Used when pressure for both global integration and local responsiveness is low. Suitable for companies with strong brands.  Direct exporting: firm produces its product in the domestic market but distributes & sells its own products to the foreign market. Involves a longer-term commitment to the foreign market with the firm choosing local agents & distributors. In-house expertise needed to develop contacts, conduct marketing research, prepare documentation, and establish local pricing.  Indirect exporting: exporting function is outsourced to the intermediaries who prepare the export documentation, take responsibility for the physical distribution of good and set up sales and distribution channels in the foreign market. Offers small cash outlay, low risk, gradual exposure, and good use of existing facilities. Can incur high transportation costs and tariffs and duties may be imposed.  Export house: buys products from a domestic firms and sells them abroad on its own account  Confirming house: acts for foreign buyers and is paid on a commission basis, brings sellers and buyers into direct contact and guarantees payment for the exporter  Buying house: similar to confirming but more active in seeking out sellers to match the buyers particular needs.  Countertrade: an international business transaction where all or partial payments are made in kind rather than in cash. Popular approach in emerging markets. Best option for importing countries when there is a shortage of foreign exchange reserves. Gives a business a competitive edge over its competitors. Helps in sales of Downloaded by Sean Egan ([email protected]) lOMoARcPSD|33425069 surplus stocks produced or stored. Businesses can sell stocks which have become outdated in their home country.  Barter, compensation, buyback, clearing agreement, counterpurchase transaction, offset  Exporting advantages: lowest possible investment; gradual exposure to international markets; speed entry; maximises economies of scale of existing facility; internet can facilitate export marketing opportuni