Doing Business in a Globalized Environment PDF

Doing business in globalized environment WHY DO COMPANIES GO INTERNATIONAL? Home market is saturated – companies must search for new business opportunities Imports – raw materials, financial aspect, cheaper inputs (workforce), better quality, lower...

Doing business in globalized environment WHY DO COMPANIES GO INTERNATIONAL? Home market is saturated – companies must search for new business opportunities Imports – raw materials, financial aspect, cheaper inputs (workforce), better quality, lower protection laws, social dumping, lower production cost Outsourcing / offshoring o Outsourcing = finding external supplier; lower cost; able to find the right people for the positions o Offshoring = moving our activities; we keep them in our company, but transfer them into another country; lower cost o To save money; to find employees o Companies usually outsource not really important parts: IT services, advisory services, call centres, cleaning services, research and development, accounting, social dumping – disusing poor labour, eco-dumping – outsorce the production that you wouldn’t be able to do in the country due to pollution regulations o Marketing, production etc. are usually located in home country Economies of scale = the more you produce, the lower are marginal costs for each additional unit of production o When going international, you have a chance to be more efficient and productive o Influences the position on the whole market Political and trade barriers – tariffs, taxes (imported products), quotas (quantity of products), deposits for importers, technical requirements and certificates, bans or sanctions on different products o They can significantly impact the way you go abroad o There are not any barriers in EU market o Companies can enter one market to efficiently enter another market (enter Mexican market to target US and Canada) Direct presence in foreign markets – companies are literally pulled from their home market, because citizens in foreign countries require their products Cooperation with foreign companies (supplier, private labels) o Skoda is in the hands of Volkswagen o Boeing gets parts of the plane from all around the world o Company is pulled to international market even without knowing o Advertising agencies must get to know the local community before stepping into the foreign market o Private label = the labels that are owned by retail companies (supermarket chain – Tesco) -> Tesco’s own products are much cheaper than usual brands, like for example Nesquik o Private label brands want to have one supplier for all foreign countries (Europe) – supplier can choose if he wants to supply all the countries, or none Lowering the costs o One of the key reasons o Mostly cheaper material o Production facilities in other country, but companies are still selling the products on home market (US sells in US, but produces in China) Extending the product life cycle INTERNATIONAL LIFE CYCLE OF THE PRODUCT The same product could be at a different stage on different markets 9/100 products are launched (=zahájeny) successfully Once you manage to overcome the launch, you start making money The cycle may be different for other markets (different steps) Decline – the product is obsolete or outdated After the decline on one market, the product can still be relevant for some other markets Nokia started selling in Africa 1  VW Beetle has extremely long international life cycle o Since 1938 o Until 2003 o 21,5 million cars produced Audi A4 has been changed to SEAT Exeo – the whole production line was moved; SEAT paid to A4 for replacement -> the model stayed on a market for a long time When the product gets declined, you can also sell the license Bad product cannot be saved even by international expansion (Coca-Cola Blak) o After changing the formula a bit, people still thought the taste is terrible If you are not able to succeed in your home country, your success on foreign market is not certain MARKET SELECTION There are 2 methods: a) Multi-stage selection process b) Scoring model We can choose several countries in a multi-stage and then rank them in a scoring model A multi-stage selection process o “must criteria” = countries to which the expansion would not make sense (distance) o “selection criteria” = countries which might not be developed enough (low GDP) o We end up with potential foreign target markets, it also depends how big they are o It is easy, not costly, quick, easy to understand o Risks: the secondary data may be false; you may filter out countries which might be potentially good for business (no competitors) 2  A scoring model for international market selection o Define a set of criteria and then apply them to all the markets o Assign different weights to the criteria (product fit is more important than tariffs) o The criteria are chosen by: expertise, brainstorming, overall experience, skills PEST ANALYSIS Best way to analyse the international environment and its impact on business Political – Economic – Socio-cultural – Technologic (+ Legal and Ecological) May be PEST, PESTE or PESTLE (PESTEL) LEGAL ENVIRONMENT Political and legal environment is getting similar (in EU) Legal system o Common law (The UK, The US) Many different sources of law Legal acts Decisions of the court Legal traditions Does not need a constitution o Civil law (Continental, Roman – In most of Europe) Written legal acts EU law is a mixture of civil and common law o Exotic systems (Islam) Sharia Based on traditions from the past o Even if your country does not use the other kind of legal system, you may still be impacted by it (when trading with foreign companies) 3  Control of ownership o In the CR it is possible to own a business if you are a foreigner (EU in general) o It is somehow limited in most countries o Some countries do not allow a foreign person to start a business o Many countries restrict specific industries (food, guns) o Investors may sometimes need a confirmation from the government (and other institutions) to buy shares o If you want to have airlines in EU, majority of shares must be in the hands of EU companies Ownership of properties o In China you cannot own a land if you are a foreign company Enforcement of law o Law is not only about the legal system, but also how quickly the country reacts to disobedience of law, how quickly does the country solve the problem o How fair is the court o How quickly you get the result or decision (Germany is 3-4 times quicker than CR) o How costly it is o doingbusiness.org Transfer of profits o Can I transfer the profit to my home country? How difficult is it? o All countries try to limit the use of tax havens o Taxes o Convertibility of currency (transfer could be entirely banned if you are not allowed to convert it) o International sanctions o Transfer from Iran to CR will be blocked by the bank o One of the solutions may be cryptocurrencies, but companies usually try to avoid them o Barter trade = I will buy products with the foreign currency and transfer it to my home country (then sell it here) o Transfer pricing = prices set between mother and daughter company Starting up new business o How complicated is it? o How much capital, how many stamps do I need, how long is it going to take o There are great differences between countries o In Canada it takes a day (low cost), while in other countries it may take several months o Fees for registering a company were reduced in the CR o Anglo-Saxon countries usually have a good score Taxes and fiscal policy o What kind of taxes does the country impose? What taxes are relevant? o Taxes are usually the same in EU countries, but there are different rates o Excise taxes (alcohol, cigarettes, petrol) o Corporate income taxes (19 % in CR, 1 % in Ireland) o Business tax (we do not have it in CR, but it is in Germany) – doubles the corporate income tax o Protection of investment, double-taxation Everything should be taxed only once If there are not any double-taxation agreements, product could be taxed more times in other countries CR has double-taxation agreement with more than 60 countries (all of EU) Protection of investment = property may be confiscated, but only for a compensation Foreigners should have the same protection as the domestic companies 4 POLITICAL ENVIRONMENT Is directly connected with legal environment Political system and stability o Democracy x autocratic system o Democracies are more stable from the long term perspective o The stability can be measured: Country risk classification (OECD rating) How often and how radically does the government change The country may be stable, but in a bad way – in this case, it is only a matter of time when the riots come Change of philosophy of leadership Corruption rating Public administration, institutions and bureaucracy o How easy it is to get all necessary documents for the business o Paperwork is time consuming and costly o In Russia, it is cheaper, easier and faster to start a new business in comparison to the CR o In developed countries, public administration and institutions may be huge and important customers Lobbying o If done correctly and ethically, is not about corruption o Showing our point of view to decision makers (2 sides against each other, the decision maker decides which one is right) o Helps the state to be more stable o Shows that the country is developing 5  Membership in international organizations o Helps to stabilize the political environment o If the country is in a lot of organizations, it is usually more stable o IMF, UN, EU, NATO, WTO, Interest groups o A big impact on business, but also on political environment o Labour unions Attitude towards foreign companies o The attitude is generally positive in the CR o France is more negative Corruption o More corruption in the south and east o If the country is corrupted, the market entry will be more expensive and less effective o May ruin our reputation, we may go to jail (in home country, if we bribe elsewhere) o Competitors may have better position if they have connections o UK and Germany helped their companies to put bribes as costs (so it can be returned in taxes) TECHNOLOGIC ENVIRONMENT Whether we can efficiently deliver our products to target markets and communicate with them Infrastructure o Logistics JIT - just in time deliviries o Communication Analysis of the technological environment o Investments into R&D (as a % of GDP) o Number of registered patents o Road and rail networks o IT infrastructure (internet, quality, speed, number of computers) o Amount of internet, smart phone, etc. users 6  For example, iTesco – you order online, somebody grabs the items at the store, and delivers it (no warehouses) Tesco Homeplus in South Korea has special wallpapers, where you can see products and shop through a mobile app SOCIAL AND CULTURAL ENVIRONMENT Is the most stable, but it differs more than other environments Culture o Customs and beliefs, way of life and social organization of a particular country o We learn the culture (social learning – we learn Czech by observing others, not in school); it is transferred from generation to generation; it is shared, differentiated and it changes in time o It is good to hire somebody who knows the local culture and can help to understand it o Wars or revolutions can change culture quickly and significantly o Understanding the local culture is crucial for your success Language o Is a part of the culture – all materials should be translated into local language o For example, Japan has 7 different words for “yes” o If an advertisement is in English (instead of local language), it could mean that the company is trying to get globalized o Body language – gestures, shaking hands, kissing, eye-contact, nodding 7  We always need to check on which level the country is (a country in central Africa will not be interested in top levels when they do not have enough food) Power distance index o To what extent people are willing to accept unequal distribution of power within society (if it is high, people have no problem with respecting unequal power) o People in countries with high power distance usually require very strict management styles o In countries with low power distance, people have more freedom, and they can do tasks as they wish Individualism x collectivism o Individualism – people strive for their own good o Collectivism – people pay more attention to society and they can sacrifice some of their needs for the better society Masculinity x femininity o Masculinity – values like success, power, competitiveness o Femininity – values like caring, understanding of needs o Good example: fast cars x safe cars Uncertainty avoidance o To what extent people are willing to accept risk o Low index means, people are not afraid to do mistakes – if your company bankrupts, it is actually okay, because you have already learned some lessons Long-term orientation o If you do something now, will you think of what happens today, or what happens in 5 years? o USA (low index) wants to start cooperating in a few months, while China (high index) takes several years for it – because they want to make sure, that the cooperation will last 20 years Indulgence x restraint o Indulgent societies enjoy their life, and they want to show it off (by non-indulgent societies they are seen as kind of naïve) o Restraint countries could be considered cynical Cultural institutions o They keep the culture living o For example, family, schools (education), churches (religion) Religion o Value structures and taboos o Festive days and holiday (opening hours in Germany – the shops are closed on Sundays, because of the church) 8  o Europe vs. USA o Protestants vs. Catholics Other factors o Values o Dress-codes o Aesthetics ECONOMIC ENVIRONMENT It is difficult to provide a full list of aspects Relevancy is the key issue – we need to consider which aspects are important for our business and which are not Why does it matter? o Crucial for businesses when entering new markets or assessing current ones o Precise assessments of these aspects must be done before any business activity starts o Different factors are important for different motivations (place of production x place of consumption x both) Suppliers Mode of entry (investment is the most expensive) Logistics Finance o If you want to build a new plant for car industry, it costs billions of euros Types of economic systems o When talking about economic systems, we need to look deeper and into more detail o Command economy Allocation of resources including production and pricing is planned by the government The plan tackles certain goals Most of businesses are state owned Inefficient For example, the CR during communist rule, now in North Korea, Cuba o Market economy Interaction of supply and demand determines quantity of production and pricing In this type of market, consumers are sovereign Danger of monopoly / monopsony Role of the government is limited Pure market economy does not exist (but the closest ones are Hong Kong or the US) o Mixed economy Certain sectors are left to private ownership, while other have significant state ownership Government provides conditions and regulations Western Europe until the end of 1980s In some countries today, role of state is on the rise Increase in time of crisis Most of the countries have mixed system Macroeconomic indicators o Stability, past development and outlook of the economy are essential for successful business o You need to look at development (around 5-10 years), not just one year o Indicators to be considered GDP indicators – basic indicators about the strength of the economy ▪ GDP/capita (size of the country does not matter) ▪ GDP/capita in PPP (purchasing power parity – will be lower than normal GDP/capita) ▪ GDP growth 9  Inflation rate ▪ It is an increase in the level of prices of goods and services ▪ Important is its stability and predictability ▪ Figures and case ▪ Higher inflation means that people can buy less goods ▪ Think twice before entering market with 2-3 digit inflation rate ▪ High inflation rate - Germany after WWII, or Venezuela now Unemployment rate ▪ Percentage of economically active people looking for a job ▪ Important is its value, structure and development in time ▪ Cheaper labour force, but on the other hand, unemployed people do not spend much money Other economic indicators o Structure of the economy Ratio of primary, secondary and tertiary sectors Impacts comparative advantages of the economy, competition, suppliers and customers Some economies are industry based; some service based Less developed countries have bigger % of primary sector o Labour market There are many factors influencing the labour force ▪ Population, education ▪ Quality, skills ▪ Regulations, labour unions The more education, the bigger salary (employers prefer less education) Countries in southern Europe (France) have very important relations with labour force Currency and exchange rate risk o Significant factor influencing profit margin o When business is done in different currencies o Companies must work with this risk and very often they try to minimize it o Hedging = strategy that tries to limit risks in financial assets o Hedging requires some experience, and it is also expensive o Internal x external hedging methods Trade policy o Important for trading goods and services o Can change mode of entry (is it better to export, or to produce in the country?) o Is the country member of WTO? – the trade between WTO countries must have some rules and norms o What trade barriers does it use? o Are there any signed FTA agreements? – free trade, without barriers o World Trade Organization - Home page - Global trade (wto.org) Market size and PPP o When looking for final market, market size is very important o Nevertheless, absolute numbers in terms of population are sometimes misleading – we must consider what people can afford to buy (PPP – purchasing power parity) o Small markets may be more interesting than large ones (Norway x India) Role of government o Level of taxes o State support o Support of innovation, start-ups, training o Government incentives – encourage businesses to invest in specific country o Tax holidays – no need to pay taxes for some years 10  o Economic zones o Monetary incentives Competition o For businesses, competition is crucial Is there any? If so, how many companies? Mostly domestic or mostly international? How do they do financially? What is the level of concentration? Is competition innovative? o It is important to know where to get the data Passport: Home | Passport (vse.cz) Statista: Statista - The Statistics Portal for Market Data, Market Research and Market Studies (vse.cz) WEF: Global Competitiveness Report 2020 | World Economic Forum (weforum.org) Technological aspects o Technology and its progress affect business Distribution, logistics typical / available in the country Use of internet for buying Use of smart devices for buying CRM (customer relationship) systems Financial sector development o Availability of financial services Loans, bank branches International banks x local banks Directly x indirectly to foreign entities Bond market, stock market Easiness of doing business o Is it easy to do business in the given country? How long do things take? (getting permits, firing employees, starting the company, etc.) Fees Level of bureaucracy In some countries you can have a company in weeks, while in some countries it takes years THE STRATEGY OF INTERNATIONAL BUSINESS The company itself and its strategy of expanding operations to foreign markets pursuing a goal of increasing profitability STRATEGY AND THE FIRM Firm’s strategy o The actions that managers take to attain the goals of the firm o For most companies, the basic aim is to maximize the value of the firm for its owners o Determinants of a firm’s value Profitability ▪ Percentage return that a company earns on invested capital (ROIC = return on invested capital) ▪ How company can transform the capital into profit ▪ Net operating profit after tax divided by invested capital 11  ▪ Value creator (e.g., producing goods that are better than their competitors’) x value destroyer x does not have an impact on value creation Profit growth ▪ Percentage increase in net profits over time o Managers should pursue strategies that increase profitability or the rate of profit growth over time o Higher profitability and a higher rate of profit growth will increase firm’s value and thus the returns to its owners VALUE CREATION (VALUE TO CUSTOMERS) The amount of value a firm creates is measured by the difference between its costs of production and the value that consumers perceive in its products The more value consumers place (they think the product is good), the higher price the firm can charge The value that consumers perceive is typically not charged (firms charge less) In competitive markets competition must be considered and thus what is charged is less than what could be charged if that were monopoly Also, firm cannot charge individual customers individual prices The difference between perceived value and final price is called consumer surplus (“value for money” concept) – companies want to have it as high as possible In general, the higher the firms (V-C), the greater its profitability will be Value creation is measured by the difference (V-C) Company creates value by converting inputs that cost C into a product on which consumers place a value of V More value can be created by: o Lowering production costs 12  o Making products (or other related features) more attractive o Combination of the previous Strategies: o Low-cost strategy (focuses primarily on lowering production costs) o Differentiation strategy (focuses primarily on increasing attractiveness of products – increase in V) -> company can ask for a higher price According to Michael Porter, superior profitability goes to firms that can create superior value Superior value does not necessarily mean lowest cost structure or the most valuable product – important is the size of the gap (V-C) STRATEGIC POSITIONING Firms must be explicit about their choice of strategic emphasis regarding value creation (differentiation) and low costs Internal operations of the company must support that strategic emphasis Efficiency frontier The company wants to be positioned on the frontier (like Four Seasons, Marriott) To maximize profitability, a firm must: o Pick a viable position on the EF (if enough demand) o Configure its internal operations so that they support that position (coming soon) o Make sure that it has the right organizational structure to execute its strategy INTERNAL OPERATIONS Operations – firm as a value chain o Various value creation activities a firm undertakes o Production, marketing, sales, purchase, R&D, HR, IT, etc. o Can be classified: Primary activities ▪ Closely related to the outcome (product or service) ▪ Design, creation and delivery of the product ▪ Marketing, sales or after-sale service ▪ All activities have impact on either V or C (or both) Support activities ▪ IT, HR, etc. ▪ Provide inputs that allow primary activities to occur ▪ They tend to be as important as the primary activities 13 GLOBAL EXPANSION Allows companies to increase firm’s value by: o Offering domestic products in international markets o Realizing location economies o Realizing greater cost economies o Leveraging valuable skills developed in foreign operations Expanding the market o A company can increase its growth rate by taking goods or services developed at home and selling them internationally o Typical process by multi-national corporations o Company’s success is based not just upon the good or service, but also upon the core competencies Are much wider than just the product itself Firm skills that competitors cannot easily match or imitate Can be found in any of the firm’s value creation activities (production, marketing, HR, R&D, or logistics) o Core competencies are the source of a firm’s competitive advantage o Global expansion thus means also transfer of them to foreign markets LOCATION ECONOMIES Countries are different in various factors Looking for locations that make sense for our company The firm will benefit by basing each value creation activity at that location, where conditions (PEST) are most conductive to the performance of that activity Pursuing that strategy is called location economies, which are economies arising from performing an activity in the optimal location This can lead to: o Lower costs of value creation o Differentiation of product offerings from competitors and increase in V COST ECONOMIES Experience curve o Systematic reductions in production costs that occur over the life of a product 14  o Studies have shown that product’s production costs decline about 80 % each time cumulative output doubles Experience effects can be explained by: o Learning effect Cost saving by learning by doing The more complex production, the higher this effect Disappears with time anyway o Economies of scale Reduction in unit cost achieved by producing a large volume Spreading fixed costs over large volume Sometimes only possible when serving global market (the Czech market is too small) Bargaining power Basically “the larger you are, the more you can save” LEVERAGING VALUABLE SKILLS Creation of skills is not monopoly of the corporate centre Leveraging skills created within subsidiaries and applying them to other operations within the firm’s global network may create value COST REDUCTION PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Corporations face competitive pressures that place conflicting demands Cost reduction pressures push a firm into minimizing its unit costs – more universal goods/services Local responsiveness pressures push a firm into more differentiation of its products and marketing strategy, which can raise costs – more customized goods/services How can a company reduce costs of production? o Economies of scale o Learning effect o Location economies o Outsourcing Pressures for cost reductions They can be intense in case of products where meaningful differentiation is difficult – products that serve universal needs 15  o Tastes and preferences of consumers in different countries are similar or identical o Commodity products – steel, petroleum, sugar o Industrial products – semiconductor chips, screen o Very typical in B2B Price remains the main competitive weapon Pressures for local responsiveness Responding to pressures requires a firm to differentiate its products and marketing strategy from country to country or region to region That tends to raise costs Differences in tastes and preferences o When they differ significantly o Historical or cultural reasons o Globalization and transport costs have created conditions for convergence of tastes and preferences – there are some successful examples o However, these differences cannot be ignored by any firm Differences in infrastructure and practices o They create a need to customize products o Different voltage o Driving on different sides Differences in distribution channels o Typical form of sale o Marketing practices Host-government demands o Standards and norms o Pricing restrictions (minimum price – to protect local producers, which can’t have that low price) o Local content rules The rise of regionalism o Convergence of previous issues in a broader region o Can be based on historical, cultural or institutional basis o This may lead to localization at the regional rather than national level Global standardization strategy o Cost oriented strategy on a global scale o Production, marketing and R&D are concentrated in a few favourable locations (location economies) 16  o Low or no level of customization – standardized product o Markets with strong cost reduction pressured and minimal demand for local responsiveness o B2B products, consumer electronics, automotive, food and beverage, furniture Localization strategy o Increasing profitability by customizing the firm’s products so that they provide good match to local tastes and preferences o When there are substantial differences across nations and cost pressures are not too intense o By customizing the firm increases value of its products o Cost reduction typical for global strategy is limited, but costs are still essential (as well pricing) o Food and beverages, print and books, luxury products, media Transnational strategy o When experiencing pressures both in terms of costs and localization o Thus, paying attention to both, which is the most difficult task for MNCs today o Optimization of design, production and distribution of goods o And focusing on regions rather than individual countries o FMCG International strategy o Low pressures in terms of costs and localization needs (typically some sort of a universal need) o Very fortunate position o Competition is limited because of innovation, patents, unique products, etc. (competitors are one or more steps behind you) o R&D is typically centralized, while production and marketing are close to final markets o For example, Xerox in 1960s, or vaccine companies today The ones who can survive for a long time (in terms of competitors) are global standardization strategy and transnational strategy Evolution of strategy MARKET ENTRY MODES Resource deployment means investment Basically, the more you invest, the more control over the foreign market you have If the control were replaced by risk, the line would be the same (the more control, the riskier it gets) 17  Factors you have to consider o Country risk If the country has high risk, exporting is one of the safe options If the ranking is around 5, then you can also consider licensing o Proximity (geographic and cultural) How far from one another your markets are How different the cultures are UK, the US and Australia are far from each other, but their cultures are similar If the countries are close to each other, exporting is one of the best options If the countries are very distant, you need to consider many criteria to decide which mode of entry is good For cultural differences, franchising and joint-ventures are good options o Financial resources The more resources I have, the more control I can have Exporting is the cheapest, wholly-owned subsidiaries are the most expensive o Size and importance of the market When you go to a big market, wholly-owned subsidiaries would be worth it Or you can start by exporting to discover market potential You can produce in Mexico (because it is cheaper), to enter the US and Canada o Future potential of the market Germans first started producing cars in China (because they saw the potential) -> this is called first mover advantage If the potential is huge, you can build subsidiaries even in small markets On the other hand, if the potential is declining, subsidiaries do not have to work even on big markets o Legal regulations and foreign trade policy Countries can ban foreign companies from owning lands or properties – in this case, joint ventures, franchising, exporting and licensing would be the best options If the trade barriers are high, licensing, franchising, joint ventures and acquisitions can help you to overcome them o Control you want to have The picture in the beginning shows what modes of entry have the most control 18  Exporting o Direct (you are selling your products) vs. indirect (somebody else is selling your products) o Quick market entry o Distant but also very close markets o Transportation costs and time of transportation o Tariffs and other trade barriers o You do not control the market o Delivery from China to Italy takes usually around 4 weeks Turnkey operations o Basically, a specific form of exporting o Somebody from other country wants to build a brewery – they will call me to supply them with necessary stuff – they build a hall, I supply them with tanks, pipes etc. and my people will build the brewery in their hall o It is riskier than exporting Licensing o Contractual agreement where one company (the licensor) makes an asset available to another company (the licensee) in exchange for a compensation (royalty fees) o The licensed asset may be a patent, trade secret or name o Licensee has to follow the rules set by the licensor (for example how Hello Kitty has to look like) o Main risks for the licensor: Limited form of participation (licensor is not fully involved) Limited control Licensee develops own know-how and can turn into a competitor Franchising o A special form of licensing (there are also royalty fees) 19  o Franchisee is provided with an entire business concept (product and marketing package, managerial know-how) o Franchisor has extensive influence on the franchisee’s operations, but commits few financial resources o Internationally uniform brand image o Combination of global brand and business concept with local know-how o For example, McDonald’s, Shell, Coca-Cola o Types of franchises: Business format Master franchise Product franchise Manufacturing franchise Wholly-owned subsidiaries o A subsidiary 100% owned by the firm (typically 100 % of stocks) o The most complicated – the riskiest, the most expensive, the most time-consuming o Can be established in two ways: 1) Greenfield venture (a new operation) - when you set up a completely new subsidiary 2) Acquisition (an established firm) - to acquire an already existing company (nothing new, only change in the ownership) o Advantages Protection of core competencies (when these are technological) Tight control over operations (necessary for strategic global coordination) Important when realizing location and experience curve economies 100 % share in the profits o Disadvantages Mostly costly method in terms of capital (tens of billions) 100 % costs and risks ▪ Could be reduced by acquisition – local knowledge and experience (we already have brand, employees, customers, etc.) ▪ On the other hand – divergent corporate cultures o Acquisitions Pros: ▪ Quick to execute (immediate presence in the target market) ▪ Pre-emption of competitors (in industries with rapid globalization) ▪ Less risky (set of assets with profit stream) Cons: ▪ Hubris hypothesis (overestimation of additional value created) ▪ Clash between the cultures ▪ Everything takes longer than expected (mainly gains from integration of operations) ▪ Inadequate preacquisition screening (due diligence – detailed check of the company) o Greenfield ventures Pros: ▪ Firm gets exactly what it wants (internal operations, organizational culture, distribution channel) ▪ Less “unpleasant surprises” Cons: ▪ Slower to establish ▪ Risky (revenue, profit, total costs) Selecting an entry mode 20  o All entry modes have advantages and disadvantages o Thus, trade-offs are inevitable o Following table summarizes all pros and cons o Core competencies and entry mode Optimal entry mode depends to some degree on the nature of core competencies Technological competencies -> wholly owned subsidiaries Management know-how -> franchising, joint ventures o Pressures for cost reductions and entry mode The greater the pressure for cost reductions, the more likely exporting and wholly owned subsidiaries will be undertaken To realize location and experience curve economies Strategic alliances o Cooperative agreements between potential or actual competitors o Forms: a) Joint ventures (long-term cooperation) b) Short-term contractual agreements (to cooperate on a particular task) o Advantages Facilitation of entry into a foreign market – China as a good example Sharing fixed costs of developing new products Bringing together complementary skills and assets that neither company could easily develop on its own – Software + hardware o Disadvantages Giving competitors a low-cost route to new technology and markets (Japan, China) o How to make them work? Good partner selection – value added, motivation, financial results, reputation 21  Alliance structure – rights, obligations, technology transfer Managing the alliance – cultural differences, relationship capital (in long-term, it is important to see people personally) More about investment o World Investment Report 2020 (unctad.org) BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY ETHICS AND INTERNATIONAL BUSINESS Basic terms o Business ethics – accepted principles of right or wrong governing the conduct of businesspeople o Ethical strategy – course of actions that does not violate the accepted principles Many ethical issues are based on differences across countries – political system, law, economic development, environmental protection, history, or culture Managers have to be sensitive to these differences Employment practices o Different work conditions in home and host country o Which standards should be applied? o Legal, but ethical? Human rights o Should a company operate in a country that does not respect basic human rights? o Countries in Asia, Africa or even Belarus o Should such company actively promote a change? – the government may not listen to you and they might even push you out of the country Environmental pollution o Different regulations in home and host country 22  o Direct impact on costs – companies are pressured to make their production plants friendlier to environment o Parts of environment are a public good (tragedy of the commons – if people are able to consume something for free, then they will exploit it very quickly) o It may be one of the reasons why companies relocate their production plants – producing in different country may be cheaper because there are no pollution fees etc. o Legal, but ethical? Corruption o In some countries it is accepted as a business practice o It is definitely bad, but it can support your business o Mostly in developing countries, but also in some developed o Usually when businesses want to speed up the process in bureaucracy, they will bribe the official – they do not have to wait 2 years, they can start much sooner Ethical dilemmas o All the previous puts firms under pressure and creates often ethical dilemmas in business o Different countries = different ethical principles (e.g., gift-giving) o A situation in which there is no ethically acceptable solution Roots of unethical behaviour o Personal ethics Our personal ethical code confronted with difficult situations, often in foreign environment o Decision-making process Not realizing unethical behaviour You do not ask, or do not think it might be wrong Typically, simple business calculus o Organizational behaviour Organizational culture that reduces all decisions to the purely economic o Unrealistic performance goals High pressure from parent company o Leadership (by setting examples) What type of person you put in the highest positions If the person in leading is behaving ethically, then the subordinates will behave ethically too o Societal culture Managerial implications – how to make sure ethical issues are considered in business decisions 1) Hiring and promotion – favour hiring and promotion of people with a well-grounded sense of personal ethics 2) Organizational culture and leadership – build culture that values ethical behaviour - articulation -> action -> reward - code of ethics 3) Decision-making processes – make sure that people consider ethical dimension of business decisions 4) Ethical officers – employees overseeing the ethical issues 5) Moral courage – its development enables managers to walk away from a decision that is profitable but unethical 6) Corporate social responsibility 7) Sustainability – sustainable or long-term strategies tend to be more responsible for future generations CORPORATE SOCIAL RESPONSIBILITY CSR is a form of corporate self-regulation integrated into the business model of a company The European Commission defines CSR as the responsibility of enterprises for their impacts on society The impacts (on neighbours, employees, suppliers, etc.) can be also called externalities 23  The goal of CSR is to embrace responsibility for the company’s actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, shareholders and all the other members of the public sphere who may also be considered as stakeholders Shareholder approach -> stakeholder approach (someone who owns an interest in the company – for example people who live next to the production plant, customers, etc.) CSR term first appeared in the US around 1960-70s – managers started taking care of employees’ happiness, because happy employees were more productive Approaches o Philanthropy (donors – people who donate money and expect nothing in return) o Shared value creation – idea that business results and social welfare are interdependent (positive externalities) o Benefiting from results (opposite of philanthropy) – the company still wants to help the society, but their motivation is not very positive o Pressure from parent company (owner) Benefits o Human resources – recruitment, loyalty increase o “bad times” protection – can be used as an advantage in case of unfavourable development of any kind o Market advantages – brand value enhancing, new customers (customers are the drivers of change, mostly on developed markets) o Lower taxes (in some countries, CSR spendings are tax deductible Concerns o Can be viewed as a tool, not a goal o Concentration on environmental rather than social questions (environmental projects are easier and better for PR) o Copy-paste method Case of emerging countries and MNCs Process is initiated internally, to satisfy foreign owners o Problems of yesterday are dealt with tomorrow CSR reacts to issues or topics that had desired attention long time ago Ad-hoc approach instead of strategy planning Innovative CSR must be able to identify new goals and use new methods, which enable an early reaction to new challenges or even a discovery of those challenges o Very often problem of SMEs (small or medium-sized enterprise) Lack of connection between CSR and business strategy Lack of proper tools to measure CSR effectiveness Ad-hoc instead of enduring involvement Examples of best practices o Unilever (food and non-food products) A very complex initiative including all stakeholders o Warby Parker (prescription eyeglasses and sunglasses maker) Initiative “buy a pair, give a pair” For every pair of glasses bought by a regular customer, the company distributes a pair to someone in need o https://www.prezly.com/academy/relationships/corporate-social-responsibility/10-examples-of- exemplary-csr-initiatives EXCHANGE RATE RISK One of the most important things in international business For small countries like the CR, the exchange rate risk is very significant 24  Types of risk o Pure risk – leads only to negative results (business, transportation) o Speculative risk – can lead to negative, but also positive results (exchange rate) Risk than can influence business performance of a firm Applicable not only to firms undertaking international business – even if you are not a part of international business, your competition most likely is Exchange rate fluctuations o A small Czech company which exports their products to Germany will have revenues in euros (but spendings in CZK) o If a Czech company imports (they have to pay 1 million EUR), the exchange rate development is the other way around Risk than can influence business performance of a firm Applicable not only to firms undertaking international business – even if you are not a part of international business, your competition most likely is Managing the risk o Process of 3 phases 1) Identification – net cash flow (to see whether it is going to be CZK appreciation or depreciation) 2) Quantification 3) Elimination of the risk – size of potential loss, expectation, historical development, personal approach, costs (not every risk needs to be eliminated, smaller ones are not worth it) o Last one is not automatic Ways of elimination 25  o Long term trends can be solved by change in revenues or costs o Short term fluctuations can be solved by hedging o Natural hedging - If a company sells a lot in Germany, it can try also buying in Germany o Forward contracts A contract that calls for future delivery of an asset at given (fixed) conditions Very effective, but with certain limitations Easy to establish Forward price – is fixed, we know 2 months in advance what the currency rate will be (it is set in the contract) The market price may be worse than the fixed rate, but also better than that Trade-off GLOBAL VALUE CHAINS As for the mode of entry, importing and exporting is very important Global merchandise covers about 80 %, services about 20 % Every 7th or 8th product which was exported, is probably from China The Netherlands are considered as tax haven and there are also great investment activities 26  China has been in a trade surplus for many years American companies are not competitive enough – the import in US is higher than the export USA leads the export of services, because they have the best universities, therefore skills and expertise iPad and iPhone case study o In 2010 the biggest exporter of high-tech products was China o Added value is very important when talking about Chinese exporting of high-tech o The value of Apple products is in their concept and design, not in the assembling part (which is very cheap and many companies around the world can do it) GVC definitions o Generally - A set of activities that a firm operating in a specific industry performs in order to deliver a valuable product for the market o International business level – Full range of activities that are required to bring a product from its conception, through its design, its sourced raw materials and intermediate inputs, its marketing, its distribution, and its support to the final customer o Value chain that is divided among different firms and spread over the globe o The sequence of all functional activities required in the process of value creation involving more than one country A brief history of GVC 27  Old world of trade (up to 1980) o Countries trade mostly finished goods o Building “national industries” New world trade o Countries trade intermediate goods – imports are needed to export o Join global industries Trends o GVCs covering up to 80 % of world trade o Rise of intermediate goods trade (fragmentation – part of gross exports previously imported): 20 % in 1990, 40 % in 2010 and it is still growing o A good example is Boeing o Consolidation within GVCs in fewer, larger suppliers o Concentration of 28  What makes GVCs specific within international business o Complexity of transactions – more complex transactions require greater interaction among actors in GVCs and thus stronger forms of governance is required rather than simple price-based markets o Codifiability of transactions – Some industries codify complex information so that data can be handed off between GVC partners with relative ease, often using advanced information technologies. GVC partners must have access and expertise for dealing with such codified information. o Competence of suppliers – the ability to receive and act upon complex information or instructions from lead firms requires a high degree of competence on the part of suppliers Contemporary status of IT (value added created by GVCs) o In low-wage labour-intensive production, the principal profits are not realized in manufacturing itself o Majority of the profit is generated in the corporate coordination and control of the entire “global assembly line” o Especially design, marketing, and retailing Where is the value added within GVCs? 29 30