International The Environment of Business
Dr. Svitlana Voronkova
Global Environment and International Managers
Difficulties operating in borderless world
The international business environment
Economic Legal-political
Socio-cultural
International trade alliances
Ways of conducting business internationally Multinational corporations
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The growth of international business
International trade existed for many centuries. Companies operating internationally, such as English and Dutch East India Companies existed since 17th century 20th century was special with regard to pace international trade and business were developing. Since 1950s international trade increased in 20 times!
Two forces especially influenced the development of international business: Developments in informational technologies (IT). IT, both as a product and production / communication technology stimulate international trade The availability and mobility of capital
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The growth of international business
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Ford Escort
Spain Wiring harness Battery
France Alternator Master cylinder
Sweden Hose clamps Cylinder bolt
UK Carburettor Clutch, Ignition
Netherlands Paints Hardware
Canada Glass Radio Italy Cylinder head Defroster grills
Germany Pistons Speedometer
Belgium Seat pads
Japan Starter
Denmark Fan belt
Norway Tires
USA Wheel nuts Hydraulic tappet
Austria Radiator Heater hoses
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The growth of international business
Companies increasingly seek to expand internationally. Tayeb (2000) classifies reasons behind expansion into push and pull factors
Push factors:
of home markets Excessive competition in home markets
Saturation
Pull factors:
markets (China, India) Lower labour costs (CEE, Asia) Lax environmental regulation
Large
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A Borderless World
Business
is becoming a unified, global field
Companies
that think globally have a competitive
edge
Domestic
markets are saturated for many companies can no longer tell from which country they are buying
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Consumers
Four Stages of Globalization
Domestic stage: market potential is limited to the home country production and marketing facilities located at home International stage: exports increase company usually adopts a multi-domestic approach Multinational stage: marketing and production facilities located in many countries more than 1/3 of its sales outside the home country Global (or stateless) stage: making sales and acquiring resources in whatever country offers the best opportunities and lowest cost ownership, control, and top management tend to be dispersed
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Global (stateless) Corporations
Number is increasing
Awareness of national borders decreasing Rising managers expected to know a 2nd or 3rd language Corporate Example Nestle (Swiss)
CEO Peter BrabeckLetmathe (Austrian) Half of general managers (non-Swiss) Strong faith in regional managers who are native to the region
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The International Business Environment
International
management is management of business operations conducted in more than one country tasks do not change management functions
Fundamental Basic
are
the same - domestic or international Greater difficulties and risks when performing on an international scale
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International Environment Factors
Economic Legal-Political Economic Political risk development Government Infrastructure takeovers Resource and product markets Tariffs, quotas, taxes Per capita Political instability Income Laws, regulations Exchange rates Organization Economic Sociocultural conditions Socio values, beliefs Language Religion (objects, taboos, holidays) Kinship patterns Formal education, literary Time orientation
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Economic Environment Factors
1. 2.
Economic development Infrastructure
3.
4. 5. 6. 7.
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Resource and product markets Exchange rates
Inflation Interest rates Economic growth
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Economic Development
Countries categorized as "developing" or "developed" Criterion used to classify is per capita income: GDP per capita
UK - $29,600; Ireland - $31,900; Switzerland - $33,800; France - $28,700; Brazil $2,760; Russia $3,020; India - 560; China - $5,600; LDCs located in Asia, Africa, and South America
Developed are North America, Europe, & Japan
Driving global growth in Asia, Eastern Europe, & Latin America
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Infrastructure
A countrys physical facilities that support economic activities
highways, and railroads Energy-producing facilities Communication facilities
Airports,
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Resource and Product Markets
When operating in another country...
must evaluate market demand To develop plants, resource markets must be available raw materials and labor
Managers
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Exchange Rates
Rate at which one countrys currency is exchanged for another countrys Has become a major concern for companies doing business internationally Changes in the exchange rate can have major implications for profitability of international operations: domestic currency depreciation has positive impact on sales revenues of exporters
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The Legal-Political Environment
Political risk: due to events or actions by host governments: Loss of assets; Loss of earning power; Loss of managerial control; Government takeovers
National institutional features (Whitley (1990)): Extent of state involvement in business Features of financial system that shape countrys practices of overseeing the management of enterprises Features of labour system Japan, Germany, France: firms are typically part of networks including banks, trade unions, state agencies
UK, USA: firms receive less direct support form banks, that traditionally avoided long-term investments
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Political Instability, Laws and Regulations
Events such as riots, revolutions, or government upheavals that affect the operations of an international company Government laws and regulations differ from country to country
Make doing business a true challenge for international firms Internet has increased impact of foreign laws on U.S. companies expands potential for doing business on global basis
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Socio-cultural Environment
Culture: The integrated pattern of human behaviour that includes thought, speech, action, and artefacts and depends on mans capacity for learning and transmitting knowledge to succeeding generations
Culture shared knowledge, beliefs, values, common modes of behavior, and ways of thinking among members of a society
Intangible Pervasive Difficult for outsider to learn
Managers need to understand difference in social values to comprehend local cultures and deal with them effectively
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Hofstede (1980) Value Dimensions
Hofstede (1980): survey of the attitude of employees of IBM in various countries
Hofstede: Culture is a collective programming of people's minds, which influences how they react to events in the workplace
National value systems influence organizational and employee working relationships
Power distance (high: accept inequality) Uncertainty avoidance (uncomfortable with uncertainty) Individualism and collectivism (Individualism: take care of themselves) Masculinity/femininity (preference for achievement/assertiveness; femininity for relationship) 5th dimension: Long-term/short-term orientation
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Hofstede (1980) Value Dimensions
Power distance (PD) extent to which the less powerful members of organisations within a country expect and accept that power is distributed unevenly
Scores for PD: high score people accept inequality) High PD scores: Belgium, Argentina, Brazil and Spain Low PD scores: Sweden, Britain, Germany
Uncertainty avoidance the extent to which members of a culture feel threatened by uncertain or unknown situations
High score low tolerance to uncertainty
High score: Latin American, Mediterranean countries, Japan, Korea Low scores: most of Anglo and Nordic countries
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Hofstede (1980) Value Dimensions
Individualism pertains to the societies where ties between individuals are loose. Collectivism: people are integrated into strong, cohesive groups, which protect them in exchange of loyalty High scores on individualism dimension: USA, UK, Canada, Australia Medium individualism: Germany, the Netherlands, the Nordic countries, Japan Low scores: South American, Asian countries
Masculinity pertains to societies in which social gender roles are clearly distinct Femininity pertains to societies in which social gender overlap roles Hofstede associates masculinity with the desirability of assertive behaviour, femininity with modest behaviour Countries with the highest masculinity score: USA, Japan, Germany, Austria Countries with the highest femininity score: Sweden, Norway, the Netherlands, Denmark
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Hofstedes comparison of national cultures: Limitations
Small
number of respondents (less than 100 for some countries) all respondents were from a technologically advanced computer company
Representativeness:
Multiple
cultures within IBM
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International Cultural Influences
Other
Cultural Characteristics
Language Religion
Attitudes
Social Organization Education
Linguistic
pluralism several languages exist regard own culture superior
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Ethnocentrism
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International Trade Agreements
Most visible changes in legal-political factors grow out of international trade agreements:
GATT WTO EU NAFTA
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International Trade Alliances
Government can protect domestic business by means of tariffs, quotas and other non-tariff barriers Tariff a tax on an imported product Quota a governments restriction on the amount of a specific foreign product it allows in the country
General Agreement on Tariffs and Trade (GATT) Signed by 23 nations in 1947 as a set of rules. Today: 148 member countries Ensured nondiscrimination, clear procedures, negotiation of disputes, and participation of lesser developed countries in international trade WTO regulate tariff concessions: countries agree to limit level of tariffs on imports from other WTO members ,,Most favored nation clause
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WTO
World Trade Organisation (WTO, 1994, the Uruguay round) a permanent institution which monitors international trade, and arbitrates in disputes between countries over the interpretation of tariffs and other barriers to trade (www.wto.org)
The WTO is the successor to the GATT, and operates with the broad goal of reducing or abolishing international trade barriers. It ensures trade among nations operates smoothly, freely and orderly
As of August 2005, there are 148 members in which most of them are developing countries WTO headquarters are located in Geneva, Switzerland
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WTO
Critiques
of WTO state that despite the WTO aim of helping the developing countries, the influential states in the WTO also pursue their own commercial interests
The
needs of the developing countries are often perceived to be ignored issues of health, safety and environment are not principle concerns
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The
International Trade Agreements
Free trade a situation where there are no government-imposed barriers to trade no tariffs, quotas or non-tariff barriers Free trade area a geographic area where free trade is permitted among the participating countries but imports from non-participating countries are limited
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European Union
Formed in 1957 to improve economic and social conditions Has grown to 25-nation alliance Initiative Europe 92 called for creation of open markets for Europes 340 million consumers Biggest expansion in 2004 10 new members from southern and eastern Europe Observers feared EU would become a trade barrier EUs monetary revolution, introduction of the Euro
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North American Free Trade Agreement
Went into effect on January 1, 1994 Merged the United States, Canada, and Mexico with more that 421 million consumers Breaks down tariffs and trade restrictions on most agriculture and manufactured products August 12, 1992 agreements in number of key areas include: agriculture, autos, transport, & intellectual property
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Ways of conducting business internationally
1.
2. 3. 4.
Exporting and importing Licensing / Franchising Joint ventures and strategic alliances Wholly owned subsidiaries
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Ways of conducting business internationally
Importing and exporting
Import represents an opportunity as well as a threat for domestic businesses Imports can compete in a number of ways. One of them is price competition
on lower costs of production ...when the value of home currency increases and the prices of imported products fall ...dumping selling imports at prices that are below the cost of production and distribution. Illegal in most countries
...based
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Ways of conducting business internationally
Licensing a business grants the right to a firm in another country to produce and sell its products and services for a specified period of time The licensing firm receives a royalty payment for each unit that is sold, while the licensee takes the risks of investing in the manufacturing and distribution. Normally for licensing firm both the risks and profits are low
Franchising - a similar agreement, commonly used by firms in service industry
In 1999 Motorola signed agreement with Chinese Eastcom which allows Eastcom to produce Motorolas base transceiver for use with cellular networks in China
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Ways of conducting business internationally
Wholly owned subsidiaries. Managers who want to retain close control over companys international business are likely to create a subsidiary in another country
This is costly mode of entry, but in case of success, profits stay within the company. Subsidiary may be established as
...a new entry (green field investment) ...by acquiring existing company (brown field investment)
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Ways of conducting business internationally
Strategic alliance a long-term agreement between businesses to work together for the mutual benefit. SA are becoming more and more popular as manufacturers work more closely with both their suppliers and their distributors Strategic alliances bring enterprises the following benefits:
Increase in capital for research and product development and yet lower risk (Innovation) Ability to bring together complementary skills and assets that neither company could easily develop on its own Access to knowledge and expertise beyond company borders (technology transfer) Rapidly achieve scale, critical mass and momentum (bigger is better) Expansion of channel and international market presence (enter a foreign market)
Nissan is distributing Volkswagens in Japan and Volkswagen selling Nissans vehicles in Germany
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Ways of conducting business internationally
Joint venture is a strategic alliance between two or more parties to undertake economic activity together. The parties agree to create a new entity together by both contributing capital (equity), and they then share in the revenues, expenses, and control of the enterprise. This form of entry allows sharing of risks and resources required for international business. A foreign/host country firm has access to distribution arrangements, knowledge of local customers, politics, ways of working
Hazards: cultural differences; differing expectations of partners STARBUCKS typically uses JV in overseas markets (Germany: KarstadtQuelle)
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Sony Ericsson Joint Venture
Sony Ericsson Mobile Communications AB (Sony Ericsson) is a JV established in 2001 by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones Both companies have ceased making their own mobile phones, letting the new company use Sony's knowledge in customer electronics and Ericsson's knowhow in cellular technology In 2005 Sony Ericsson was the sixth largest mobile phone manufacturer, behind BenQ, LG, Samsung, Motorola, and Nokia, and held market share of around 6%
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Strategies for Entering International Markets
High
Greenfield Venture
Ownership of Foreign Operations
Acquisition Joint Venture
Franchising Licensing
Exporting
Low Low
Cost to Enter Foreign Operations
High
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Multinational Corporations (MNC)
Receives
over 25% of total sales revenues from operations outside parent companys home country
Managed
as integrated worldwide business system
Controlled Top
by single management authority
managers exercise global perspective
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Managing in a Global Environment
Managers must be sensitive to cultural subtleties Personal challenges culture shock Managing Cross-culturally
Leading Decision making Motivating Controlling
Managers must be culturally flexible and easily adapt to new situations
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Reading
Daft, R. (2006) "Chapter 4. Managing in a Global Environment" in "The New Era of Management", International Edition, Thompson South-Western, pp. 116-147
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