Summary written and donated to WorldSupporter in 2012-2013
International Business – consists of international transactions (e.g. trade (exports and imports) and foreign direct investment). It is very useful in order to satisfy the needs of companies and private households.
Multinational Enterprises (MNEs) – these are organizations that have their
headquarters in one particular country, but do business in one or more other country. This creates an extended arena for international trade since it supports international business.
Exports – these are goods and services that are being produced in one country and then traded to another country. In order to maintain a positive balance of trade, a company should always export more than it imports.
Imports – this includes goods and services that are being produced in one country and then brought in by another country. In case of imports exceeding exports in one country, a trade deficit will be the result on the nation’s trade balance.
The basis of international business is trade which contributes to the understanding of MNE strategies and practices. The world’s most exporters are also the world’s biggest importers. Exports and imports are the motor of international trade and enhance worldwide interaction among countries and businesses. If they were to decrease, the world economy would suffer grandly from that.
Foreign Direct Investment (FDI) – FDI are equity funds invested in other countries by MNEs.
FDI is often used by organizations to gain a foothold in other markets by obtaining firms in different countries or by operating in foreign markets.
Especially companies from the US have invested greatly into several countries (Western Europe, Latin and North America and Japan). FDI is an essential factor when it comes to international trade because it helps, for example, less developed countries to establish worldwide trade relationships.
Triad – these are geographic areas (the US, the EU and Japan) that play a crucial role in international trade. They are responsible for most of the trade and investments that take place worldwide. Further, when the US is important as a triad member, Mexico and Canada are usually included into the considerations.
North American Free Trade Agreement (NAFTA) – The NAFTA is a free trade agreement between the US, Canada and Mexico which was founded in 1994. It has the purpose to abolish trade and investment barriers between those three nations.
Concerning the triad, the US has the world’s largest economy. Followed by the EU, whose collective GDP is larger than that of the US or Japan. Japan is the greatest economy in Asia and is a grand investor into the US and the EU. Countries from the triad practice more trade and FDI than any other economy.
The global environment has rapidly been changing in recent years and the reasons for this fact are:
A - A slowdown in the triad economies
B - The introduction of additional trade regulations
C - The impact of technology
D - More small and medium-sized multinationals
A - In the 1990s the US held a fast growing and healthy economy and became the most competitive nation in the world. After the Clinton-era, the triad and other countries started to suffer from economic problems.
Organization for Economic Cooperation and Development (OECD) – an
organization with 30 moderately wealthy member countries that assists its members, if economic difficulties evolve. This is done in form of a forum in which economic problems and their solutions may be discussed.
B – The development of a liberalization in trade and investment helped organizations in the triad countries to improve their profits in open markets. In case of a trade conflict between countries, international organizations were formed to regulate international trade.
World Trade Organization (WTO) – the WTO is a worldwide organization that was founded in 1995. It deals with the rules of trade and smoothing out conflicts among member countries; furthermore, the WTO is allowed to enforce its decisions.
General Agreement on Tariffs and Trade (GATT) – the GATT is a trade organization that was created in 1947. Its purpose was to liberalize trade and negotiate trade concessions among member countries
Nowadays the WTO implements the provisions of GATT. If conflicts arise among member countries, the WTO supports problem solving. If nations disagree with decisions made by the WTO, harsh consequences such as trade retaliation may be the result. Due to trade liberalization though, disputes among countries should be eliminated because it encourages international business transactions.
C – Technology is a constantly developing area and especially communication technology is of great importance to many businesses and in certain markets. The use of computers, the internet, as well as cellular technology makes it possible for firms to remain in continuous contact with their office and their customers. This enhanced communication is essential for individuals since it eases conducting business. Through technology the production of goods and services is enhanced. Shorter production periods as well as less defect goods can be ensured due to the “Six Sigma” quality programs. These are quality measurements that have been created in order to
ensure high quality, as well as remove performance difficulties.
D – Small and medium-sized enterprises (SMEs) – the definition varies depending on the country. In the US, SMEs have up to 500 employees; in Japan SMEs in industry have up to 300 employees, those in the wholesale industry have up to 150 employees, and those in the retail industry up to 50 employees. In the EU SMEs employ between 11 and 200 individuals and the company’s sales are less than 40 billion US $. The World Bank benchmark for developing countries is set from 11 to 150 employees, and sales of under 5 billion US $.
Due to the fact that many SMEs have a well-trained workforce, are highly innovative and apply the latest technology, they can compete effectively and are very flexible in comparison to larger firms. These points are important for SMEs because they rely heavily on their customers and therefore focus on cost control and quality.
Facts about MNEs:
Strategic Alliance – this is a relationship between two or more businesses in order to attain a communal advantage. This has become popular since MNEs started to recognize the importance of creating regional and local strategies.
In order for a business to stay competitive it needs to be continuously innovative. The ability of a firm to gain success by doing so depends on four determinants developed by Michael Porter:
Strategic Management – managerial actions including strategy formulation, implementation, evaluation, and control. Also assessment of organizational strengths and weaknesses and environmental analysis of internal and external circumstances is a task in strategic management
Multinational Enterprise (MNE) – an MNE is a company with its headquarters in one nation, but it operates in one or more other nations. MNEs are essential organizations for international trade.
The largest 500 MNEs are responsible for 80 % of the world’s foreign direct investment. Out of these, 430 businesses are located in the “triad”. Therefore it can be said that the “triad” represents the basis of an analysis of strategies of MNEs.
Characteristics of MNEs:
To identify the characteristics of such an enterprise it is useful to look at the environment in which it is active. More clearly, this is the home country (where the headquarters are located) and the host country in which it operates.
Internationalization – when a business penetrates a foreign market, this process is called internationalization.
In order to stay away from risk and information costs, the internationalization process should be implemented carefully, as well as step-by-step, supported by experts in international trade that are not employees of the organization. With the passage of time, information costs will decrease and the perceived risk that is involved with “going international” will be lessened due to increased experience concerning the foreign environment.
License – a contractual agreement between two firms. One business, which is called the licensor, allows another one, the licensee, to make use of its patents, technology or trademarks in return for a fee or royalty.
Licensor – a company giving the licensee access to its patents, technology or trademarks and therefore receiving a fee or royalty.
Licensee – a company gaining access to another company’s (the licensor’s) patents, technology or trademarks in exchange for paying a fee or royalty.
The internationalization process can be viewed as follows:
License
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Export via agent or distributor
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Export through sales representative or subsidiary
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Local packaging and/or assembly
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FDI
Taking the licensing option not into consideration, there are other options to follow the internationalization process:
A – Firstly, a local agent or distributor may be employed to enter a certain foreign market because the company discovered that there might be potential for exports to generate additional sales.
B – A sales representative may then be used in order to situate a sales subsidiary in a particular foreign market, giving the company the possibility to expand its capacity for more exports. Furthermore, the sales representative may then set up a separate export department to administer foreign sales and production. In addition, the production process, as well as the product design may then be adapted to manufacture tailor-made products for these foreign markets.
C – Moreover, in order to engage in local assembly and packaging of its products, the business may begin employing host-country workers and start dealing with working conditions of its host-country. This is a critical action since the enterprise starts to become more familiar with the foreign markets and has to begin dealing with cultural attitudes, worker expectations, and wage rates.
D – After gaining adequate knowledge about its host-country, and therefore reducing the perceived risk, the company may regard a foreign direct investment as appropriate. This means, that the entire production process of the product line is being moved to the host-country and sales are generated there as well.
There are several reasons for a company to become a multinational enterprise:
A – Companies may diversify risk by investing in separate markets. By spreading the risk this way, negative economic developments in the home-country may be compensated.
B – Engaging in the world market in order to sell goods and services is a reason for a firm to become an MNE. This action is associated with the process of globalization, meaning there is growth in an integrated world market.
C – Enterprises may feel the need to respond to the increasing number of foreign competitors in order to defend their home market share. This “following the competitor” strategy is useful because it takes away business from the competitors by making a greater product variety available to the customers. Furthermore, it makes it harder for competitors to engage in the other company’s home market knowing that the company will respond similarly.
D – The issue of reducing costs is another important reason for companies to become an MNE. For example, transportation costs, as well as middlemen handling a product can be removed by locating a company’s operations nearby a foreign customer. This also makes the firm more flexible in reacting to customer needs.
E – Firms may want to become an MNE in order to overcome barriers to entry. These include tariffs, quotas (tariff and non-tariff barriers) and can be avoided by supplying a market from within.
F – Having technological experts work with the company is an advantage when operating as a MNE. Due to the direct manufacturing of goods (FDI) rather than making license agreements, the firm can maintain their exclusive rights concerning patents, trademarks, and technological expertise.
In general, MNEs make decisions concerning their operations based on what is best for the company. Though personal matters such as cutting back jobs or moving working places to other countries are important issues, the MNE will not take those into account when making decisions regarding the firm’s success.
Due to the “triad”, there is a vast economic interaction worldwide. Since many MNEs hire workers in several different countries, every business has a great responsibility concerning the economies of other nations.
The process of Strategic Management:
The steps in the process of strategic management need to be conducted carefully. The outcome of the process helps the MNE to create a strategic plan which supports the MNE to be able to compete successfully in international trade. The following illustrate the essential steps for formulating the strategic plan:
Classification of the firm’s mission
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Examination of internal and external environment
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Formulation of objectives and plan
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Execution of the plan
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Assessment and control of operations
Firstly, this process contains the formulation of the firm’s basic mission. Further, an environmental analysis of internal and external conditions of the environment is crucial in order to be able to take the process to the next level. The internal analysis takes care of the company’s financial strengths and weaknesses, while the external analysis is performed to identify the firm’s opportunities and threats. The next action to be taken is the formulation of the company’s objectives and its plan which contains, for example, goals to be achieved. Both, long-range (2-5 years) and short-range (<1 year) goals are
being recognized. After completing these analyses, the actual implementation process starts. A periodical assessment of the new strategy in action is very important in order to confirm the success of the strategic plan. If problems concerning the implementation arise, the operations should be adjusted or the plan may be revised.
Basic Mission – a company’s vision answering the questions: “Which business is the firm in?” and “Why does the firm exist?” and therefore determining the company’s identity, as well as identifying the direction in which the business wants to go
The CSA-FSA Matrix
Firm specific advantages (FSA’s) are firm specific factor that determine the competitive advantage of an organization. It can also be called a proprietorial capability, which is also unique. Another kind of advantages is the country specific advantages (CSA’s). These advantages can be based several factors like the labour force of a country, or the natural endowments. Managers hope to strike a balance between two factors, in order to be in a unique space. The firm’s ability to coordinate certain factors like productivity, are related to FSA’s
The competitive advantage matrix
This matrix helps in formulating a strategic option (s) for a multinational. On the horizontal axis, the FSA’s are denoted and on the vertical axis the CSA’s. The matrix consist of 4 quandrants, each with a corresponding generic strategy.
Triad – three geographic areas consisting of the US, the EU and Japan that deal with most of all trades and investments worldwide.
Foreign Direct Investment (FDI) – if firms have ownership in foreign countries or control of foreign assets, this financial involvement is called foreign direct investment (FDI).
This ownership of a business in another country may either be whole or partial and is called a foreign subsidiary. Investments can be made by overtaking an already existing company or by building up a new company while working with joint ventures or complete ownership in foreign countries.
The purpose of FDI is for the investing firm to be able to actively take part in managing the foreign company in order to get a foothold in the host-market.
Portfolio Investment – this is the purchase of financial securities (e.g. bonds) of other firms in order to gain money when the firm’s assets are sold.
The purpose of a portfolio investment is for the investing firm to be able to gain financial growth in the value of its financial holdings in the foreign company.
There are several reasons for companies to make FDIs and portfolio investments:
A - The increase of sales and profits.
Many firms (MNEs as well as SMEs) receive a large part of their revenues through international relationships. Especially SMEs now recognize the opportunities that are offered to them by extending their worldwide relations. As multinationals constantly grow larger, local suppliers are increasingly needed which then represents the task of an SME. If there is a good cooperation between the two companies, there is potential for the SME to receive a longer contract and get in touch with other MNEs. A result of this may be increased profits for the SME, as well as the establishment of business
relations.
B - The entrance in quickly growing markets.
Most of the international markets are growing and developing much more rapid than domestic ones, meaning that MNEs are able to take advantage of this by increasingly making foreign direct investments. The potential for profits in such markets is very high, which is one of the incentives for MNEs to make FDIs and portfolio investments.
C – The reduction of costs.
Due to high labour costs in several markets, companies that have labour-intensive operations might want to consider reducing costs by going abroad.
Moreover, the costs of materials should be taken into account. Rather than importing costly materials, it might be wise to move production closer to the supply of materials. This decreases transportation costs significantly.
A third factor is materials that are of short supply. Again, moving the production process to another country where there is a sufficient amount of those materials helps reducing costs. Lastly, the cost of energy plays an important role. In the case of expensive energy in the domestic market, a firm could reduce costs by moving closer to cheaper energy sources.
Twin Factories or Maquiladoras – institutions (in the US and Mexico) that engage in production processes in both countries, as well as the shipment of goods between both nations in order to reduce tariffs.
D – The gain of a foothold in economic areas.
MNEs entering an alliance or obtaining a company in one of the economic areas of the triad have the advantage to be able to sell their goods and services without any restrictions such as tariffs etc.
E – The protection of domestic markets.
In order to protect their home markets, many MNEs penetrate foreign markets to keep potential competitors from expanding their companies. In this case, the likeliness of the competitor entering the other company’s home market is low since the firm is busy defending its own market position.
Now and then there are MNEs that penetrate an international market to challenge another company which before confronted the other firm’s domestic market. As can be seen, international rivalry is a crucial factor that MNEs have to deal with. Further, if firms want to make portfolio investments and FDIs, there might arise the advantage that by going abroad, the company protects its position with current clients who are also going abroad.
F – The protection of international markets.
Sometimes it is important for a company to protect its position in the foreign market by making a foreign direct investment (e.g. merging with another company that is active and healthy) in order to protect one’s market share.
G – The attainment of managerial and technological knowledge.
In order to be able to set up a well-trained workforce, many MNEs recruit scientists from different universities or laboratories. This helps the enterprise to employ the latest technology and stay up-to-date. To be able to implement this strategy, the company should shift its operations closer to their competitors.
The Triad:
Considering that the worldwide FDI is made up to 80% by the triad, it is obvious that triad countries invest grand amounts of money in each other’s markets. These three economic areas are therefore the economic forces with the highest influence worldwide. Moreover, the countries belonging to the triad also invest in poorer nations.
FDI Cluster – an assembly of developing nations that are mainly positioned in the same geographic area as the particular triad country and usually there is some kind of economic link between the two countries.
The developing countries often have difficulties in attracting the triad members because many MNEs rather build regional networks than investing into poor nations. The fact that the countries located in the triad area are constantly strengthening their position by investing into one another makes trade and investments complicated for the poorer countries. It becomes therefore clear that non-triad members are in the need of being linked to the triad in some way. Concerning the future, it is expected that the triad will persist in leading the worldwide markets.
Especially the auto market is relevant for the triad members. On the one hand, both demand and supply in the auto market are footed grandly in the triad countries. On the other hand, there is an increasing activity in the auto market by non-triad members concerning demand and production.
The triad countries are overall interrelated. An action taken by one country often has a grand effect on another market of the triad members since members of the triad compete with one another in domestic as well as foreign markets. In addition, triad relations are influenced by economic conditions. If, for example, the economy of the EU suffers, the US and Japan will increasingly serve as the target for exports by other countries.
Triad members continuously search for ways to make them gradually more competitive. Especially Japanese business practices are being observed by the EU and the US because they have a vast potential of success. It is common in Japan to form “keiretsus” (also called business groups) which cover several economically dominating firms. These are linked through joint ventures and/or ownership in order for them to be able to control markets worldwide due to their connections and wealth.
FDI
The members of the triad have a significant fdi flow between them. Part of this was because of the deregulation in Japan. American firms were very eager to buy local Japanese firms. Also, European countries were very interested in pouring money into American firms.
Considering the political and economic environment, there are continuous movements among these factors which releases new opportunities for multinationals. Some countries that cannot adapt their processes to new developments quickly enough might easily fall behind compared to other nations.
Ideology – these are political theories, beliefs and doctrines that have been created in order to give direction to the actions of society. Political ideology and economic philosophy are almost always interrelated.
Democracy – a governmental condition in which people directly or through elected officials come to a decision of overall actions of the government. Characteristics are, for example, the right to express one’s opinion, the election of representatives for limited terms of office, an independent court system, and a moderately non-political bureaucracy and defense infrastructure.
Totalitarianism – this is a state of government in which there is only one leader or only one leading party.
Communism – a type of totalitarianism, in which all property is owned by the government. It is also those distributing goods and services to individuals, as well as determining how much is to be produced by companies. (E.g. Cuba)
Theocratic Totalitarianism – this is a religious grouping of people having complete power and repressing or discriminating non-orthodox people. (E.g. Iran)
Secular Totalitarianism – a form of totalitarianism in which the military has power over the government and makes decisions for the whole country. (E.g. Iraq) In general, due to political systems, an economic infrastructure within a country is being established. In order for a nation to be able to change its economic system, the governmental system in the country needs to be altered before.
Concerning the economic systems, it can be differentiated between capitalism, socialism and a mixed system. Nevertheless, when dividing these economic arrangements into a resource allocation, the following economies are to be taken into consideration:
Market-driven Economy – a form of economy in which goods and services are allocated in terms of market demand and supply. The characteristic of this form of economy is private ownership; market share is trying to be maintained by the companies by selling high quality goods and services at competitive prices.
Centrally Determined Economy – a design of an economy in which the allocation of goods and services is determined by a committee that sets limitations to the availability of certain goods and services. Public ownership with fixed production quotas is a characteristic of this kind of economy.
Mixed Economy – this is a state of economy in which a mixture of market- and centrally driven economies is present.
In general, over the past years, a movement from centrally determined economies to market-driven and mixed planning can be observed.
Privatization – this is the process of selling government assets to private buyers. Privatization gives companies and individuals the possibility to obtain these businesses and therefore make high potential profits.
Nationalization – this is the process in which governments control business assets. In order to be able to overtake privately-owned companies, governments sometimes pay a certain amount to the previous owners to compensate for his loss.
There are many reasons for nations to engage in nationalization. Some of these include:
Divestiture – this is a form of privatization in which a government’s or firm’s assets are being sold to the public.
Contract Management – the process in which a certain operating responsibility is given to an industry by an organization such as the government. In this case, the government does not transfer its ownership or a legal title to this particular industry.
Reasons for countries to engage in privatization:
Ministry of International Trade and Industry (MITI) – a Japanese ministry having the responsibility to supply information about foreign markets, facilitate in guiding an economy, as well as promoting investment in certain industries. The organization has moved from a proactive form to a cooperative institution. Lately the ministry’s focal point lies on industries which are less energy-intensive in order to boost Japanese growth and investments.
Research and development is a crucial factor when it comes to conducting business successfully. In order to be able to apply the latest technology and serve the needs and preferences of the customers, R&D needs to be performed carefully. Several organizations have received money by the government in order to improve research and development (R&D):
RACE - R&D in Advanced Communications in Europe
Focus: Supporting research in the development of an integrated broadband
telecommunications network
ESPRIT - European Strategic Program for R&D in Information Technology
Focus: Working in high-tech areas in R&D (e.g. IT, microelectronics, and
computer-integrated manufacturing)
EUREKA - a pan-European group
Focus: Reaching better cooperation between research institutes and privately-owned businesses
Sematech – a group of 14 companies in the US
Focus: Shoring up the chip-making equipment industry
National Center for Manufacturing Sciences
Focus: Technological breakthroughs
Microelectronics & Computer Technology Corporation
Focus: Working on advanced computing, software and computer-aided design
America’s government has made agreements stating that it will provide help for research. They have actively supported research consortia monetary in their research on technological development.
Economic Integration – Regulations that have been created in order to improve trade and cooperation among nations. Despite this, there are some difficulties concerning the implementation. Participants may not want to give up their economic control by agreeing to a common goal in economic integration.
Trade Creation – arises when countries that are a member of an economic integration group have a comparative advantage compared to others and therefore start trading with those goods and services increasingly among each other. This might result in other countries being left behind; Further, the gap between nations with a comparative advantage and others that are not involved in the economic integration group may increase constantly because it is harder for outsiders to keep up with the pace of trade.
Trade Diversion – arises when countries that are a member of an economic integration group trade less with non-member nations, but increase their trade with other member countries. This happens mainly because of the costs that evolve due to trade barriers that are set for non-members. The consequences for non-member countries may be the loss of exports and production. Therefore economic integration groups are only helpful when trade creation goes beyond trade diversion.
Free Trade Area – a group of countries that are economically integrated and where there are no trade barriers among member nations. If this is the case, countries with a comparative advantage may start specializing on those, and import those goods and services for which other countries maintain a comparative advantage.
North American Free Trade Agreement (NAFTA) – the NAFTA is a free trade region made up of the US, Canada and Mexico
Customs Union – a group of countries in an economic integration group that creates common trade policies toward non-members, but do not have trade barriers among the member countries. This facilitates trade among members and enhances their economic development.
Common Market – a group of countries in an economic integration group that creates common trade policies toward non-members, in which there are no trade barriers among member countries and in which there is a free flow of production factors (labor, capital etc.) among members. Trade among participants of the integration group is being improved grandly; this is due to less cost concerning trade and the ease of the flow of the factors of production. As can be seen, a common market contains several benefits.
Economic Union – a deep form of economic integration in which there is free flow of factors of production, as well as free flow of products and services between members. Moreover, an economic union has a common currency, holds the same tax rates and structures for all member countries and combines fiscal and monetary policy among members.
Political Union – an economic union in which there is a single government, unification of economic policies, as well as complete economic integration.
Facts about economic integration:
Internal Economies of Scale – This is the theory of the relation between efficiency and internal costs: The lower the internal costs (e.g. production costs), the more efficient a company operates.
External Economies of Scale – This is the theory of the relation between efficiency and external costs: The lower the external costs (e.g. labor costs), the more efficient a company operates.
Non-Governmental Organizations (NGOs) – Non-profit organizations whose
ambition it is to advance various social interests. Usually the interests of NGOs concerning equity and redistribution do not go well together with the economic and efficiency issues that are essential for conducting business.
Civil Society – a grouping of institutions, organizations and individuals, whose goal it is to advance various interests. This movement is independent from the government and the market and is against global business.
European Coal and Steel Community (ECSC) – a set of six nations (Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany) that have the aim of creating a common market in order to increase efficiency and competitiveness of these particular industries. The ECSC is the basis of the European Union (EU).
European Union (EU) – a set of countries that united under several treaties in order to enhance economic and political integration. The founding treaty of 1957 had as main provisions the following:
European Free Trade Association (EFTA) – a combination of four countries (Iceland, Liechtenstein, Norway, and Switzerland) with the objective to eliminate trade barriers among each other
Single European Act (SEA) – this act prevents a nation from rejecting any EU decision it considers to be in conflict with its central interests
Issues faced by the EU today:
Associations that are in charge of regulating the EU:
European Council – is constituted by the president of the European Commission, and the heads of state of every EU member nation. The European Council is responsible for directing policies, as well as for resolving policy issues.
Council of Ministers – this institution is made up of the foreign ministers of each country. It is their responsibility to make final EU decisions
European Commission – its 20 members act as the executive of the EU and it is their objective to propose changes in legislation to the Council of Ministers and furthermore carry out studies on key policy concerns
European Parliament – this institution is composed of individuals that are directly elected by voters in each member nation. The European Parliament is in charge of voting on the appointment of commissioners and vetoing issues concerning the budget of the EU and the single market legislation
Court of Justice – the participants of this are judges from each EU member country (one per country) and they serve the purpose of defining the EU law.
There are several different economic unions present:
The purpose of a strategic alliance is for firms to work together and therefore to gain a common advantage due to creating business relationships. For example, some companies allow another company to produce and trade a certain product of theirs in a specific area. Another common case is a jointly transmitting of research in order to promote a product. Often a strategic alliance takes on the shape of a joint venture.
Since companies all over the world differ in the way business operations are being conducted, it is important to take the localization of products, profits, production, and management into account. In order to meet the needs and tastes of local and regional customers, MNEs consider the localization of business operations in general.
These include:
Localization of products – mostly a process of modification of a certain product in order for it to meet the needs of customers and the certain market. This is done by considering the development, manufacturing, and marketing of goods and services.
Localization of profits – the reinvestment of earnings gained within a company into a local marketplace (e.g. expand plants and offices, increase operations, enlarge the workforce).
Localization of production – the process of manufacturing goods in the host market. Often firms do this by amplifying the local content in the product by increasingly producing more of the subunits in the host economy. Another common strategy is to import the product, and adjust it to local conditions and preferences and therefore add value to the final product.
Localization of management – the process of either persuading managers from the home country to move their workplace to the host country, or increasing the power of managers in the host country to support these employees.
Culture – values and attitudes of a group, organization or society which have the purpose to create adequate social behavior. Culture is usually acquainted by experiences, as well as education.
Grande ecole
On of the most pregious group of school, admission is said to determine wheter someone will be selected for a business of political function.
Corporate culture
This is the term used to describe the behaviour of employees and managers of a certain firm. It could also means the attempt of senior exectutives to shape the kind of behavioru they want to see in their organizations.
Cross cultural management is gaining in importante. Managers are required to understand different ultures and make them work together. In other word there need to be a balance.
Ethnocentrism – judging one’s way of doing things superior compared to others. This can become an issue in business operations, if, for example, a manager from the home country is employed in the host country due to his expertise, but not because he is capable of adapting to another culture, or if a certain product is not altered in order for it to serve the needs of a foreign market.
Cultural convergence
Also termed as Americanization or mcdonaldization. It states the fact that cultural preferences all over the world are coverging, or getting the same.
Two ways to look at culture:
There are several factors that need to be taken into consideration when dealing
with culture:
Language
The most important way of communication in order to understand certain
information, establish good business relationships, and to form ideas is
communication in different languages. When corresponding with foreign
countries, the capability to speak and understand different languages is
essential for being successful.
Religion
Religion can become an issue, if the workforce of MNEs includes different
beliefs. There are several variations among countries in terms of religion, and
especially the way in which employees perform their tasks may become a
problem.
Values & Attitudes
Among diverse cultures there may arise different values and attitudes which may make dealing with them difficult in the workplace.
In general, attitudes evolve from values which then have a direct weight on international business. Moreover, values influence culture in several different ways, showing that all elements are interrelated.
Customs & Manners
Customs and manners vary among cultures. Dealing with them may be a
difficult task, and should therefore be taken into consideration.
Material goods
The overall infrastructure in a country regarding finance, economy, and social
systems is of grand importance for an MNE. After becoming familiar with the differences in the host-nation, the conduction of business should be eased.
Aesthetics
Aesthetics in different countries need to be understood by companies that go international. This is best done by studying the dissimilarities and how these particularly affect behaviors of individuals.
Education
The education of a culture is very important when it comes to business. The better educated, the greater the economic productivity and technological advances. Literate people tend to have a better understanding of culture in general and it is easier for them to build up managerial ability.
When dealing with culture, its dimensions should be taken into account:
Power Distance – since power is not allocated equally, power distance is the degree to which organizational members accept this irregularity. For example, when there is low power distance in a firm, a greater priority is set on independent working of the employees. In this case, the organizational structure is rather flat. When a moderately high power distance is present in a company, the decisions made are based on a rather autocratic style with a tall organizational structure.
Uncertainty Avoidance – The handling of risk and ambiguity by certain people. If there is low uncertainty avoidance, the society is more risk-taking and practices rather low-structured activities within companies. In case of high uncertainty avoidance, risks are hardly ever taken by firms and they rely grandly on rules and instructions.
Individualism – the independent self. When people follow individualism, they mainly take care of themselves and their direct family. This is particularly true for nations that are economically advanced. Self-sufficiency, achievement, personal financial security, autonomy, and individual initiative are just some of the characteristics of a culture that emphasizes on individualism. Decisions of people that live in an individualist culture are expected to be made independently without the support of groups.
Collectivism – the trend for people to be group-oriented. Looking after one another is essential within those groups in exchange for loyalty. This is particularly true for countries which are rather poor. Affiliation, group decision making, and the feeling of belonging to a group are attributes in collectivism.
Masculinity – the tendency to entitle the most important values in society as “money, success and material things”. All achievements of an individual are judged by these characteristics. A high degree of economic growth and rather large businesses are regarded as positive, if masculinity is in place.
Femininity – the opposite of masculinity. In this case the leading values in society are defined concerning the quality of life, as well as taking care of others. Cooperation, a pleasant work environment, and employment security represent the attributes of countries where femininity is in place.
Culture can take on several different shapes and it is important to be able to define these when doing business:
Universalism – the belief of managers that certain business practices can be equally applied worldwide. This means that the actions taken are not being adapted to the specific country the company works with. This might result in problems since the way business is conducted varies in almost every nation.
Particularism – the opposite of universalism. Particularism is the idea that business practices need to be adapted to the surrounding conditions and nothing can be applied universally. Further, particularism states that the way ideas and practices should be performed is determined by the surrounding conditions.
Neutral Culture – a culture in which emotions are not expressed freely (e.g. in Asia and the UK).
Emotional Culture – a culture in which emotions are expressed freely and naturally (e.g. in Mexico).
Achievement Culture – a culture in which people are valued by looking at their status and success in their workplace (e.g. in the US and the UK).
Ascription Culture – a culture in which people are valued based on their personality
Differences in management styles in different cultures may evolve to a problem since the underlying ethics sometimes differ grandly. When taking into account mergers and acquisitions (M&As), which is a widespread way of gaining a foothold in another country, a cultural clash with losses in morale and effectiveness is sometimes the outcome. Especially due to acquisitions of firms by foreign businesses and the maintenance of the previous workforce makes the work environment more complicated. The unequal management styles of both cultures need to be adapted to one another in order to prevent such losses.
Moreover, work attitudes of the workforce are of great importance in order for the business to function. The way employees perform their tasks is essential for the overall quality and quantity of the products. Organizational commitment, as well as job satisfaction is a crucial factor in order for a company to operate successfully.
Furthermore, another cultural aspect is achievement motivation. If there is no aspiration by the employees to complete their tasks productively and therefore reach the goal of achievement, an effective operation of business cannot be ascertained.
Obviously, time and the future are also an issue that needs to be discussed in this context. The way in which a certain culture views time makes a difference to decision making and can affect long-term strategies. For example, some cultures take more time to make up their mind when it comes to decision making, but are quicker implementing the strategy once they decided. In other cultures this might be the other way around, meaning fast-made decisions, but slow execution.
Ethics represent the basis of morality and conduct. Standards should be set when operating internationally because there sometimes are grandly diverse views of ethics in different countries.
International Trade – consists of the exchange of goods and services among different nations. International trade becomes continuously more important as many economies increasingly turn from state-run to rather market-driven economies. Worldwide trade offers many possibilities and advantages to MNEs such as enhanced business relationships, cutting costs, and exploring new markets.
Mercantilism – a theory in trade which states that by supporting exports and repressing imports, a government can enhance the economy of a country. This has the effect of increased wealth and a positive trade balance for that particular nation.
Theory of Absolute Advantage – when countries are able to produce goods more efficiently compared to others, they should specialize on those in order to advance their economy.
By doing so, the country’s resources can be allocated appropriately, and the nation is then able to offer a larger number of goods, produce efficiently, and enhance the national well-being.
Theory of Comparative Advantage – consists of the theory that countries should concentrate their production on goods for which they have the largest relative advantage.
By doing so, trade can be improved; given that the relative price ratios of the goods are different under international exchange from what they would be under circumstances of no trade (this domestic situation is also called autarky -an entirely self-sufficient government policy). Overall, worldwide consumption and efficiency rise if there is free trade and nations equally gain an advantage (even if one of them holds an absolute advantage of both goods). An uncertainty concerning the comparative advantage is the allocation of gains among the countries, which it not necessarily always equal.
Factor Endowment Theory (a.k.a. Heckscher-Ohlin Theory) – consists on the assumption that any nation will import products for which their resources are limited, and export those goods for which their resources are plentiful. The theory therefore takes the size of the workforce, and the amount and cost of the production factors into account.
One disadvantage of this assumption is, for example, that some nations have high prices for a moderately large workforce due to minimum wages, resulting in imports of some goods that can be produced for less in another country.
Leontif Paradox – Some countries (e.g. the US) export more labor-intensive goods and import rather capital-intensive goods. In this case, the quality of labor input is more important than man-hours of production.
International Product Life Cycle (IPLC) Theory – consists of the different stages of every good’s particular lifecycle. When the theory is being applied and trade patterns are to be found out, the factor of technology as an essential need for the development of new products, as well as the market size and structure are important elements. When it comes to technology in the international arena, it is possible for a product to be in the standardized product stage in some countries, and in the maturing stage in others since the development of technology is different worldwide.
Stages of the lifecycle:
· New product
In the beginning, the price of the product usually is inelastic and the purchase of
the product takes place in the home country. Often the profits are relatively high
and when production eventually exceeds local consumption, the company
usually starts exporting.
· Maturing product
Due to the exports, the firm continuously has increasing sales. Foreign
competitors usually recognize the potential profits they could gain through producing an imitation of the product quickly and therefore start working on inexpensive substitutes. Demand for the original product then usually decreases and the company’s strategy moves from production to a rather market-protective strategy.
· Standardized product
The technology of the product develops into a commonly used one and the demand often turns into the determinant of the product’s price. Production is being moved to rather low-cost countries and the product is eventually associated with an image of being standard.
Other factors that have an impact on international trade theory are government regulations which often consist of trade restrictions with other countries. Furthermore, monetary currency valuations, as well as consumer tastes play an important role when dealing with international trade.
Monetary Exchange Rate – the price of one currency expressed in terms of another currency. Therefore, a specific value is given to a currency.
Trade barriers are a crucial factor in international trade and they are usually set in order to:
There are numerous types of trade barriers:
There are several different types of tariffs in international trade:
These are mainly used to increase the revenue of the government and to protect the domestic market. Due to the tariffs imposed, the price is higher for the consumer and therefore the demand decreases. These trade barriers harm mostly the purchasers with a rather low income and have hardly any effect on higher-income consumers.
Dumping – an action of firms selling imported goods below cost or below the price of the home country. Dumping is prohibited in many countries by the government in order to protect domestic industries or enterprises since it harms these economically.
The US and their trade policies:
Due to the North American Free Trade Agreement (NAFTA), trade is supported because many trade barriers between the US, Mexico and Canada are eliminated.
Caribbean Basin Initiative – a trade union which abolishes almost all tariffs on imports between the Caribbean and Central America
Furthermore, the US enforced a Trading-with-the-Enemy Act, consisting on no trade with nations that are considered to be enemies of the United States (e.g. Cuba).
Foreign Sales Corporation Act – an act created in favor of US exporters. When they found partnerships overseas, they do not pay taxes on the partner’s income until the incomes are forwarded to the parent company
Trade Adjustment Assistance – a service offered by the government to support US companies and individuals, if they suffer from foreign competition. In that case, the government provides job counseling or loans.
Types of non-tariff barriers (NTBs):
When it comes to imports, quotas set the limit to the amount of goods that are
allowed to be imported. As a result, prices rise and there is increasing domestic
production.
A regulation for the government to give priority to domestic businesses;
occasionally foreign companies are being entirely excluded. These restrictions
are important in supporting and protecting local businesses from going
bankrupt.
This valuation works in the area for the payment of duties and holds that the value for duty is based on the invoice cost, and the latitude of customs to reclassify goods has been decreased.
If there are certain standards required for imports in some countries, the
obstacle of tec lead to an exclusion of such nations in trade, and thus lets them fall behind in economic developments even more.
Countries are allowed to protect their markets from dumping because this unfair
competition may drive local producers out of business. They have the
permission to place extra duties on goods that were subsidized in their home countries or are dumped.
In order to sustain high domestic prices in the area of agriculture, international
trade with such goods is vastly controlled. Local producers receive subsidies from the government and quotas, as well as fixed and variable tariffs are imposed.
When dealing with the exporting of natural resources, the circumstances under
which exports can be limited have been tightened. After the Tokyo round, where
such issues are being discussed, countries are now allowed to limit exports to
encourage further domestic processing.
Countertrade – barter trade where goods are being exchanged. In the case of countertrade the exporting company obtains payment in terms of products from the importing nation. This sort of trade usually reduces efficiency of international trade.
Free Trade Zone – a trade area in which the payment of customs duties may be postponed while at the same time a continuation of the processing of products takes place. A free trade zone serves as a tax-exempt commercial activity by taking advantage of local workers and financing.
Advantages of free trade zones:
Maquiladora Industry – this is a free trade zone between the US and Mexico in order for them to produce goods and then trading them between the two nations.
International Finance – deals with the international monetary scheme, as well as with the balance of payments (BOP). For example, if the value in currency of one country compared to others changes, the costs of imports and exports are grandly influenced by this incident.
Balance of Payments (BOP) – all transactions between one country and the rest of the world are documented in the balance of payments. Thereby the economic activity of a nation can be determined and divided into the areas of the current account, the capital account, and reserves. For example, if an amount is debited from the BOP, it means that something was imported, assets increased, or liabilities decreased.
International Monetary Fund (IMF) – an organization whose objective it is to sustain stability of the balance of payments since this has an influence on the entire international financial system.
Current Account – an account on the balance of payments in which services, merchandise trade, and unrequited transfer are recorded.
Merchandise Trade – the part of the current account where imports and exports of goods and services are documented. Exports are recorded as credits, and imports as debits
The part of the current account called Services covers for example financial transactions such as tourist travel, and insurance and freight on international shipments. If the country acquires such services from other countries, it is reported as a debit since it can be set equal to an import.
Unrequited Transfers – the area of the current account that does not require a payment or the performance of any other service. When, for example, a sanitary organization sends food to third-world countries.
Capital Account Items – transfers that entail claims in ownership. Direct investments, as well as portfolio investment are examples of such transactions. Furthermore, governmental and private transactions are being distinguished.
Moreover, Reserves is an important account. It is used in order to balance out the accounts from the balance of payments. Since debits never exactly equal credits, ‘reserves’ is an account in which net errors and omissions are recorded. If a country continuously carries a deficit on the BOP, its currency will depreciate and loans from the capital market will be hard to acquire. If this is the case, the nation may borrow money from the International Monetary Fund (IMF) in exchange for certain rules that
the particular country has to follow. If a nation does not want to borrow money from the IMF, it may for example start changing its fiscal policy concerning taxes and tariffs.
International Monetary System – an agreement of all central banks from the countries that engage in the International Monetary Fund (IMF). This System has the goal to promote the free flow of goods, services, and capital among countries; furthermore, a stable foreign currency, and liquidity for countries are objectives to be strived for by the IMF.
International Bank for Reconstruction and Development (today called the World Bank) – a bank owned by several governments. It serves the purpose of supporting economic development projects by offering low-interest loans.
Objectives of the IMF in general:
Special Drawing Right (SDR) – a unit of value that has been established by the IMF in order to replace the dollar as a reserve asset. Thereby, international reserves may be raised.
A managed float system has been created in order to allow a floating exchange rate. This way, every country is responsible for its own monetary policy. Furthermore, floating rates automatically facilitate trade balance adjustments.
Opposed opinions rather see advantages in fixed exchange rates. For example, countries cannot simply increase their money supply and cause inflation. Also, the trade with currencies would not be possible and therefore there are no grand fluctuations in the exchange rates. Fixed rates ease business planning and decrease risks concerning international transactions such as imports, exports and FDI.
European Monetary System (EMS) – a system made up of the major EU members. Their currencies are fixed among the members of the EMS, but float against the rest of the world. Its main purpose is to:
In order to realize these goals, the European currency unit (ecu) and the exchange rate mechanism (ERM) have been created.
Economic cooperation is an important factor when it comes to national policies of the industrialized countries. If monetary and fiscal policies are used independently by some nations, exchange rates may become highly volatile.
Foreign Exchange – the exchange of payments from one currency to another. This can take place in different transactions. Between banks, foreign exchange is mainly conducted through telephone transfer. Between businesses it is the draft. In the case of tourism, currencies are physically exchanged.
Exchange Rate – the value of one currency in comparison to another currency. In detail, it is the amount of one currency that can be acquired for another currency
Foreign exchange can take place in different ways:
· Through a broker
When there is a broker conducting business, he deals with several other foreign
exchange brokerage companies. His objective is to bring together buyers and
sellers and then charge a commission for doing so.
· Business between banks
When banks engage in foreign exchange, the interbank market for foreign
exchange is playing an active role.
· Through forward transactions
The forward foreign exchange market gives the customer the ability to “lock in”
an exchange rate and thereby eliminate the risk of a devaluation of the currency
that he needs.
Spot Rate – a type of exchange rate that stands for current foreign currency transactions.
Forward Rate – is the rate that stands for the delivery of foreign currency at a fixed future date.
Cross Rate – an exchange rate consisting on two other rates. This may be of interest for businesses if they are dealing with more than two currencies.
Foreign Exchange Traders – are employees in banks that fulfill orders such as buying and selling foreign currency for their employer. This is done because certain customers placed orders before and then the transactions are made at the spot rate or forward rate.
Foreign Exchange Brokers – individuals that are employed in brokerage firms. They usually only engage in foreign exchange transactions at both spot rates and forward rates.
Speculator – an individual that has either foreign currency on hand or is supposed to deliver foreign currency in the future which he does not have on hand. Currency that one has on hand is called “long-position”, whereas currency that one has not on hand is called “short-position”.
Foreign Exchange Hedgers – these are participants that avoid risk by “locking in” assured foreign exchange positions.
Foreign Exchange Arbitrageurs – individuals who benefit from differences in exchange rates of two or more currencies; it is their work to buy and sell those in foreign markets.
Furthermore, governments also play an important role in foreign exchange markets. They sometimes serve the purpose of stabilizing particular prices by acting as buyers and sellers in the market. This benefits the overall well-being of the economy in terms of international trade.
Purchasing Power Parity (PPP) Theory – relies on the assumption that the relative purchasing power of two currencies determines the exchange rate between those currencies. For example, in case of inflation, purchasing power is influenced and foreign currencies have to rise or fall in value in order to restore parity.
Fisher Effect – a theory which expresses the relationship of interest rates and inflation in two nations. For example, if inflation increases, the nominal interest rate will as well since lenders want to protect the real interest rate.
The Fisher Effect consists of three important factors:
International Fisher Effect (IFE) – a theory which states that the exchange rate differential is a neutral determinant for forecasting future changes in the spot exchange rate.
The forward exchange rate can also be concluded from the differential since the difference in interest between two countries may be counterbalanced by the forward exchange rate. Other elements that need to be considered when exchange rates are being determined are, for example, confidence in the currency by the public. Furthermore, technical factors such as seasonal demands and economic statistics are important.
Exchange Risk – the risk for a business to not be able to alter costs and prices to compensate changes in the exchange rate. In order to decrease exchange risk, methods to do so include:
When it comes to matters of financing, a company may try to borrow or lend money on foreign capital markets depending on where the interest rates are the most promising. If multinationals establish part of their production in a foreign country, they often receive loans in the form of subsidies from governments.
Eurocurrency – any currency that is stored outside its home country
Eurodollars – dollars that are banked outside the United States
Eurodollars have several possible sources:
London Inter-Bank Offered Rate (LIBOR) – If banks hold Eurocurrency loans, the LIBOR is the interest rate charged between banks for such loans.
Foreign Bond – a bond which is issued in the currency of the country where it originated, but then sold outside the country of the borrower.
Eurobond – this is a bond that is usually signed by several banks from different nations. It is then sold in any country which does not have the currency in which the bond has been issued.
Eurobonds have several advantages:
Strategic planning is the evaluation of the environment of the company and its
internal strengths, identifying long- and short-term objectives and implementing an action plan for achieving these goals. Multinational Enterprises (MNEs) find great support in this kind of planning since it provides them with both general direction and specific guidance. Competitive situations ask a different kind of approach from MNEs and they either redirected their efforts or exploited new areas of opportunity. Without strategic planning, they wouldn’t have been able to do this.
MNEs have strategic tendencies that determine the specific courses of action the firm undertakes. There are four such tendencies, an MNE with a:
1. Ethnocentric predisposition relies on the values and interests of the parent
company while formulating and implementing their strategic plan. Their basic
mission is profitability and when a company tries to sell the same products
abroad as they sell at their home country, this tendency is most commonly
used.
2. Polycentric predisposition will adapt its strategic plan to the needs of the
local culture. Their basic mission is public acceptance and profits will be set
back into the country in the form of expansion and growth. When the enterprise
is doing business in more than one culture, the overall plan will be adapted to
reflect the local needs.
3. Regiocentric predisposition has a combination of the poly- and ethnocentric
tendency. Their mission is to obtain both profitability and public acceptance.
Both local and regional needs will be taken up in their strategy. The focus is not
so much on a particular country, but more on a geographic region.
4. Geocentric predisposition has a strategic plan with a global view of
operations. This tendency is most often used by the largest international
corporations and Multinationals in the true meaning of the word.
The strategic planning process is influenced by the MNEs tendency. Some are
interested in profit, others in large-scale manufacturing and again others in selling in other countries with a culture similar to their own.
A Strategy formulation contains the evaluation of the environment and the company’s internal strengths.
First, the external environment will be assessed. This analysis exists of two activities: Information gathering and information assessment. Competitive intelligence (the use of systematic techniques to obtain public information about competitors as part of the decision-making process) helps with these activities.
Information gathering is a very important phase of international strategic planning. It is even critical, which not all companies realize early enough.
MNEs have different ways of conducting an environmental scan.
The four most commonly used are:
The expert opinion is used most frequently. Information about competitor strengths and weaknesses is particularly important when a company serves a product in many market niches around the world which are too small to be profitable in an individual niche. Firms that are coming under attack benefit from this information as well.
Information assessment is the evaluation of the gathered data. One of the most
common approaches is to make an overall assessment based on the five forces.
Bargaining power of buyers: MNEs want to predict the probability of keeping their buyers (customers). If the chance of buyers moving their purchases to another business is great, MNEs will counter this by adapting their strategy.
Bargaining power of suppliers: an MNE wants to see if it can gain competitive
advantage over other suppliers in the industry.
New entrants: an MNE will investigate the possibility of new entrants entering the industry and will try to keep the power of new entrants low by keeping costs low and consumer loyalty high and by encouraging the government to limit foreign business activity through regulation.
Threat of substitutes: By lowering prices, offering similar products and increasing customer services the threat of substitutes will be kept low.
Rivalry: an MNE will investigate the rivalry between itself and the competition. The market strength can be improved by: offering new goods/services, increasing productivity, differentiate current goods, increasing overall quality, targeting specific niches.
The internal environmental assessment helps to find the MNEs strengths and
weaknesses. The MNE will explore two specific areas: Physical resources and personnel competencies and how the value chain can be used to bring these resources together.
Physical resources are the assets used to carry out the strategic plan. Many of these are on the balance sheet under cash, inventory machinery and equipment accounts. However, the location and disposition of these assets play an important role. Many MNEs are divided in
Strategic Business Units (SBU’s), which are operating units with their own strategic space.
Some large MNEs use vertical integration: ownership of all assets involved in
producing the final product. The goal is to have control over the supply and that the materials needed are delivered.
However, this strategy is not profitable to all MNEs and therefore some use virtual integration: ownership of the main assets for producing the final product, but rely on outsourcing to provide all other inputs needed. The advantage of using virtual integration in a company is that it can operate like a vertical integrated company, without needing ownership of all factors of production.
Personnel competencies (capabilities of the employees) reflect most of the
company’s strengths and weaknesses and are therefore useful to investigate. An
understanding of employee abilities can help a firm to decide if it wants to be the leader in the firm or to follow and copy the leader. After all, not every company has the competencies to be a good leader.
The value chain is a complementary approach to internal environment assessment and it consists of primary activities which, together with supporting activities generate customer value and increasing profit margins. The primary activities consist of inbound logistics, operations, outbound logistics and marketing & sales. The supporting activities contain firm infrastructure, human resource management, technology development and procurement. A value chain analysis helps the company to choose a strategy.
There are three generic strategies possible from this analysis:
1. A cost strategy relies on low price and is achieved through cost reductions,
overhead-control and cost minimalization in R&D, sales and advertising.
2. A differentiation strategy is aimed at adding perceived value, something unique and is achieved through many forms including creation of brand image and increased customer service.
3. A focus strategy aims at concentrating on a particular market segment or buyer group and is different from the two other strategies because their objectives are industry-wide focused and the focus strategy is built around a particular target market.
Furthermore, the company will decide its competitive scope, which is the width of its target market within the industry.
In both external and internal analysis, the MNEs are provided with information needed for setting goals. There are two ways to investigate these goals or objectives. One way is to examine them on an operating basis and the other is to examine them by geographical area or on an SBU basis. The “cascading effect” is an approach that each SBU will have its own list of goals.
Strategy implementation is the process of achieving predetermined goals by
implementing the formulated strategy in a good manner. In this process there are many areas on which the focus can be, the three most important are: location, ownership decisions, and functional area execution.
Location is important for a number of reasons: Local facilities often provide cost
advantages for the manufacturer, especially when raw materials or labor needed for the final product can be obtained close to the facility. Further, residents may prefer locally produced products. Sometimes an MNE is doing so much business in a country, that the local government can insist that the company will produce its products locally. That is one of the major reasons that Japanese car manufacturers moved their operations to the US. Although the benefits can be great, there are disadvantages in locating operations overseas. An unstable political climate can leave the MNE in a vulnerable position towards low profits. Moreover, the possibility of attacks by international terrorists has lead MNEs in those areas to reduce their risks.
Ownership of international operations has become an important issue recently. Many Americans feel that foreign-owned businesses located in the US, harm the US economy. On the other hand, non Americans have the same feeling about US business there. The real issue of ownership is that whether or not the company is bringing economic prosperity to the country where it is doing business. If countries want to stay economically strong they should attract international investors and build products that are demanded on the world market. Two approaches in achieving this objective are: international joint ventures and strategic alliances.
An international joint venture (IJV) is an agreement between to or more partners to control and own a business overseas. Government encouragement and legislation have raised the popularity to start an IJV in recent years. Further, the growing need for partners with knowledge of the local culture and the urge for outside investors to find local partners to team up with have contributed to the popularity of joint ventures. Unfortunately, most IJV’s did not work out well. The major reason is the desire of MNEs to control the operation which sometimes resulted in poor decision making. Mainly, joint ventures are very difficult to manage and therefore many MNEs have switched to strategic alliances.
A Strategic partnership is an alliance between competitive MNEs for the goal of
serving a global market. Strategic partnerships are almost always formed between MNEs that are in the same line of business (this need not be the case with IJV). Since a 100% ownership of a business in another country is a very risky and expensive given that the MNE may not have much experience in that particular market, it is becoming more and more popular to start an IJV or strategic partnership.
Functional strategies help to coordinate operations and to make sure that the plan is carried out properly. The functions fall into six major areas: marketing, manufacturing, finance, procurement, technology and human resources. For purposes of analysis they can be divided in three: marketing, manufacturing and finance.
The marketing strategy is designed to identify consumer needs and to formulate an action plan to sell these needs (products of services) to the customer. Most marketing strategies are divided in the “four p’s” (product, price, promotion and place). First, the demanded product is defined, it will be adapted to local needs and then the appropriate price will be determined. Then promotion of selling the product to the local market can be started.
The manufacturing strategy is designed to fit to the marketing plan and to ensure that all products are manufactured and delivered in time for sale. This strategy is also coordinated with the procurement and technology department to make sure that products have the state-of-the-art quality and are delivered in time.
Financial strategies used to be formulated and controlled out of the home office, but recent years showed that this approach is quite unmanageable because of a.o. fluctuating currencies. Nowadays, overseas units can control their finances more but they are bound to a constructed budget that is in line with the overall strategy. Moreover, they are held responsible for their financial performance. When the finance strategy has a leading position, the other functional strategies are limited to the amount of money they can spend. In a lag position, the financial strategy is used to evaluate performance and to provide insight in future strategies.
Strategy formulation and execution is followed by control and evaluation. After control and evaluation the MNE might want to set higher standards or change the strategy formulation or implementation. In making these decisions, there are common methods of measurement.
In most cases, return on investment is used (net income before taxes/ total assets). The reason that ROI is such a popular measurement is that it is an extensive result which is influenced by all business activity. Moreover, ROI is easy to compare with other units in the same country as well as in others. ROI does however have some shortcomings: ROI can be artificially inflated if a unit sells to another unit, the ROI in a growing market will be higher than in a maturing market, so the performance can be misleading and ROI is a short term performance measure.
Other types of measurement are sales growth and/or market share (the MNE wants to increase sales and maintain or increase market share), costs, new product development (an extremely important area for firms that rely on new offerings), MNE/host-country relations (poor host-country relations can endanger profits) and management performance.
These methods of measurements are used to determine if the MNE performs well. Based on the results, the MNE can sharpen or soften its goals and the strategic planning process will start over.
Major MNEs operate in global structures that form the basis of their organizational strategy. Sometimes these MNEs have affiliates which are integrated in the company structure, for example the Mitsubishi group. Forming these global structures is a very difficult task, especially when you need to take all other businesses into account. Sometimes it takes more time and effort than the formulation of the strategic plan.
MNEs need an effective structure to implement their strategies; because the structure is needed in order to ensure that the desired goals are met efficiently. Every enterprise will choose a structure that best meets company goals. Of course, strategic plans change and therefore also the organizing structure.
Early organizational structures
When a company starts with international operations, these activities are normally a continuation of the domestic operations. While the local market is still the primary focus, international involvement is of second importance. There is no attempt yet to put international transactions in a separate department. When international operations increase, the MNE will align the growth structurally. There are several ways to do this, for example:
Let international sales be handled by the marketing department, create an export
department which is a sub department within the marketing area or directly reports to the CEO, use of overseas subsidiaries.
When MNEs become more involved in foreign markets, the export department
structure or subsidiary arrangement cannot meet the changing needs of the company anymore and will be discarded or supplemented.
After this the company will look into joint ventures or foreign direct investment and is likely to choose an international division structure.
The International division structure is an organizational arrangement that centralizes all international operations. This gives the advantage of reducing the CEO’s burden. Furthermore, this structure raises the status of overseas operations to that of the domestic departments.
But, this structure also has a few disadvantages, namely: it separates operations in two categories: domestic and international. This can create rivalry between them. The second drawback is that this arrangement puts a lot of pressure on the home office to think globally. This is very difficult for MNEs which have most of their sales in the home country and is domestically focused. In spite of the disadvantages, the international division structure is mainly used among US MNEs.
When MNEs generate more revenues from overseas operations, their strategy
changes. Moreover, their organizational structure changes too. There are six basic types: global product, global area, global function, mixed, matrix and transnational network.
Global product structure is an organizing arrangement in which the domestic
divisions have worldwide responsibility for product groups. So, each product division sells its output worldwide and each manager is responsible for the entire product line and product division (marketing, personnel and finance).
This arrangement works by a “profit center” concept. This entails that each product line is expected to generate a predetermined ROI and the performance of each line is measured by ROI. Further, each product line is an autonomous business free from the home management controls. The only exception is a budgetary constraint enforced by the central management.
A number of benefits come with this global product structure. Each major product line is allowed to focus on customer needs (if the firm has a large product portfolio) and can therefore help the company matching its marketing strategy to customer needs.
There are also a couple of disadvantages that come with this structure. First, there are more personnel and facilities needed, since every product line operates by itself. A second disadvantage is that the attention is on successful products, while less successful products are sidetracked. This can lead to a long term profit loss. A third is that most managers are knowledgeable about the local demand, whereas knowledge about the international market is needed. A fourth is the difficulty of organizing the different product divisions. Because each product division operates on its own, less scale advantages are obtained which can lead to a loss in sales.
A global area structure is an arrangement where operations are divided between area managers which are each responsible for a specific geographic region. This is a polycentric structure (host-country-oriented). Each regional division is responsible for all functions within the area (production, marketing, personnel, finance). There is structural similarity between this arrangement and the global product structure, but they way they operate is very different. A product division in a global product structure is responsible for the output of one product line throughout the world, whereas a product division in a global area structure is responsible for all product lines in one specific area.
A global area structure is most commonly used by mature businesses with narrow product lines that are not differentiated by geographic area. The global area structure provides managers to react rapidly on local tastes and regulations and therefore the firm becomes more “nationally responsive”. Herewith the company usually gains competitive advantage.
With this structure however, there are great expenses associated with duplicating facilities. Moreover, since production efficiency is usually dependent on the amount of output, small plants are often less efficient than large ones. Further, companies using this structure, find it hard to coordinate the dispersed divisions into the overall strategic plan. R&D is not favored in companies that obtain this structure because global area divisions are not ready to accept new offerings. Because each group serves a regional market and new products often need adaptations to fit in the current market, managers are unwilling to try new products.
A global functional structure is built around the fundamental tasks (and herewith, primary functions) of the company. The head of production is in this case responsible for all domestic and international manufacturing. Similarly, the head of the marketing department is responsible for all sales (domestic and abroad). MNEs with a narrow product line which have reached a stable coverage and are not likely to face major changes in competitive attack use this structure most commonly.
A main advantage of the global functional structure is that a small group of managers have responsibility and control over a wide-reaching organization. Further, there is little duplication of facilities. Moreover, this structure allows a close-fitting, centralized control.
A disadvantage is the difficulty to coordinate the different functions (production and marketing) since they operate independent of each other. This is particular problematic when the enterprise has multiple product lines. Another drawback is that the responsibility for profits is with the CEO because there is little distribution of operating authority far down the chain.
The global functional structure serves raw materials extractors with heavy capital investments and energy firms also use this structure. However, other kinds of companies do not benefit from this structure.
A mixed structure is a cross organization design that combines different structures in a way that best meets company needs. Sometimes this structure is used temporarily but it’s also used to serve the company for an infinite time. The drawback of this structure is that when a new “mix” is introduced, it sometimes is too flexible and employees find it hard to adapt quickly to this new structure. Therefore, MNEs must carefully outweigh the advantages and disadvantages of whether to use this arrangement.
A (geographic) matrix structure is an arrangement that blends two structures such as a product and functional structure or a regional and product structure. There is emphasis on as well the function (attention to the activities to be performed, inputs) as the product (attention to the good to be produced, outputs). Herewith, managers get a more globally orientated attitude.
There are three types of managers in this matrix structure:
1. Regional managers have a polycentric focus and are charged with selling
products in their geographic locale.
2. Product managers have an ethnocentric attitude and need to coordinate
people’s efforts in such a manner to ensure profitability in a product line or
business.
3. Matrix managers are responsible to both regional and product managers.
There is also another matrix design: the multinational matrix structure. It is more complex than the geographic matrix structure and has three dimensions.
There are two kinds of managers in this structure:
Further, this multidimensional matrix addresses three areas: function, production and geography.
On of the major advantages of the matrix structure is that it allows management to focus on more than one primary area. MNEs that need a balance between a product and global location strategy can find great advantage with this type of structure.
Unfortunately this structure brings disadvantages. The complexity of the design and the use of deal command can lead to confusion regarding what everyone is responsible for and to whom one reports on different matters. A second disadvantage is the large amount of meetings and discussions that need to be held because so many different groups need to be coordinated. A third drawback is that managers need to learn how to operate in a matrix structure and this takes a lot of time. The matrix structure is almost never a first choice of MNEs; however this structure can function as a temporary arrangement as the company looks for some hybrid design that will help them to operate more efficiently in the international business.
The transnational network structure is the newest form of international
organizational arrangements. It is designed to help MNEs take advantage of global economies of scale while at the same time being responsive to local demands. It combines elements of functional, product and geographic designs, while relying on a network arrangement to link the various worldwide subsidiaries. Different product groups and geographical areas have different structures depending on what best suits their operations.
The basic structural framework consists of three components:
This structure is difficult to put in the form of an organization chart because it is very complex and continually changing.
Effective organizations begin by formulating a strategy and after that design a structure that will efficiently implement this plan. To determine the best structure, three questions must be answered.
1. Is it possible for the enterprise to operate efficiently with only domestic
divisions, or are international divisions also necessary?
2. How should the organization be structured? By: product, area, function, mixed or matrix?
3. How can the cooperation and coordination be most effectively reached?
There are five key variables that MNEs examine in choosing the right structure.
Most of the time, there are three or four interacting variables that the structure must address.
1. Evaluation of relative importance of international operations at present time and with this information estimating the future.
2. The history and experience of the enterprise in the international arena.
3. The company’s business and product strategy.
4. Management’s operating philosophy.
5. Company’s ability to adjust to organizational changes.
The ultimate decision lies with the management, but that usually comes down to a compromise between personnel needs and needs of the enterprise. The result is a structure that is efficient and humanistic.
Decision making is the process of selecting between alternatives. In international operations it is important to consider where the ultimate decision-making authority lies. When the home office is in control, decision making is centralized. When the subsidiary can make decisions, it is decentralized.
Decision making in MNE subsidiaries varies from country to country and culture to culture. For example, British organizations work with decentralized decision making because they feel that middle-level managers have a higher level of understanding about business operations than upper-level managers.
French and German subsidiaries are fairly centralized. French senior executives like to stay in control of operations and German managers are hierarchical in their approach and most decisions are made at the top.
In Norway, Sweden and Denmark operations are highly decentralized as well in
Scandinavian based companies and abroad. They put great emphasis on the quality of work, which is more important than high profits.
The Japanese use a combination of centralization and decentralization; they make use of a process called ringsei, decision-making by consensus. At the same time they keep control of authority in what will be discussed at lower levels.
US MNEs use centralized decision making in their overseas operations, particularly in marketing policies, financial matters, and decisions on production capacity.
Decentralization is a current trend worldwide as MNEs try to increase economies of scale and try to attain a higher operational efficiency. This is mainly done through outsourcing, thus simplifying their structures and delegating some authority to their suppliers.
Communication is the process of transferring denotations from sender to receiver. The way in which this is done varies per MNE. US MNEs use direct communication, since their culture encourages openness and specific communication. The Japanese use indirect communication, their culture encourages indirect and implied approaches.
These differences in cultures can be very difficult for an MNE. Non-verbal messages are another communication problem. These take two major forms in international business:
· Kinesics is the transfer of information through body movement and facial
expression.
· Proxemics is the physical space that people take when talking to one another.
Controlling is the process of ensuring that all things go according to plan. This
process is to reward performance and consists of three steps:
1. Establishing standards
2. Comparing performance against standards
3. Correcting deviations
There are many differences in controlling a US, Japanese, or European firm. These differences are summarized in the following table.
You see, there are many differences on how to control an MNE; running operations in the same way abroad as at home is often difficult.
Many new goods and services were produced because of production management. The nature of this management is in many respects similar to MNEs and domestic firms. Both are interested in:
· Efficient use of labor and capital
· investing in R&D
· organizing operations to generate successful new product lines
· increase service and production efficiency
MNEs should organize their production management, through the use of inventory control so that they can minimize operating expenses. However, pressures from the host-country governments can influence the decision-making of MNEs in production areas. For example, resource-based MNEs are often criticized because of their integration.
Backward integration is the purchase of a firm that is involved at an earlier stage of the production chain. MNEs who apply this kind of integration are criticized by doing little for development or employment in the host nation.
Forward integration is the purchase of another firm that is at a later stage in the chain of production so that the company moves closer to the customer. A point of criticism is that MNEs use this strategy to homogenize the taste of the consumer and that is damaging to national identities.
Horizontal integration is the merging of two companies in the same industry and at the same state of production. MNEs who choose this kind of integration are criticized for introducing the same product line on a worldwide scale. Local firms cannot compete with these economies of scale and will be taken by the MNEs.
The industrial relations area copes with the same problems. MNEs must bear in mind different labor practices and wage rates. Host governments can pressure multinationals to use local sources for their supplies, hire local workers and to help improve the production environment in the host nation.
Another challenge is financing of operations. Foreign exchange risk, international tax laws and government controls on capital complicate the choice between local and international borrowing and the use of internally generated funds. Additionally, MNEs need to know where they are on global and local cost curves, so as to exploit any cost advantages with an appropriate organizational structure. In spite of all these challenges, experienced MNEs learned how to deal with them and have employed a wide range of production strategies.
An effective production strategy begins with new product development, not
manufacturing. When you think of the fact that today’s best-sellers were unavailable a short time ago, this new product development gains importance. If MNEs are not developing new products they should improve their current offerings. In either case, they focus on R&D and innovation.
Every year, many new products or services are introduced, or old ones are proved. Most MNEs develop their own goods and services, but some of them use outsourcing to obtain innovative offerings. In fact, many small firms are rising and provide large companies with new products. Other companies form agreements with firms to jointly produce and market a new product while continuing to produce others on their own.
A big challenge for MNEs is the speed with which they bring new products to the
market. A “speed to market” strategy can be extremely profitable according to many companies. To be clear, it is important to design and market the new product as quickly as possible.
A way to increase speed is to make use of a time-to-market accelerator. This
accelerator removes bottlenecks and errors out of the production process and ensures a product that is of higher quality and can be faster delivered. Every company uses a different accelerator, but the effects and outcomes are the same. An example comes from Pirelli, a French tire maker, showed its modular integrated robotized system (MIRB). MIRB allows the entire production system to be robotized.
Previously, companies focused on the manufacturing side of the operation, but recent research showed that putting most attention on product design and planning of operations is the best way to increase the delivery speed and to reduce defective objects. This accomplished through concurrent engineering. This is the process of having engineering, design, and manufacturing people working together to create a product.
A good product design is useful for two reasons:
1. There are fewer changes needed later in the product stage and the good can
be put to the market more quickly.
2. Costs of changing the product get higher when coming close to completion.
Once the product has been planned out, the attention will turn to production. This strategy is focused on minimizing costs and increasing quality and productivity.
The production process does not only involve producing physical goods, but it is also about generating services. Quite often the two are interlinked. Sometimes the goods or services are produced by the MNE itself and other times the firm will have an arrangement with other firms or suppliers to provide them with the goods needed. When generating goods and services, there is often a mix of product/service strategies at work.
Global sourcing is the use of suppliers, which are more efficient than the MNE. The location of these suppliers is not important (can be anywhere in the world), but the efficiency is. There are a number of reasons why global sourcing gained importance and the most obvious one is cost.
It is important to remember that not all global sourcing involves an outside supplier. Some MNEs use their own source of supply or hold an equity position in a supplier. This relationship does not have any guaranties for a next bid and there is a great deal of pressure on the supplier to develop and maintain quality products.
At the same time, these suppliers provide service/ goods to more than one firm. If they are operating in similar or complementary industries, their processes will be easily copied by others, therefore, their business relationships are important to stay competitive and to hold positions as world-class suppliers.
Close working relationships between suppliers and the industry leads to competitive advantages. Suppliers help firms notice new methods and opportunities to apply new technology. Firms have quick access to information, ideas and supplier innovations. The exchange of R&D and joint problem solving results in faster and more efficient solutions. Suppliers also function as water pipes for transmitting information and innovations from firm to firm. Because of this process, the velocity of innovation within the national industry is accelerated.
These advantages explain to some extent why US suppliers are going international. By setting up operations close to competitors, US suppliers find it easier to monitor developments, changes in production and technology in the industry and can herewith stay competitive. In fact, when production companies set up operations abroad, they find their suppliers putting a plant nearby in order to keep serving the manufacturer. The other reason for doing this is to prevent local competitors from taking up some of this business.
When MNEs turn to global sourcing, the use of internal sources is their first preference. However, if it turns out that it is more profitable to use outside sources, the company will do that. Actually, sometimes MNEs do not make the effort to produce part of a product if they know that they are not sufficient in manufacturing it.
After an amount of time, MNEs know exactly which supplier is best and will turn to them immediately. Then, the attention can be focused on the actual manufacturing of goods.
This production of goods comes with a variety of concerns. For example, cost, quality and efficient production systems.
A way to control the MNEs costs is by increasing the efficiency of production
processes. This often means exploiting new, improved technology such as new
equipment and machinery.
This seems quite expensive but it is often the best way to increase productivity and to maintain competitive advantage.
Modular manufacturing is a production process that consists of modules that can be easily adjusted to suit changing demand. Car producers like Volkswagen, Ford and General Motors make use of this process. Moreover, they are also developing similar assembly plants to test their efficiency for future execution to their other factories. A second approach is to make use of low-cost labor sources. In the maquiladora industry hundreds of US plants have been established because of the low-labor cost. Labor costs are 20% lower for workers in these plants than for workers in the US. Further, because there exists a free trade zone between Mexico and the United States, US duties are levied only to the extent of the value added in Mexico. So Mexico’s low wage rates help to keep down the import duty.
A third approach is the development of new methods used to cut costs. In the US, it is typical for a company to calculate the selling price after a new product is developed. When the price is judged to be too high, the firm sends the product back to the drawing room to be reworked or accepts a lower profit margin.
Japan uses a different system, they first determine the target cost of the product before going into design, engineering and supplier pricing. This unique cost-cutting system helps the Japanese to keep their costs low and to be cheaper than competitors.
A fourth method gaining popularity with MNEs is that of costing products as part of a portfolio of related goods and not on an individual basis. Instead of evaluating the costs of developing one new soft drink, a company will look at the costs and revenues of the entire line of beverages. For example, in Japan 1000 new beverages are introduced every year. Ninety percent of them fail, but this does not stop Coca-Cola to introduce approximately one new beverage each month. This is not a very profitable strategy from a cost accounting standpoint. However, one Coke executive said that they have to produce these many new products, because their competitors do also. As a result, Coca Cola has a most profitable market in Japan and the company sells a variety of non-carbonated drinks to supplement its main brand.
Quality has been on of the major criteria for business success over the past decade: products are expected to be close to perfect. Nowhere is this more clearly reflected than in the auto industry. The Japanese have gathered a large market share in the international market because they make use of kaizen, which means, non-stop improvement. Ways to achieve kaizen are:
Large R&D expenditures and meticulous design, engineering, and production
processes that ensure a right fit of all parts and overall endurance of the unit.
Recently, US car manufacturers have been able to improve their quality and herewith gained market share. European car producers are very focused on quality, because they are aware of the fact that Japanese are a threat to their markets.
Another example of a high quality company is an auto supplier called Monroe Auto Equipment. This company has continually increased its quality and is a major supplier of parts in North America. Further, it does prosperous business in Japan (Toyota) and Europe (Nissan).
Other companies that have a blooming business are the WD-40 Co. that manufactures WD-40 a kind of super product that fights rust, cleans heel marks, looses sticky valves and defrosts frozen locks and screws. This super product is a best-seller in Great-Britain and is rapidly gaining international market-share.
Another company, A.T. Cross of Providence, Rhode Island manufactures mechanical pens and pencils of extremely high quality. In fact, despite a lifetime guarantee, less than 2 percent are ever returned for repair. This company’s pens and pencils are one of the most popular US-made gifts in Japan.
A production system is a group of related activities, which are designed to create value.
In generating goods and services this system includes:
· Location
· Layout
· Materials handling
Location can have a great impact on distribution and distribution costs and is therefore important. Many MNEs have found that governments as well national as local encourage them to set up operations by providing tax breaks or other financial stimulations. Location is also important for service companies; they need a face-to-face contact with customers. Typical examples are hotels and airlines. Further, accountants, lawyers and management consultants fall into this category.
Plant Layout has a major impact on the efficiency of a company and is therefore very important. For example, car producers use an assembly line layout so that employees can stay at their station and the cars move past them. Volvo uses another layout: employees work in small teams to build an entire car. Of course this work flow is accommodated with an appropriate plant layout. Other manufacturing settings use U-shaped-cell flow lines because these are more efficient. According to Schonberger (an internationally known manufacturing expert) this production design enables one employee to contribute to several workstations and to increase the speed of material delivery and the speed of which defective parts can be adapted.
In service companies the layout varies widely, although the use appears universal. For example, in fast-food units, the place where food is prepared is close to the counter of the restaurant as well as to the drive-in counter. This helps employees to serve both the in-unit and drive-through customers quickly.
Materials handling is the careful planning of when, where and how much inventory will be at one’s disposal to warrant maximum production efficiency. Careful inventory control process resolves part of this. The remaining is handled when the production layout is designed.
For example, General Electric uses process mapping, a very detailed flowchart of
every step in the production process of a particular product. Through this the company can carefully look at every step in the process and determine which are redundant or can be streamlined.
One of the most popular concepts in inventory control is just-in-time inventory (JIT), which is based on delivering parts and supplies just before they go into a production process. Many MNEs throughout the world have adopted this concept, although the degree of use varies based on the product and the company’s production strategy. For example, the Big Three US auto manufacturers use JIT to keep their inventory low. In Japan, firms like Toyota have taken the concept to a next level and match supply directly to demand. Dealers order directly from the factory, which means that customers can get
their car in 7 to 10 days.
However, the success of JIT relies greatly on the quality and reliability of suppliers. This creates a major problem. In Japan, MNEs have shares in their supplier companies. Therefore, suppliers will make a lot of effort to meet the demands of their partners. In Europe and the US it works differently. Most suppliers are independent companies that work under a contract relationship and therefore the relations between the two parties are not that good.
Another problem with JIT is that many firms have troubles with applying the concept to the entire production process. Most firms use JIT with delivery of parts to the assembly line, but they lack in matching supply and demand before producing.
It is very important to remember that JIT requires strong support from workers and suppliers in order to work well. Everyone must be operating in unison.
Another production process is Demand-Flow™ Technology (DFT). This allows for
flexible changes in the middle stages of production. It is typically used to manufacture standardized assembly products, such as computers. DFT permits quick reactions to changes in demand and technology. This process caused Intermec, a bar code printer and hand held scanner company, to reduce inventory by 50% and decreasing manufacturing floor space by 20%.
Many products are involved with a service element. Sometimes this element is even more important than the product itself. MNEs will do two things in addressing this area:
1. Orientation of the strategy, a product or service focus or a combination of the two.
2. Ideal degree of service to provide.
Some MNEs benefit from a product dominated focus while others benefit most from a service orientation. Underneath is a table that gives an overview of which kind of firms are product oriented, which are service oriented or equally balanced. However, it should be used as a reference, not as a factual source that addresses every firm in the industry.
Knowing whether to sell on a product-dominated focus or on a service-dominated focus is critical to the success of an MNE. When an MNE makes a mistake at this point it can lead up to putting emphasis on the wrong sales factors.
After setting the balance of product and service domination, the MNE will evaluate the specific type of service that is warranted. This is very important because many MNEs find that the strategy used in their home country does not work internationally. For example, Japanese firms offer much more service with their product than Western firms do. But, when the Japanese firm competes in the US, it will provide less service than in their own country, simply because Americans don’t appreciate this.
International logistics is the designing and managing of a system to control the flow of materials and products throughout a firm. It is an important area of strategic consideration because the expenses are high. In the logistics area, three topics are discussed:
1. Transportation
2. Packaging
3. Storage
There are means of transportation. Rail, pipeline and motor carrier are commonly used in the EU, but for most MNEs, the primary modes of transportation are ocean and air.
There are many ocean carriers to choose from and the three most commonly
used are:
1. Container ships: used for carrying standardized containers that can be simply
loaded on the carrier at shipping point and unloaded at destination.
2. Unconventional cargo vessels: used for shipping cargoes with an unusual
size.
3. Roll-on-roll-off (RORO) vessels: are ocean-going ferries. Trucks can ride on
and roll-off at the destination point.
A carrier similar to RORO is the lighter aboard ship (LASH) vessel. Instead of ships, there are barges stored on the ship and lowered in the water at destination point. From there, the barges can operate on inland waterways.
Because there is a lack of ports and port services it is very difficult to plan an ocean shipping strategy. Especially in developing countries there is limited equipment to load or unload container cargo.
Air shipping is a difficult mode of transportation because its costs are very high.
Although international air freight has grown, it still accounts for less than 1% of the total volume of international shipments. It is only used for items of high value that must reach their destination quickly.
Although, a number of developments have helped to increase air shipment. These include more efficient ground facilities, larger aircrafts and better marketing of these services to shippers. In particular, the development of jumbo cargo jet planes and the combination of cargo and passengers planes has helped immensely.
In deciding the best mode of transportation to use, MNEs tend to focus on four
important criteria:
1. Time
2. Predictability
3. Cost
4. Non-economic factors
A question the firm will have to answer is: How Quickly is delivery needed? A couple of factors influence this answer. For example: the perishability of the product. Exotic flowers are flown from South America to the US, because they would not survive transport per ship. A second factor is how soon the goods need to fill up the current stocks.
In businesses where speed is very important companies are coordinating their supply chains in order to reduce the time that materials are in the production cycle.
Although, both air and water transportation are reliable, they are dependent on nature and its “surprises”: An airport can be shot down because of bad weather. Because there is a great difference in the delivery time, the choice between the two options is often clear. If a package needs to be delivered the next day, it will come by air.
However, some carriers are more reliable than others and the MNE will choose the best companies for delivery. It should be clear that reliability is particularly important for air shipments, since the difference of a day directly influences the salability of a product.
Sometimes, the mode of transportation is determined by non-economic factors. For example in the US, all government cargo must use flag carriers when available. Similarly, other governments subsidize their carriers and MNEs are pressured to use these when doing business with such countries.
Packaging is important in ensuring that it is shipped safely and that it arrives
undamaged. It is also important because it has a direct effect on costs. If units must be shipped in odd-shaped containers, there can be fewer containers in one transfer and thus the product gets more expensive. The weight is also important, especially when goods are shipped by air and the costs are dependent on both weight and distance. Additionally, the package is important in reducing theft and pilferage and keeping loading and unloading costs minimal.
Lately, many shippers started using intermodal containers, which are large metal boxes which fit on many modes of transportation like trains, trucks and airplanes. It helps to reduce handling cost and theft losses because the merchandise is shipped in an easy-to-move unit that is tightly sealed.
In some cases, goods need to be stored before they can be transported to their
destination. In the US public storage is widely available, but in Japan there is little supply of these facilities. Additionally, the sizes of these warehouses are often different then in the US. For example, the ceilings are lower and there is less automation for loading and unloading containers. In these cases MNEs must decide whether to invest in warehouse facilities or eliminate the function and only ship goods when needed.
In some countries are free trade zones. By making effective use of them, the MNE is helped:
· Store its goods temporarily while breaking a large shipment into smaller ones to be shipped to other places.
· Combine small shipments into large ones and reship them together.
· Process the goods and be a host for value-adding activities before repackaging them for the market.
· Give goods that will remain in the country a “made in” status so that they can be sold as locally produced products.
An effective storage strategy can be helpful in carrying out the final stages of the production plan, minimize overall product cost, reduce delivery time and increase customer satisfaction.
Currently, MNEs are focusing on a number of areas to improve their production
strategies; three are getting particular attention, namely:
· Technology and design
· Continuous operations improvement (kaizen)
· Use of strategic alliances and acquisitions
MNEs are spending more money on R&D nowadays than they ever did in the past. These investments help to explain why auto engineering and quality have improved so much. During the 1980s US MNEs focused on new R&D whereas their international competitors focused on improved R&D. The US found a lot of problems in putting their focus on new R&D and in the nineties they started to focus more on improved R&D.
A second trend is concurrent engineering. Many MNEs are realizing that working in a team to develop a new product creates a more successful good.
Innovative human resource development programs are coupled with these strategies and are designed around the concept of empowerment. Empowerment is the process of giving employees more and more control over their work. This strategy works very well, because employees get a feeling of pride and ownership of the job and makes them feel important. Empowerment is not restricted to the R&D department, it is important in all phases of production.
Due to the success of Japanese MNEs, kaizen is being strived for on an international basis. US firms have benefited from this mostly as seen in their immense increases in productivity.
JIT is a related concept that MNEs use to achieve continuous improvement. In the past it was only used for managing inventory but nowadays JIT is being employed in many other ways.
Another strategic production strategy is the use of alliances and acquisitions. Many MNEs find that they cannot operate effectively if they do not form alliances or joint ventures that can complement in their production strategy.
The forming of alliances or joint ventures works well in most cases and some
researchers claim that alliances account for more of the success of Japanese firms than does JIT or other production technique. Working in unison with each other, keiretsu companies have been able to exercise a great deal of power.
Fujitsu exercises another production strategy: acquisition coupled with autonomy. In addition, the firm strongly believed that the Japanese way of management can not be obtained universally. Overseas companies have their own ways of doing things. So it yields to give overseas acquisitions the autonomy to make their own decisions.
International marketing involves the identification of goods and services wanted in other countries than the home country and providing them at the right price and place. This process is quite similar to the national marketing process but there are some important modifications that are used to fit the local needs. Some MNEs are able to use the same marketing strategy abroad as at their home country. For example, many fast-food units have found that people anywhere in the world have the same reasons for coming to their unit. However, in most cases there needs to be a local marketing strategy made. These changes fit into five main areas:
1. Market assessment
2. Product decisions
3. Promotion strategies
4. Pricing decisions
5. Place or distribution strategies
The latter four are also known as the four p’s, a term commonly used in marketing, which forms the core of international marketing efforts.
An international marketing strategy starts with international market assessment, an evaluation of goods and services that the MNE can sell globally. This assessment consists of a couple of screenings and the first one is the screening of basic need and potential, the initial screening.
Initial screening is the process of determining the potential basic demand of the MNEs goods and services in foreign markets. The following question will be answered through this screening: Who might have the need to buy our output?
One way how initial screening can be done is by examining the current import policies of other countries and identifying which goods and services are imported. A second way is by stating the amount of local production. A third way is by investigating the demographic changes in a country which can result in new emerging markets. All these efforts help the MNE to target its potential markets.
The second screening is used to narrow its selection of market prospects by removing those that do not meet the financial and economic considerations. Financial considerations include inflation and interest rates, expected ROI, the buying habits of customers and credit availability. These factors are important to select those markets from the initial screening that are financially feasible.
Economic considerations relate to a range of market demand influences, including market indicators. Market indicators are used for measuring the relative market strengths of various geographic areas. These indicators focus on three important areas:
1. Market size: relative size of a market compared to the total world market (as a percentage).
2. Market intensity: degree of purchasing power, compared with other countries.
3. Market growth: increase in sales on an annual basis.
To analyze all these data there is made use of quantitative techniques, which are
sometimes fairly simple. A trend analysis is an estimation of future demand by
extrapolating the data over the last three to five years, assuming that this trend
continues. A similar approach is the estimation by analogy: forecasters estimate
market demand or growth based on information gathered in other countries. A
regression analysis is a more refined approach, which forecasts in a mathematical way which attempts to test the explanatory power of a set of independent variables. Another sophisticated approach is the cluster analysis: a marketing approach to forecast customer demand through the grouping of data based on variables like market area and customers for example. Than, a market strategy is formulated for each group.
The third screening looks at political and legal forces. One of the primary
contemplations is the entry barriers some countries have in the form of import
restrictions or limits on local ownership of business operations. Some MNEs have been able to avoid these legal restrictions by setting up joint ventures with local firms. Production restrictions and limitations on profit transfers that restrict operating flexibility must be taken into account. When starting a successful operation the stability of the government is important, however this is often difficult to predict. Something else to consider is the protection offered for trademarks, patents and copyrights.
The fourth level of screening focuses on sociocultural forces such as language, work habits, customs, religion and values. Culture has a great effect on how people live and MNEs want to know how well their operations will fit into another culture. For example, Japanese car manufacturers that have set up facilities in the US have adapted the length of the work week to the wants of the Americans because most of them are unwilling to work 5,5 days a week, which is common in Japan.
The fifth screening is focused on competitive forces. If there are more locations equally attractive, the final choice of the MNE will depend on the degree of competition in every locale.
In some cases the company does not want to operate in a competitive environment but most of the times the MNE will decide to enter a competitive market because they believe that the advantages outweigh the disadvantages. In a competitive environment the company can force itself to improve and get more efficient and becoming thus more competitive.
The final step in the screening process is making a field trip to the site and talking to trade representatives or local officials. Depending on the outcome, the MNE will decide which goods and services to offer overseas.
Product strategies will depend on the product as well as the customer. Some goods need a modified strategy when sold abroad and some don’t need any adoption at all. The following table provides an overview of which products need adaptation and which don’t.
Industrial goods and technical services are typical examples of products that do not need modification. A bulldozer and a photocopying machine serve the same purpose in every country. The only modifications that should be made are minor and include things like adapting the machine to the appropriate electric voltage or changing the language in the instructions manual.
If an MNE has to use a moderate or a high modification is influenced by a
number of factors such as:
· Economics
· Culture
· Local laws
· Level of technology
· Product’s life cycle
Economic considerations can affect the decision to modify a product in many ways. For example, in the US chewing gum packages consists of 10 to 20 sticks. In many other countries, however these packages consists of 5 to 10 sticks because the country has a lower purchasing power and is more likely to buy the product if the content is of smaller volume.
Economic considerations are also important when the cost of a product is either too high or too low to make it salable in another country. For example, electronic cash registers are only used in economically advanced countries, because the less developed countries simply do not have the money for it and use hand-cranked versions.
Similarly, in economic advanced countries products are likely to have extras, while at the same time in less developed countries the basic model is offered. Bikes are in many countries a primary source of transportation and are made to be easily maintained, but in the US a bike has special features for comfort and ease of handling. So, the producer will modify the product to the customers’ needs.
Sometimes, a product must be adapted to the way people are used to doing things. Producers of washing machines who sell in the EU must produce a variety of different units: French people prefer to load their laundry from the top, while British prefer to load from the front. Germans prefer a high speed machine because they like their laundry to be dry when it comes out of the machine. Italians, however like to dry their wash in the sun and prefer a low speed machine.
Food is another product that should be modified or sold differently to serve customer needs. For example coffee in South America has a stronger blend than in North America. Sometimes the product is not modified, but the marketing focus is because the item is used differently. Schweppes serves as a mixer in Countries like the US and Britain, where it is drunk with gin. In France, on the other hand, it is not drunk with alcohol at all.
Style also influences purchasing decisions. Cosmetics that are best-sellers in Europe often have difficulty with selling in the US. The same account for shampoos and deodorant, because people may find it difficult differentiating the product from local offerings.
Convenience and comfort are other factors that help to explain why there is a need for modification. Especially in the car industry this is widely seen.
Yet other product modifications include color and language. The color black is in most Western countries a color for mourning, whereas in other countries white is the color for mourning and so it is not used for consumer goods. Further, in bilingual countries such as Canada and Switzerland, the information is provided in the appropriate languages.
Local laws can require modification of a product in order to meet environmental or safety requirements. Emission-control laws in the US have required Japanese and European car importers to adapt their model significantly to those requirements before they could be sold in the US. Food and pharmaceutical regulations require packaging and labeling that are often quite different from those in the home country. Brand-name protection can also require product modification, Ford-Motor has found this several times, with its Ford Falcon in Mexico and in case of the Mustang in Germany.
Another reason for modifying a product is because of the limited product life cycle (PLC) of the good. One of the best strategies is to shorten PLC by offering new goods before the old good starts losing demand. By doing this, the MNE can retain a large market share. The typical strength of this process is that the competition is left scurrying up, because every time they try to “copy” the product of the leading MNE, this MNE markets a new product.
Promotion is the process of encouraging demand for a company’s goods and services. MNEs execute this process through advertising and personal selling.
A variety of approaches can be used when promoting a product. The choice of
approach will be heavily influenced by whether the company will adapt its product and/ or marketing strategy.
There are four variations:
1. Identical product and identical message: when the MNE believes that it can sell the product worldwide with an identical promotion in all markets.
2. Identical product but different message: when the product satisfies a different need in various markets.
3. Modified product but same message: when the market asks for a different
version of the product but the customer needs are the same.
4. Modified product and modified message: when the product use and buying
habits of customers are different then from those in the home country.
Advertising is a non-personal form of promotion to persuade a consumer to a certain point of view. Many products satisfy worldwide needs, but in many cases the advertisement needs to be adapted.
There are two common reasons for adapting the advertisement to the local
market:
· The use of the product is different from that in the home country.
· A direct translation of the message does not make any sense.
Commercials that are not adapted when needed will only leave the viewer confused as to what the advertiser was saying. As a result advertisers do not want to tie the message to buyer needs and wants too much. On the other hand, there are many advertisements that are slightly adapted because they do make sense in other cultures. For example, Marlboro’s “cowboy image” has a universal appeal and Nike’s use of international stars works across boundaries.
MNEs use a number of media to carry their advertisements, most commonly used are television, radio and newspapers. However, there are restrictions to what the commercial may show. For example, some countries forbid comparative advantage in which firms compare their products to those of the competition with the purpose of talking the customer into buying a particular product. Another example is that some countries want to discourage the use of products like cigarettes or alcohol and therefore do not allow advertisement for those products. Censoring is another example of a restriction. In Islamic countries there is censor on messages that are regarded as erotic.
Personal selling is a direct form of promotion to persuade a consumer to a certain point of view. Firms that rely heavily on personal selling are industrial products or goods that require explanation or description. This form of promotion is also commonly used in pharmaceuticals and sophisticated electronic equipment. Many international markets are so large that many MNEs have turned to telemarketing, which has been particularly successful in the US.
MNEs have focused on attaining salespeople worldwide. Recruiting local talent is
extremely important because these people know more about the local market and are better in selling to local customers.
Prices of goods and services in the international marketplace are often influenced by factors in home market pricing. These factors include:
· Government controls
· Market diversity
· Currency fluctuations
· Price escalation forces
Every country has government regulations that influence the price of a good. Some countries use minimum and maximum prices to protect either the producer or the consumer. Minimum prices are adopted to protect local companies. Because there is a price floor these firms are ensured with profit.
Dumping is the selling of imported goods at a price lower than its costs and is
prohibited by governments.
Consumer tastes and demands vary per country and that is why MNEs have to price some products differently. For example in the US, there is a high demand for light turkey meat and a low demand for dark turkey meat. In Europe however, there is strong demand for dark turkey meat. That is why dark turkey meat is much cheaper in the US than in Europe.
A second factor that influences market strategy is the perceived quality of the product. In the US, people are willing to pay a premium for German cars, while in Japan this is not at all the case. Therefore German car manufacturers like Mercedes have a different pricing structure in Japan.
A third factor is the tax laws and attitudes about carrying debt. In some countries like the US interest payments are tax deductible and there is no aversion against having some debt. In Japan, the opposite is going on: interest payments are not tax deductible and there is aversion against having debts.
When selling products overseas, MNEs tend to take the responsibility of the risks associated with currency fluctuations. For example, Mercedes produces and ships a particular model to the US, which costs 30000 dollars and then sells it to the dealer for 40000 dollars.
The profit is than (10000/30000) is 33%. However if the dollar decreases against the euro, the company’s profit will decline and the firm will have to choose between the following options:
· Increase the selling price to the dealer to make up for the loss of the dollar
value.
· Leave the price the same and absorb the loss.
· A combination of the above: raise the dealer price and absorb the loss.
A similar problem is price escalation forces that drive up the cost of products. If prices rise, the company would want to pass this on to the dealer and the dealer will pass this on to the customer. You can imagine that the more middlemen there are in the process, the more the price will rise. The price has an effect on consumer demand and therefore will be a key marketing consideration.
Distribution is the course that goods take between manufacturing and the final
customers. Every country has another way of distributing goods and an MNE will spend a lot of time in deciding which distributors and channels to use.
It is often difficult to standardize a distribution system because there are many
individual differences to be considered. For example, retailers in Finland carry a wide assortment of merchandise while in Italy every retailer specializes on limited lines of merchandise. So, MNEs need to employ different strategies in distributing goods in these two countries.
Consumer spending can also have a negative effect on standardized distribution. In the US most people pay with a credit card while in Japan most consumer purchases are on a cash basis.
The location where consumers are used to buying their products also has an effect on distribution. Most purchases are made in small stores and therefore the MNE has to deal with a large number of retailers.
In creating the most efficient distribution system, MNEs use a number of criteria. One is to get the best distributors to carry their products. The retailer’s financial strength is very important because MNEs want to know if the retailer survives in the long run. MNEs that sell goods which require periodic maintenance and servicing (autos, computers and electronic equipment) want to work with a distributor that can keep sufficient inventory on hand. A second factor is how well the distributor has its own network of knowing the right people and being able in helping the MNE handle the governmental bureaucracy. A third factor is how many product lines the distributor carries currently. If the MNE knows this it can identify middlemen who are most likely to give its products a marketing boost.
In many cases distributors sell competitive products or do not want to add another product line. If this is the case, then the MNE needs to convince the distributor to carry its products.
This is done through a number of reasons:
· Pay a part of the product’s local promotion campaigns.
· Providing generous sales abundance
· Performing marketing research to help the distributor decide how much
inventory to carry.
· Ensuring that unsold or outmoded products can be returned to the MNE.
Depending on the nature of the market and the competition, the MNE may decide to have one local distributor or to have a number of sellers that sell the same product.
Data collection and analysis for the purpose of developing and updating market
assessments is very important to MNEs. As a result, MNEs change their market
approach and in other cases it supports maintaining a current strategy.
Clarins SA, a French cosmetics firm, refines its market strategy based on market
assessment data. They have gathered feedback from customers about their products for years. Their company growth has been huge in France and is now achieving the same in the US. Particularly interesting is that they have achieved this growth despite their high costs. They focus on up-scale customers and have been very good in using market assessment information to develop and market high-quality skin-care products.
Shell Oil is an MNE whose market assessment has showed the importance of not
changing too much about products or delivery systems; the company has learned to stay close to what it knows best. Moreover, they learned that being able to assess situations and react quickly is an important element in its marketing strategy. Shell has improved its assessment skills by simulating supply disruptions such as dealing with a cut-off of oil from Kuwait. By evaluating these situations, Shell was able to bring in preapproved crudes from other sources after Kuwait and Iraq had no oil in 1990 because of the Iraq invasion.
New product development is also a critical part of the strategic management plan. In the early 1990’s General Motors (GM) was the leading US car manufacturer in Europe because of product development and expansion. However, in the early 2000s, GM’s energy was shifted to cost reduction because of overcapacity in the Western European market. Today, GM is trying to retrieve its position by increasing market outlets and setting up a 178000 unit capacity assembly plant in the eastern part of Germany.
Sabaru is another example of a car company that is turning to product development for market growth. During the 1980’s it has been known for its cheap, good quality cars. But when the value of the yen decreased against the dollar, the price of a Sabaru rose significantly and market share in the US dropped. In the 2000s they attempted a comeback by developing new products and it is working, by 2001 Subaru was the market leader in four wheel drive in the US.
IBM has a 75% world market share in top-of-the-line disk drives that are used in
mainframe computers. For the millennium, this market was one of its top priorities because disk drives have high profit margins. IBM is now developing higher capacity versions of mainframe disk drives and intends to speed up its product cycle. By doing this, IBM tries to stay ahead of competition because by the time the competitor introduces a new product, IBM markets a better version.
Effective pricing can either be to obtain a high price strategy or a low-price strategy. Both strategies can be successful, depending on the nature of the market.
Bang & Olufsen is a Danish company that manufactures electronics (stereo
components, televisions and video equipment). They serve style-conscious consumers who are willing to pay a high price for their products. There products include: thin, sleek and modern looking televisions and stereos with a futuristic design. While many consumers prefer less stylish products, Bang & Olufsen have a steady stream of customers and a 406 million mark sales.
In 1997, Wal-Mart showed an interest in Chifra Inc. of Mexico, the country’s largest retailer. Wal-Mart’s acquisition fueled expansion throughout Mexico and today Wal-Mart has 545 stores. Wal-Mart Chifra is doing the opposite of what Bang & Olufsen are doing; they offer low prices. Today, they are pushing a “bodega-concept”: fast-moving, non-perishable goods that are sold in bulk in poor neighborhoods. This concept averages a million dollars per store each month.
International human resource management (IHRM) is the process of selecting,
training, developing and compensating employees in overseas positions. The process begins with selecting and hiring of personnel and there are three basic kinds of sources. Home country nationals are citizens of the parent country of the multinational but are assigned at a host country and reside there. These individuals are called expatriates. Host country nationals are people who are locally hired by the MNE. Third country nationals are citizens of a country different from the country in which the MNE is headquartered or the one in which they are assigned to work by the MNE.
There are different approaches in how to staff employees. One approach is to use home country nationals in less developed countries and to use host country nationals in more developed areas. Another approach is to use a home country manager at the start of a new operation, but once the unit runs well, turn it over to a host country manager.
Stages of internationalization follow a certain pattern of country managers. When an MNE is exporting to a foreign market, everything is handled by host country nationals. As the firm starts its production in that country, it makes more use of expatriates and third country nationals. As the company moves through different stages of internationalization, the changing demands of the environment will determine which kind of country managers will be used.
Different countries have different approaches to staff personnel. In Japan, home
country managers usually staff senior-level positions. In the same fashion, European MNEs assign home country managers overseas for their entire career. US MNEs view overseas assignments as temporarily and will use expatriates to work under a host country manager.
The costs of sending people overseas has increased and therefore, host country or third country nationals who know the language and customs are more widely used.
Two major challenges that face HRM are to select qualified people for overseas
assignments and in the case of home country nationals, repatriating them effectively into the workforce when they return.
International screening criteria are factors used to determine which individuals are most suitable for overseas assignments. There are a number of screening criteria used in this determination and they focus both on individual and family considerations.
One screening criterion is an individual’s ability to adapt to cultural change. Most managers find themselves very happy when sent overseas, but after a few months they begin to suffer from a cultural shock, because of the large number of changes they go through. This has a negative effect on one’s job satisfaction, but as managers continue performing their job, satisfaction goes back up. It is also found that men are able to adjust slightly faster than women and people over the age of 35 have higher levels of satisfaction after the first year.
In determining the ability to adapt to cultural change, MNEs examine a number of characteristics:
Managers who are posted overseas must be self-reliant and independent because they have to make immediate decisions without consulting the home office. In determining independence, the amount of field experience will be evaluated as well as special project and task force experience, because such assignments often require and nurture independence.
Age is another matter of consideration. Young managers are often eager for
international assignments and want to learn about other cultures. Older managers are more experienced and mature. Often, both kind of managers are sent to the overseas post so that they can learn from each other.
Opinions on whether an international manager should have a college degree differ, but the best overall combination seems to be an undergraduate degree coupled with an MBA from a recognized business school.
Expatriates must have a good physical and emotional health and a good family
situation. An unhappy family life will have a negative effect on the productivity of the employee. Therefore, some firms often interview the manager and the spouse before deciding to approve the assignment.
The dual-career trend in families is another challenge that MNEs face. If there is no supporting employment for the management’s spouse, there is a lot of dissatisfaction towards the MNE.
Another selection criterion is the motivation of the manager to work abroad and the personal commitment to the new job. Many people who are unhappy with their position at home will consider an overseas assignment, but this is not a sufficient motivation. Motivational factors are: a desire for adventure, a pioneering spirit, a desire to increase one’s changes for promotion and the opportunity to improve one’s economic status. Researchers examined the factors that influence the willingness to work overseas and concluded that:
Another selection criterion is leadership potential, because most expatriates have to supervise others. This is a different factor to asses, but there are a number of characteristics that are commonly sought. The following characteristics are indications of leadership potential: maturity, emotional stability, ability to communicate well, independence, initiative and creativity.
The selection procedure is mostly done through an interview. An interview of
candidates with their spouses provides the best method of selection. Although, some MNEs use tests to help them predict who is most likely to do well on an overseas assignment. Drawbacks with this procedure are the fact that it is expensive and that many MNEs feel that tests do not improve the selection process. As a result, evaluations from peers and superiors along with an interview are most heavily relied on.
Repatriation is the process of coming home after an overseas assignment is
completed.
There are a number of reasons why managers are repatriated. The most common one is that the predetermined time assignment is due. Another is the desire to have their children schooled in the home country. If the expatriate is unhappy overseas and performs poorly, the MNE may decide to put another person on that position.
When expatriates come back, some find it difficult to adjust. There are a number of reasons for this. The home office job often lacks the amount of responsibility and authority that the expatriates had in the overseas job. Another one is that they feel that their international experience is not valued by the company and their time spent overseas seems wasted in the view of their career progress.
Research has shown that the longer managers remain overseas, the more problems they will have when returning into operations at home.
There are several factors that make repatriation difficult, these include:
In many cases it takes 6 to 12 months before a returning manager is operating a 100 percent.
By now, some companies have developed transition strategies that are designed to smooth the path between foreign and domestic assignments.
One of these strategies is the repatriation agreement; an agreement which spells out how long the person will be overseas and what kind of job the person will be given when he/she returns. This agreement does not give any certainty about salary or the particular position but it does promise a job equal in authority and compensation to the expatriate.
This agreement takes away a great deal of anxiety that expatriates encounter because it secures a place for them when they return.
A second strategy is to maintain or rent the home of the overseas manager. This
reduces the financial burden of the mortgage and further, they do not have to buy or rent another house when they return.
A third strategy is to assign a senior executive as a sponsor for each expatriate. This person can check whether his/her performance, compensation and career path are on track and when the expatriate returns home, the sponsor can account for a suitable position at the home company.
A fourth strategy is to keep up ongoing communications with the overseas managers. They should be aware of the situations at the home office. In this way, they will not become outsiders, but regular members of staff when they return.
All these strategies help MNEs to maintain a proactive approach in dealing with
concerns about expatriates.
Training is the process of changing personnel behavior and attitudes in a manner that increases the probability of goal attainment. Training programs are designed to provide expatriates with the information and experience regarding local customs, cultures and work habits. By doing this, the manager will be more effectively at working with the local workforce. Managerial development is the process by which managers gain skills, experience and attitudes to become a better leader.
MNEs use a number of training and development programs, which can be grouped in two general categories:
1. Standardized
2. Tailor-made
Standardized training programs are general and can be used with managers
throughout the world. Examples include programs for improving quantitative analysis or technical skills that can be used universally and programs that address cultural differences on a global scale. Even many behavioral oriented concepts can be handled with a standardized program, although for specific needs of the country a tailor-made program should be conducted.
Tailor-made programs are conducted to address the specific needs of the participants and include a large amount of culturally based input. The inputs are usually provided by current expatriates or local managers, personnel and citizens in that specific country.
The following six types of programs are most popular:
Usually, firms use a combination of these different kinds of programs. Further some companies extend their training into including the family of the participant. This will create a support group that will work together on solving problems that arise during the overseas period.
Compensation for the overseas assignment has become an area of IHRM attention. On the one hand, the MNE wants the best person for the job, but on the other hand it wants to keep its costs down and increase profits. Sometimes, these two objectives cannot go together. When we look at the breakdown of international compensation packages, this becomes clearer.
An international compensation package includes:
A base salary is the amount of cash compensation that an employee receives in the home country. This base salary is tied to their home country and is the benchmark against which bonuses and benefits are calculated. Recently, this base salary has become an issue when foreign firms have merges with companies abroad where salaries are significantly higher. For example, when Daimler Chrysler merged; one executive made 1.1 million a year and the other 1.6 million. So, base salary can present problems when going international.
Benefits are often a large part of the compensation package. In addition, there are a number of difficult issues which must be resolved, these include:
Most MNEs include their expatriates in the company’s benefit program and the cost is not higher than it would be at home. MNEs also provide vacation and special leaves to home country managers.
One of the most common allowances is the cost-of-living allowance, which is a
payment that compensates for differences in expenditures between the home country and the location where the expatriate works. Through this compensation, the employee has the same standard of living.
This allowance can cover over a wide variety of areas, such as:
MNEs also provide a tax compensation for expatriates in the form of protection or equalization. Most MNEs use a tax equalization program: the MNE withholds an amount equal to the tax obligation in the home country and pays all taxes in the host country. Tax protection is an approach where the employee pays up the amount of taxes that has to be paid based on compensation in the home country. If then the total taxes are less in the foreign country than in the home country, the employee can keep this amount.
The most common used concept is for the MNE to determine the expatriate’s base salary and other bonuses like if he/she was living in the home country. The taxes to be paid are then compared to the total taxes to be paid on the expatriate’s income. Any taxes above and over that amount that would have been due in the home country are then paid by the MNE.
In terms of compensation, the MNE wants to make sure that the expatriate does not have to pay more because he/she is living abroad. A compensation package is very expensive to an MNE and therefore the current trend is towards not sending employees overseas unless there is a need for their specific services.
Another trend is to keep expatriates motivated. In the process, MNEs have dropped bonuses or premiums for overseas assignments and have replaced them with lump sums. A benefit of these lump sums is that the payment is only made one time, so expatriates know this when they move to the international locale. Further, the company does not have the prospective of future payments and is not financially committed.
MNEs face a major challenge in orienting their strategy to meet the varying demands of organized labor around the world. This is caused by national differences in politics, economics and legal systems.
In managing labor relations, most MNEs use a combination of centralization and
decentralization, although some countries tend more towards centralization (US) and others more to decentralization (Europe). A number of factors have come up to explain this development, namely:
Labor relations practices vary widely. The difference between a strong and a weak economy influences the union’s ability to bargain. Similarly, some countries are very pro-management while others are heavily union-oriented. Germany and Japan show some interesting contrasts.
Labor unions in Germany have a strong position. Union membership is on a voluntary basis, but there is one union in each industry. This union will negotiate a contract with the employers’ federation for the industry in which all aspects of a job are determined. If there is a disagreement over the contract, it is resolved between the worker and the company with the participation of a union representative. If the procedure is unsuccessful the matter will then be handled by a labor court for final settlement. Despite their power, unions have a much more corporative relationship with management than US unions do.
A strike usually occurs when a contract has run out and a new one needs to be
approved by the workers. As in the US, several agreements may be in forces which all have different termination dates. So one group may be striking or working without a contract, while another group is working under a contract.
In Japan, relationships between a union and management are extremely cooperative. According to their culture it is not appropriate to act confrontational. Labor agreements are often general and vague, but disputes about it tend to be settled in a friendly manner. Strikes are never started because the two parties cannot cooperate. They are only used to embarrass the management and almost never last longer than a week.
Japanese unions are most active when bonuses are negotiated, that is in spring and at the end of the year. Again, these negotiations almost never result in conflicts. A reason for this is that Japanese workers subject their needs to those of the group.
Many countries, accept the US have industrial democracy, the right of employees to help decide on significant management decisions.
Industrial democracy exists in a number of forms:
Codetermination is a legal system that requires employers and their employees to discuss major strategic decisions before firms implement them. This system is quite popular in Europe. On the negative side, many employees feel that they do not have enough workers input in major decisions.
Work Councils are groups that consist of employee and manager representatives and deals with matters such as improving company performance, working conditions and job security.
Shop floor participation takes many forms, including job enrichment programs, quality circles and other versions of participative management. It is widely used in Scandinavian countries and has spread to other European countries and the US.
Industrial democracy and codetermination are both very strong in Germany, in
particular in the auto and steel industries. Researchers found that codeterminism works well in Germany. Some critics have argued that there are too many people involved in decision-making and that it slows down the whole process; however this argument is rejected by a study and it seems that there are even greater efforts toward codeterminism.
In Denmark, workers have the right to participate in management on a direct as well as an indirect basis. In the direct form employees are part of semiautonomous groups that provide ideas on how to increase productivity and quality. In the indirect form there are all kinds of representatives who stand for the workers. Industrial democracy works exceptionally well in Denmark; cooperation committees contribute to openness coordination of effort and workers who feel more important.
The industrial concept in Japan is oriented towards the Japanese culture and the belief of group harmony, instead of the political philosophy in Europe. Workers are encouraged to help solving job-related problems and management is in return very receptive to worker ideas. As a result, Japanese firms face a great challenge from industrial democracy because they are the least used to using this idea. Though, they are pushed authority-sharing concepts when they are expanding to Western countries.
There are a number of HRM strategies that currently receive attention from MNEs, three of them will be addressed here:
There are a number of reasons why it is important to know the language of the country where the company does business in, including:
For the moment, language training is a weak link in the development of an effective IHRM strategy.
It is very important for managers to understand the culture of the country to which they are assigned.
In preparing managers for their overseas positions, MNEs use three basic approaches:
The advantages of learning a local language is that a manager can speak directly to the suppliers and the customers, also it is very handy in measuring the competition.
Anohter benefit is that it can help building a relationship with local organizations, which might come in handy in hard times.
A cultural assimilator is a programmed learning technique to learn members of one culture about another culture’s basic concepts, attitudes, role perceptions, customs and values. These assimilators are usually developed in pairs of cultures, for example to
familiarize a US manager with the German culture.
Cultural assimilators use critical incidents as a basis for the training. In these incidents the expatriate will be interacting with a host nation, the situation can be mishandled if the person is no properly trained and the event is relevant to the expatriate’s task and mission requirements. The incidents are provided by expatriates that have worked in that particular country.
Assimilators can be very expensive to create. It costs approximately 50000 dollars to develop one. However, for MNEs who send their people continually to the same overseas location it can be very cost effective in the long run.
MNEs start to evaluate the costs of sending people overseas as well as they review the costs of maintaining executive talent in the international arena.
Compensation costs vary widely because goods and services in some countries of the world differ a great deal from others. Life in the US is fairly inexpensive when it is compared to Japan, Hong Kong, Taiwan or Great Britain. In particular the cost of living allowance for expatriates in Europe and Japan are very high and add significantly to the company’s overhead. For this reason a few MNEs are looking for local people to staff operations and thus reducing the need for expatriates.
Another problem is the amount of compensation top management talent receives when hired and especially when moved to another location. Therefore, the MNE hires these individuals and leaves them in place for extended periods of time. This is far less costly than moving the managers from one location to another.
Another trend which is currently emerging is specially designed HRM programs. It has been realized that these programs have to be tailor-made.
This is done through comparing factors with different countries, five of these factors are:
None of the participating 13 countries had the same profile (they all scored differently on the 5 factors) and that reveals that countries are unique in their approach to HRM. Something else that came up is that MNEs have to focus on HRM programs that are designed to meet the needs of local personnel. A survey of over 1000 business and engineering students from Poland, Czech Republic and Hungary showed that almost two-third of the respondents said that they wanted their boss to be receptive to their ideas; 37 per cent wanted a manager who had a strong industry experience; and 34 per cent wanted a good rational decision maker as a boss. This shows that HRM is becoming more of a two-way street: both employees and employers need to adapt continuously to emerging demands.
Country risk analysis
This analysis measuring the changes of a firm getting hit by financial, strategic or personall losses, due to a non market event, which is caused by FDI
PEST Framework
Used to identify en map out the political, economical, social and technological
conditions in the market of a certain country
Political risk is the probability that political forces will negatively affect a company’s profit or interfere with the attainability of other business objectives. The study of political risk aims at changes in the environment that are difficult to stay ahead of.
Most people think that political risk is limited to Third World countries and countries with an unstable government. However, political risk is also an issue for companies doing business in highly industrialized nations. For example, France had a policy toward limiting Japanese investment.
Further, there are cultural barriers that create or increase political risk. In Japan there is a value system which discourages to buy from foreign producers. Many MNEs have difficulties to crack the Japanese market because of this system.
Political risk is and will remain an area of concern for US MNEs because they operate in so many international markets. In dealing with this, negotiations can help to reduce problem areas.
Political risk consists of macro- and micro factors. MNEs will first investigate macro factors and then determine how the micro factors influence the risk.
A macro political risk is one that affects all foreign enterprises in the same manner. An example of macro political risk is expropriation, the confiscation of a private business by the government with little or no compensation for the owner. Expropriation was a carried out a lot in communist countries like Eastern Europe and China after World War 2 and in Cuba from 1958 to 1959. Both large and small firms felt the impact of this governmental decision.
Political boycotts can also result in macro political risk. Further indigenization laws, which require that nationals hold a majority interest in all companies, can have macro political risk as a result.
In recent years the macro political risk has changed in many nations. Former
communist countries do now encourage private investments and China joined the World Trade Organization in 2001. These developments have reduced macro political risk but, it still needs to be considered.
Micro political risk affects certain sectors of the economy or specific foreign
businesses. These risks typically come from government action in the form of industry regulation and taxes on specific business activity. For example, the US decided to put a tax on textile imports.
The degree of micro political risk is determined by a number of factors:
There are a number of motivations that explain political risk. A major source is the change in the political philosophy of the country’s government. This can be a result of one government being driven by another or a change in government action. But also, a change in government philosophy toward foreign investments can have an impact. For MNEs dominates a major challenge to identify these motivations and then decide how to deal with them.
There are a number of strategies used in managing political risk. A typical approach is to first forecast the risk and then reduce or eliminate those that are considered unacceptable.
There are many differences in dealing with risk. For example, there is the choice
between formal or informal procedures. Some companies use an ad hoc group to deal with these issues while others have a standing committee that is charged with the responsibility.
However in each case, the assessment is focused on two things:
The MNE will determine how vulnerable it is to risk based in this evaluation.
It is important for the MNE to know the host country’s political system because this influences economy and political risk. This explains why MNEs are careful with their investments in countries like Russia and China; there is a chance that the political climate will change and this will result in major financial losses for the MNE.
MNEs are also critical about governments that give preferential treatment to home country companies. MNEs have become more involved in lobbying both home and host governments. This resulted in free trade agreements with the US, Mexico and Canada.
Other forms of governmental action have also proved useful. For example, the US role in the Gulf War positively influenced the sales of US goods in Kuwait and Saudi Arabia.
Operations and products also face political risk. Some countries have government restrictions on local ownership. When the government requires joint ventures or local participation in operations the MNE must determine the amount of risk that comes with doing business under these conditions.
A related risk is that the joint partner will steal product knowledge or technology. For example, copyrights are not legally enforceable in China and many MNEs in the US do no longer enter into joint ventures because of this.
Some governments encourage buying only local-made products and for MNEs that are operating in this country their risk grow substantially.
In some countries collusions and forming cartels is legal. In the US this is illegal and there are antitrust laws that encourage competition. In recent years the US government has put pressure on countries like Japan to prohibit price fixing and other practices which hinder countries like the US to crack the market.
This has resulted in new trade laws and some of the changes that have been
introduced are:
After evaluation of the political system, the company will try to express this risk in scores. The higher the total score, the more likely the MNE is to drop that country from consideration, unless there are ways to reduce the scores of some criteria. Through negotiations and deals it is sometimes possible to lower the political risk. Especially when a government is very interested in the MNE setting up operations there, the government may offer special treatment to the particular MNE which it will not offer to other companies and herewith reduces the MNEs political risk.
There are two important steps in developing effective negotiating techniques. The first step is the evaluation of the MNEs own position and that of the other party in order to see how both interests can fit together. The second step is examination of the behavioral characteristics of the other party in order to discover their negotiation style.
An MNE can enter negotiations with a host country in order to ensure a number of guarantees like low taxes and the right to repatriate profits. Other times the negotiation will be in the direction of a potential partner, such as working out the terms of a joint venture. And there is yet another time when MNEs negotiate with a host of parties. In all these cases it is important to assess the strengths and need of all parties.
The strengths of a party are the assets and benefits that one brings to the negotiating table. An MNE could have strengths like technology, products, services, managerial expertise and capital.
A country will have strengths like political stability, sources of capital, tax breaks and an appropriate labor force. For example, the US offers all these strengths to MNEs and therefore the MNE in question will have a diminished bargaining position.
The bargaining strengths of an MNE will depend on their specific contributions. A local partner, who knows the market, has capital, a well-trained workforce and retail outlets for moving goods to the customer can be very valuable to an MNE.
A negotiation is also influenced by the needs of both parties. The host country can have a need for the technology or product that the MNE is planning to produce in that country. Moreover, as a result of these operations, exports may increase and the economy will benefit from this. Stakeholders of an MNE can also influence the negotiation.
After the strengths and needs of both parties are defined, the MNE will investigate the negotiating behaviors of the parties. When it knows how the other party negotiates, it minimizes surprises for the MNE.
The objective of a negotiation is universal (strike a deal which is as good as possible), but the way in how people negotiate is influenced by norms and values.
One of the major differences is the amount of authority the negotiator has to approve an agreement. In countries like the US and Great Britain, negotiators have the authority to make agreements on the basic arrangement. On the other hand, Japanese and Russian negotiators are often not authorized to approve agreements.
The negotiating style of the parties can also be very different. US businesspeople tend to be very practical and focus on short-term results. Businesspeople from the Far East tend to move more slowly and are focused on long-term goals.
Social customs also play an important role in negotiations. In some parts of the world it is a custom to give presents to those with whom they are doing business. To many western business people this seems awkward, which considered to be bad manners by the other party. Language is also an obstacle in negotiations. When people or documents need to be translated this asks for misinterpretations.
Written documents are used differently between cultures too. US MNEs want an
agreement to be on a detailed written document where everything is spelled out clearly while other countries just use a general more open-ended agreement and the parties then negotiate the implementation.
Three areas are important when negotiating an agreement:
An acceptance zone is an area within which a party is willing to have negotiations. It usually has to do with money, the minimum amount an MNE is willing to pay, the maximum amount the MNE is willing to pay and the amount with which they start bidding. Conversely, the other party also has an acceptance zone, but than in the terms of the amount they want to receive.
If the acceptance zones of two parties overlap, there is common ground for negotiation. However, it is important to know that when the zones do not overlap there still can be made a proper agreement. After listening to the other party, the parties may decide to change their respective bids and adjust the acceptance zones.
When an agreement is made after negotiation the final price will never be lower than the seller’s minimum price or higher than the buyer’s maximum price.
After the negotiation an agreement is made, but this does not have to be a final
agreement. Many contracts that last longer than a year are open for renegotiations and at the end of the contract a new settlement will be made.
An MNE must remember that when the other side feels that it gave up more than it should have the next negotiation will be tougher and the MNE should expect
reciprocity.
During the negotiation there will be many tactics and behaviors used to gain as much as possible from the negotiation. In some countries it is common to get to know the other party before the negotiation. This is usually done over lunch, dinner or reception. Realize that already before business has to be mentioned, the work of conducting a successful negotiation has already begun.
Another common tactic is the time limit of the other party. When that party needs to build a factory in 90 days, the other party can use this information and postpone the meeting until the end of this time period. Then the party that postponed the meeting can ask for a price that is on the high side of the other party’s acceptance zone.
Another tactic used is reciprocity, which is done by Arab and US negotiators. They tend to reciprocate by trading favors. If one party gives away on an issue, the other will do the same. When the negotiator knows how likely the reciprocity is going to happen, it has a better bargaining position. This tactic is not used by all cultures. Brazilians tend to make initial concessions but then they hold their ground.
Extreme offers are another widely used tactic which is very popular with Chinese, Arabians and Russians. It is the concept of when a price of 10 million is offered, the other party asks for an outrageously higher price, let’s say 90 million. Most of the time the party gets a much more favorable bid when using extreme offers.
Non-verbal behavior is also used as a tactic in negotiations. Silent periods and facial gazing can be very effective in negotiations. Other common tactics include threats, promises, rewards, commitments and self-disclosure.
Companies take a lot of steps to ensure that their strategies can handle unexpected developments. They use two steps:
1. Integrative and protective/ defensive techniques
2. Joint ventures and partnerships
MNEs employ many tricks to reduce their political risk. Some are known as
integrative techniques, which are strategies designed to help a company becoming a part of the host country’s infrastructure. The goal of this technique is to help the MNE blend into the environment and to become less noticeable as a foreign firm. One of the simplest way to do this is to use a name which is not identified with an overseas company.
Another commonly used integrative technique is to develop good relations with the host country and other political groups. In turn, the MNE will hire and promote local personnel and use them in their operations. This strategy puts the company in a safe position when the government takes any action against foreign firms.
Protective and defensive techniques are strategies that are designed to discourage a host country from interfering in the operations of an MNE. These techniques try to achieve the exact opposite of what integrative techniques try to reach; it fosters non-integration of the MNE into the local environment.
There are different kinds of protective/defensive techniques, namely:
A low-technology production firm would use the protective/defensive technique through raising capital locally. As a result, the firm will integrate into the country and act like a local firm.
An international air carrier will use an integrative strategy by setting up local operations and using local staff. The airline will bring in a lot of people into the country but at the same time has only a few planes in that country. Further, the headquarters will not be located in that country. So if the country seizes the aircraft or increases taxes, the airline will be well-positioned.
A high-technology R&D firm does not want to become integrated in the host country and will therefore make little to no use of integrative techniques. If the company needs local employees it will try to keep them loyal to the company and not to the country. In this case, the loss will be minimized when there is an attempt to seize the firm’s R&D facilities.
An oil producing and refinery company will make strong use of both techniques. The MNE must have a good relationship with the host country because it is tapping its natural resources. There will probably be a lot of local personnel for routine jobs. The firm will also try to make as much revenue as possible because the government will not interfere with a company that produces high revenues in its country. At the same time, the high-skilled jobs will not be performed by local workers, so that if the company is taken over, the local workers do not know how to operate the machines.
Another way through which MNEs deal with political risk is by setting up joint ventures and partnerships. However, problems can arise if there is trouble between the partners.
Therefore, MNEs use two strategic factors when deciding on a joint venture or
ownership arrangement:
1. Compatibility of firm-specific advantages
2. Safeguards against unethical behavior
Firm specific advantages (FSAs) are strengths that are specific to a firm and are
brought to the joint venture or arrangement of ownership. However, it can happen that one party takes advantage of the other, what will happen than? Many MNEs believe that if a joint venture is not working well, the government will take the side of the local company, so MNEs protect themselves from the start to prevent this from happening. For example, if the local company steals the technology and starts producing it under a different name the MNE will take revenge by finding another local partner and try to drive the initial partner out of business.
IF the local partner uses venture capital for purposes other than discussed with the MNE, the MNE will simply put no longer money in the project.
In each case, the MNE has the change to take revenge and the local partner knows this, so is unlikely to act unethical.
International Financial management contains a number of areas:
These areas are all related and a decision in one area can greatly affect the other. The goal of international financial management is to help all geographic locations to limit financial losses trough the use of the above areas. The responsibility for these areas is spread over the total organization and to be sure that every subsidiary knows what to do, financial management planning begins with a determination of parent-subsidiary relationships.
Finance is a very important area of operations and therefore it is important to establish how the subsidiaries should be planned and controlled. One the one hand, each subsidiary should be responsible for its own planning and control, but on the other hand, there should be centralized control to ensure profitability and efficiency.
There are three solutions in addressing this:
The polycentric solution decentralizes decision making to the subsidiary levels and makes the MNE a kind of holding company. Decisions are made on the spot by those who have the most knowledge about market conditions and subsidiaries tend to be more flexible, motivated efficient and competitive. On the other hand, authority of the home office is reduced and the competitive attitude works as a disadvantage for the MNE; different international subsidiaries compete with each other and this result in lower overall profits for the company.
The ethnocentric solution treats all subsidiaries as extensions of domestic
operations. Management can coordinate all operations carefully. The disadvantage of this solution is that it can cause problems for the individual subsidiaries; they can feel hindered by the parent company.
The geocentric solution handles controlling decisions and financial planning on a global basis. The nature and location of the subsidiary influences controlling decisions. A second factor of influence is the gains that can be achieved by coordinating all units in a similar way.
Careful handling of global cash flows is of high importance when managing
international finances. This can be obtained through many ways, but there of the most important are:
Working capital is the difference between current assets and current liabilities and is used by MNEs when they need money from internal sources to expand operations or fund activities. Another way to raise internal money is by borrowing from a local bank or the parent company. Yet another way is by having the parent company increase its capital investment in the subsidiary. The method which is most likely to be used depends on a number of factors such as government regulations regarding lending within the company. For example, when tax rates are high for a profitable subsidiary, it will lend money at low interest rates to other less profitable subsidiaries in the MNE. The logic behind this is that the profitable subsidiary does not need high interest rates, because the government will tax away most of it, and the less profitable subsidiary can
use the low interest well as to save that money for expansion. MNEs can take a lot of advantage from this lending method, but in recent years many governments have set a minimum rate that can be charged on loans within the company.
Governments have also limited the ability of a parent company to charge its
subsidiaries a licensing or royalty fee for using technology. If there were no government restrictions the MNE had more freedom in collecting funds from overseas operations and providing the MNE with a sufficient amount of money which could be distributed throughout all overseas units.
Funds positioning techniques are used to move money from one multinational
operation to another. The three most common approaches are discussed:
A transfer price is the price set by an MNE at which one unit will sell a product to
another unit. A transfer price is not the same price at which a unit sells a product to the customer, but neither is it a discount price because it is an intra-firm trade. A transfer price will be determined by local regulations and will be set at an amount that is most convenient for the MNE (most profitable, cost reducing, or moving money among different subsidiaries).
An arm’s length price is the amount of money a buyer would pay for a product in a market with perfect competition. MNEs never use this kind of pricing for their units. Their objective is to maximize profits in a low tax rate country and to minimize them in a high tax rate country. By using transfer pricing, the MNE can reduce taxes. Further, the firm can concentrate their cash in a specific country. A problem with transfer pricing is that it does not correctly reflect the performance of a unit because the profit margins are manipulated. Further, this strategy discourages efficient performance by the seller because it can not sell its products with the highest possible profit margin. In recent years, countries are trying to make transfer pricing impossible by adapting their tax codes. MNEs pricing policies are first viewed by several agencies before they can be adopted. The objective is that MNEs charge the same price to their overseas units as they charge to independent third parties.
Another funds positioning technique is using tax havens, which are countries with low tax rates that are welcoming to business. This strategy is used in combination with transfer pricing: a subsidiary sells its output at a low price to a tax haven country, which sells the output at a very high price to a third subsidiary.
A fronting loan involves a third party that manages the loan. For example, a US firm that sets up operations in China might be worried about political risk (discussed in previous chapter). To protect their investments, the parent company could deposit its funds with a major international bank that has a good relationship China and its government. In turn, the subsidiary would apply for a loan with this bank. Now it is very unlikely that the Chinese government will seizure this loan because it will endanger the relationship with the international bank, so the MNE has positioned its loans safely.
When subsidiaries do business with each other, unit A may owe money to unit B and unit B may owe money to unit A. Eventually this will be solved between the units, but to help quicken the process, clearing accounts have been set up at every location and every manager at each location is responsible to make the transfers to the needed units. This process is called multilateral netting and is the determination of the amount owed to other subsidies through multilateral transactions. After this is determined, the money is sent to a clearing account from which all units are paid.
Multilateral netting has become popular for a number of reasons:
There are also some problems with multilateral netting:
Netting cannot resolve the fluctuating value of international currencies, which is of particular importance when MNEs do business with buyers who are paying in weak currencies. Therefore, MNEs often formulate a foreign exchange risk management strategy in addressing this problem.
There are a number of ways through which MNEs try to manage their foreign exchange risk. A number of areas ask for special attention when this is done:
Every nation faces inflation. An advantage of inflation is that it can make financial liabilities attractive and it encourages buyers to purchase now while prices are lower. A disadvantage of inflation is that it affects interest rates by driving up the cost of loans and it affects the value of the local currency in the international marketplace.
When an MNE does business in a country with rapid inflation, there are a number of strategies which it can use:
The most common forms how MNEs reduce their exposure to exchange rate
fluctuations are:
Translation is the process of rephrasing foreign financial statements in the currency of the parent company. In addition, the MNE will combine the major financial statements of subsidiaries into composite statements for the parent firm, a process known as consolidation.
Translation exposure is the foreign exchange risk that a company faces when it
rephrases foreign currency financial statements into the currency of country of the parent company. A good example of this exposure for a US MNE is when the currency of a local country weakens in relation to the dollar. This decline would negatively affect the subsidiary’s ability to buy imports from other countries with strong currencies, because it would take more of its own currency to purchase these products.
Transaction exposure is the risk the firm takes when paying bills or collecting
receivables when it knows that exchange rates are likely to change. This exposure is on both part of the seller and the buyer in international sales.
Economic exposure is the foreign exchange risk involved in pricing products or
locating investments in order to stay competitive. For example, if the yen increases value against the dollar, should a US firm that sells to Japan lower its price? The fluctuating yen/ dollar relationship creates a risk for the US firm.
Another example of economic exposure is when an MNE sells to a country with a
weakening currency. Most MNEs make their production more efficient, lower costs and continue to gain acceptable profit.
A hedge is a form of insurance that helps to minimize the risk of loss against an
unfavorable movement of an exchange rate. Most common forms of hedging are:
Operating financial strategies are designed to keep the effect of exchange rates on the local unit’s profitability to a minimum. In order to protect cash flows, there are two strategies designed, a lead and a lag strategy. A lead strategy calls for paying foreign currency payables before they are due if the currency is expected to rise in value and collecting foreign currency receivables before they are due if the currency is expected to lower in value. A lag strategy calls for delaying the receipt of foreign currency payment if this foreign currency is expected to rise in value and delaying foreign currency payables when the local currency is expected to lower in value.
Some MNEs use the following rule in addition to these strategies: make purchases in a weak currency and sales in a strong currency.
Sometimes debt strategies are used but they find a few drawbacks. During periods of inflation it is very expensive to borrow locally. Similar, the use of a weak local currency reduces the firm’s ability to buy from countries with a strong currency.
A forward exchange contract is a legally binding agreement between a company and a bank that states a delivery of foreign currency at a specific exchange rate on a predetermined date in the future. A positive side of this contract is that it provides safety against the decline of the buyer’s currency. On the other side, these contracts can become costly sometimes.
A currency option is like a forward exchange contract, except the buyer does not
have to exercise the option, he has the right to buy or sell a specific amount of a
foreign currency at a predetermined rate within a certain time period. The price of an option is 25,000 dollars and many firms feel that this is a reasonable price to ensure them that they will not suffer from a declining foreign currency.
Foreign exchange risk management can become very complex, especially when an MNE needs to decide on 20 subsidiaries. In creating the necessary system for
managing these decisions there are a number of steps the MNE can take:
Capital expenditure analysis and capital budgeting are other financial areas that
receive attention. Capital expenditures are huge projects in which the costs need to be allocated over a number of years. Major acquisitions, building new plants and refurbishing existing equipment are examples of capital expenditures. Most of the time, mathematical techniques are used with the analysis including discounted cash flow techniques such as net present value (NPV) and the internal rate of return. Basic techniques like payback period and accounting rate of return are also used.
In case of an MNE, it should be decided who will conduct the analysis, the parent or the foreign unit. Mostly, the initial analysis is done by the subsidiary and then passed to the parent who modifies and approves the analysis. There might be two subsidiaries wanting to build a new plant and serve the same market. In this case they would be competitors and this is not favorable for the entire MNE. Therefore the parent company decides which unit has the highest NPV; only this subsidiary may carry out its plan.
There are differences between how a parent unit will decide on the impact of political risk and how a subsidiary will decide on this impact. The basic NPV criterion is used to review why these differences occur.
The NPV equation is: NPV= ∑ It+Ct / (1+KA)t
Where: KA= ke(S/V) + kd(1-tx)(D/V)
Definitions of the terms:
It= investment cash outlays in year t
Ct= cash inflows in year t
T= terminal date or end of project
KA= weighted average cost of capital
ke= cost of equity capital
kd= cost of debt financing
tx= tax rate
D/V, S/V= debt and equity ratios, respectively
NPV= incremental net present value for the project
The discount rate KA, investment cost and annual cash flows can result in
disagreement between the parent and the subsidiary. Political risk can also have effect on all values. A subsidiary is not concerned with the problem of foreign exchange controls in a direct way and it will discount all cash flows that are incremental from its own perspective.
In the same way, political risk can cause the parent to increase the discount rate or required return to reflect that risk. However, if the subsidiary does not agree with this view, it will not increase the discount rate so its NPV will be higher. If foreign exchange controls are enforced the local capital markets can be cut off from the international capital market. The subsidiary might then think to lower local real interest rates, which make local investments seem attractive. However, the parent company might think more global and withdraw capital from that country to invest elsewhere.
Parent and local NPV’s can also differ because there is wrong application of the NPV framework. The most mistakes are made in choosing tx and KA. The subsidiary views the tax rate as an extra tax that it pays locally. The parent company however must also consider an extra tax after dividends are remitted.
Several problems come up when the discount rate KA is determined. It is logical that discount rates differs a few percentage points, after all inflation differs across different countries and thus the inflationary premium in the discount rate will differ. A company must calculate the real discount rate and then “gross it up” for the inflationary expectations of the relevant country.
Debt ratios may also differ between subsidiaries and the weights in the KA equation may alter the cost of capital. It is wrong to use the local real cost of debt to determine the cost of capital. If an MNE uses local debt norms and costs it doesn’t use its advantage of being a multinational. The advantage is the ability to raise debt internally where it is the cheapest. So, local debt norms and interest costs will be ignored unless government regulations restrict the use of debt funds to projects within that nation.
So, the financing options to a multinational are greater than those of a domestic firm. The MNE has the ability to raise funds where the cost is the cheapest. This results in lower overall cost.
Accept from technical evaluation, there are two institutional factors that ask for
attention:
· Government subsidies and controls
· Political risk insurance
Governments have influence on the profitability of a project or its financing. For
example, Canada and Australia have foreign investment review agencies that
review investments to ensure that they benefit the local economy. The result of many local content regulations is to seizure all the advantages possessed by the MNE. One of the problems with this is local ownership requirements. The parent’s viewpoint is to maximize market value, which is owned by shareholders in the home country.
Only, when joint ventures are traded locally this solution breaks down, the problem becomes: whose market value should be maximized. The result is that minority ownership reduces political risk of expropriation and this reduces the freedom of action for the MNE. Therefore it should not come as a surprise that when political risk is lowered, minority shareholders get bought out.
However, government regulation is not always bad. The interference of most
governments creates opportunities for an MNE. For example, the British Export
Credits Guarantee Department (ECGD) is a governmental agency that lends money for export financing of British equipment and has some of the lowest costs in exporting finances as long as the borrower uses British equipment. By structuring an investment to use British equipment, an MNE can borrow money at a 3 percent discount rate instead of the market rate of 9 percent.
Political risk insurance is in most countries available for exports and foreign direct investment. In the US the Overseas Private Investment Corporation (OPIC) was established to provide insurance for US foreign investment against expropriation, blocked funds, revolution, insurrection and war.
With political risk insurance the firm has to decide the incremental value of this
insurance. This is done by thinking of how the MNE can restructure foreign investment such as by fronting loans, or long-term contracts at high transfer prices as alternatives to political risk insurance. The final decision will reflect the best structuring of the proposal under analysis.
The international financial concepts can be applied by MNEs in a number of ways. One way is by employing a geocentric approach. Another approach is the manner in which financial analysis is used in choosing locations for overseas operations.
Because the US is a large market for international firms, many foreign companies have been worried about the value of the US dollar. This resulted in foreign firms setting up operations in the US in order to offset the competitive impact associated with having a currency which is strong against the US dollar.
At the same time US firms are moving abroad, especially because many Asian
currencies are declining and many purchase prices have fallen. Further, not only the US and European firms are going abroad, also Pacific-based MNEs try to start up operations overseas, by using direct investment and joint ventures to help open markets in Europe and the US.
There are also other tactics useful in reducing risk like alliances and cost-cutting techniques.
Many MNEs have been joining together to share costs of high-tech projects. This sharing involves R&D expenses and also the costs of manufacturing and selling the finished products. Examples include Microsoft and Sony, and GM and Isuzu.
Cutting-costs and investing in new plant and equipment is another key financial
strategy. The latter is critical to the success of an MNE during the millennium.
Especially Japan has troubles because many car manufacturers have difficulties with finding personnel.
Many employees refer to the three K’s: kiken (dangerous), kitsui (difficult) and kitanai (dirty). Young people prefer office jobs that do not make them exhausted at the end of the day.
Trying to deal with this problem, Nissan has built a new factory that will be far less stressful to employees. For example, they have replaced the traditional conveyor belt with motor-driven dollies. And instead of poor lights, the factory is brightly lit with natural filtered sunlight. Further, the plant is air conditioned and there has been made a great use of robots to do the dirty work and perform difficult tasks.
Other Japanese manufacturers like Honda and Toyota have also adopted a cost-cutting approach. They reduced cost while at the same time increasing the quality of their cars. This “more value for your money” concept has been of a great influence in increasing US market share and profitability.
Some MNEs have relied on their home market to generate R&D, design and production that is needed to sell their goods in foreign markets. However, many firms are finding out that they should focus on those foreign markets and on strategies to gain sales entry.
Further, many small countries realize that they should adopt export strategies to ensure the growth of their economies. Countries like Canada and Mexico have been able to tap into the triad market. They found the US a profitable market for exports and imports.
The strategy that these MNEs are following can be linked to the Porter model, although some modifications are in order. First, his ideas are examined in more detail in order to understand them better, and then it’s determined how his findings are applied to triad countries. After that, it will be determined how his ideas can be modified and applied to non triad countries.
Porter’s diamond model is based on four country- specific determinants and two
external variables.
The four specific determinants include:
Factor conditions consist of:
Demand conditions consist of:
Related and supporting industries include:
Firm strategy, structure and rivalry include:
There are also two external variables which play an important role:
Chance can invalid the advantages of some competitors and can bring a shift in overall competitive position because of developments as:
The government can influence all four determinants by:
Each of the four determinants has effect on the others and all determinants are
affected by the two external variables, role of chance and government.
However, this diamond model has found some critique. First, the Porter model was constructed based on statistical data on export shares for 10 countries.
It is however highly unlikely that this model can be applied to other countries without modification because most countries do not have the same economic strengthor affluence as those 10 studied by Porter.
Second, the government can highly influence a home nation’s competitive advantage. Actions like tariffs or subsidies can be well intentioned but they can backfire and create a domestic industry that is unable to compete on a worldwide basis.
Third, chance is a critical factor of influence, but is extremely difficult to predict and guard against.
Fourth, Porter’s model must be applied to company-specific considerations and not in terms of national advantage; of course, companies, not countries compete in international markets.
Fifth, Porter outlines four stages of national competitive development: factor-driven, investment-driven, innovation-driven and wealth-driven. In the factor-driven stage successful industries get advantage from the basic factors of production. Although industries are successful internationally, they compete primarily on price. In the investment-driven stage firms invest in modern facilities and work to improve these investments through modification and alteration. In the wealth-driven stage firms begin to lose their competitive advantage, rivalry declines and the motivation to interest lowers. Every country can be placed in a stage of competitive development. This has a great influence on the country’s competitive response so the placement of countries is critical. Also the logic that countries move from one stage to another is important to
consider.
Sixth, Porter contends that only outward FDI is of value in creating competitive
advantage and inbound foreign investment is never the solution to a country’s
competitive problems. This has been rejected and Rugman has found that the 20
largest US subsidiaries in Canada have as much export as import.
Seventh, Porter views that the reliance on natural resources (the factor-driven stage) as insufficient to create worldwide competitive stature. However, Canada has a few mega firms that have turned the country’s comparative advantage in natural resources into firm-specific advantages which are sustainable.
Eighth, the role of MNEs is not adequately addressed by the Porter model.
Researchers such as Dunning have suggested including multinational activity as a third outside variable. There is a good reason to doubt whether MNE activity is covered in the “firm, strategy, structure and rivalry” determinant.
One conclusion is indisputable in applying Porter’s framework to international business: different countries ask for different diamond constructions and analysis.
Porter’s diamond has been used as a basis for analyzing the international
competitiveness of smaller countries. First, it will be applied to Canada.
In Canadian industrial policy, two themes have recurred: export promotion for
industries in natural resources and substitution for import in the domestic arena. The Canadian market has always been too small to develop economies of scale. Hence, Canadian firms have developed large-scale resource businesses that are designed to exploit natural Canadian resources. The US government as well as the Canadian has encouraged export strategies by eliminating tariffs (US) and establishing low taxes on resources extraction, subsidizing the costs of capital and low interest loans (Canada).
Canada’s goal had been to use tariffs and non-tariff measures to protect the
development of the secondary industry. Under this approach the arrangement Canada was very inwardly focused. It relied solely on its natural resources as the base of creating wealth.
By the 1960’s it became clear that Canada needed a more international focus. The Canada-United States Pact demonstrated that tariffs on trade between the two countries on autos and parts had to be eliminated. In this process Canadian plants gained economies of scale because they were serving North America in stead of just the Canadian market. As a result, there became a development of a Canadian US “double diamond”. This double diamond shows that the two countries are now integrated for strategy purposes into a single market.
Canadian firms have to compete with US firms now. In order, to survive this
competition they have developed highly competitive capabilities. They can no longer depend on their home country diamond and managers need a “double diamond perspective” for their strategic decisions. This double diamond is also relevant for other small, open countries.
The Free Trade Agreement has also put pressures on the Canadian subsidiaries of US MNEs. Many of them were designed to overcome Canadian tariff barriers. Now there are unnecessary and many of them are in competition with their US based parent.
At the same time major Canadian companies are working to develop a competitive position on the US and in the rest of the world. Other big companies in Canada are following and operate from a North American perspective in order to become globally competitive in a later stage. This includes viewing Canada and the US as home-based markets and integrating the use of both “diamonds” for development and implementation of strategy. This requires:
The best thing about the double diamond is that firms and governments are forced to think about strategy and public policy in a more productive way. It encourages managers from small countries to be outward looking and doing well in this double diamond is the first step toward global success.
Once a country is convinced of the advantages of the double diamond perspective it should first identify successful clusters within its borders and then investigate their linkages across the diamond. A strategic cluster is a network of firms and supporting activities within a specific region, where the leading firms compete on a global basis and supporting activities are based in the home country. A successful strategic cluster will have one or a couple of large MNEs at its center. It is not important if these are foreign- or home-owned, as long as they are globally competitive. The whole cluster
depends on these flagship MNEs. A vital component of the cluster is companies with related and supporting activities including both the private and public sector organizations. Further, they include think tanks, research groups and educational institutions.
Presently, there are several strategic clusters in Canada. There is an auto assembly and auto parts industry in Ontario and there are also strategic clusters based on banking and financial services in Toronto.
Many of the Canadian clusters are resource-based. The challenge for firms that are in these clusters is to keep adding value and to eliminate the commodity nature of Canada’s resource industries. This can be done by developing a global marketing strategy. Implementing such a strategy requires a large investment in people with strong marketing skills and the development of a global intelligence network.
In 1998 Canada is the fifth most competitive country in the world. Canada then faces the problem of raising its productivity levels; this has increased only half as fast as in the US.
Further research is needed to examine Canadian-based clusters and their competitive advantage compared with rival clusters in North America and around the world. This will require two types of work: First, the competition between firms in the same cluster in America needs its data adapted to the nature of foreign ownership and whether FDI is inbound or outbound.
Last, the real sources of Canada’s competitive advantage are to be examined by not only statistical analysis, but also interviews with managers and fieldwork in the clusters. This research is very time consuming and expensive but the task can be made feasible by making self-audits and selecting only a few clusters for analysis.
Porter’s diamond can also be adapted to examine strategies and international
competitiveness in Mexico. Their linkages to the US are quite different from Canada’s. One reason is that Mexico only has a few MNEs that have enough capital to invest in Canada and the US. Mexico’s strategy with North America lies more on trade than on outward FDI, while using inward FDI for boosting their internal development.
Mexico runs a negative trade balance with the world, but its balance with the US is positive. In fact, Mexico is the third largest trading partner of the US. 70 per cent of Mexico’s imports and exports are with the US. The next largest trading partner is Japan. 0,6 of Mexico’s exports goes to that country and 3.7 per cent of Mexico’s imports comes from Japan.
Mexico depends heavily on the US and is linking itself to the US diamond in a number of ways. One is by serving as a customer for outside goods. For example, the US firm Caterpillar is the main supplier of heavy road building equipment in Mexico.
Simultaneously, Mexican firms are putting effort in expanding their links in the US market. In four years’ time their exports tripled. Many of these exports are automobiles. General Motors is one of the major producers of cars in Mexico. US firms also invest in other projects than the automotive. For hard-disk drives and textiles the US also goes to Mexico instead of Asia.
In 1965 the Mexican government established the maquiladora industry to attract
operations from foreign countries. Today, this industry is one of the country’s largest sources of hard currency earnings from exports, after oil. Most companies in the industry are US owned and although it has brought both countries major advantages, the Americans feel that the low wage rates in Mexico are causing companies to transfer work there and to fire personnel back home.
Though, it is expected that Canada and the US will keep investing in Mexico. In
contrast to Canada, which is trying to create Canadian owned MNEs that will compete worldwide, Mexico will rely on financial and technological investments from the US and Canada.
Not only Porter’s ideas should be addressed, the last decade it has become
increasingly important for firms to balance globalization (or economic integration) and national responsiveness. Globalization is the production and distribution of the similar kind of products/services on a worldwide basis. National responsiveness is the ability of MNEs to grasp different consumer tastes and to react on national standards and regulations imposed by the government and agencies.
The issues of economic integration and national responsiveness can be analyzed with the use of a matrix. The vertical axes measures the need for globalization (economic integration) and the horizontal axes measures the need to be nationally responsive.
4 Situations are can be distinguished in this matrix. Quadrants 1 and 4 are the simplest cases.
Quadrant 1 has a focus on economies of scale which leads to competitive strategies that are based on price competition. Mergers and acquisitions often occur in this environment.
Quadrant 4 is the exact opposite of quadrant 1. In this case niche companies adapt products to satisfy the high demand for sovereignty. Economies of scale are not important and therefore ignored.
Quadrants 2 and 3 are totally other situations. In the case of quadrant two, both
sovereignty and economies of scale are not important. This leads to strategies with an increased international standardization of products/services.
In Quadrant 3 both sovereignty and economies of scale are very important. There is a strong need for integration in production and regional adaptations in marketing. It is the most challenging case and most successful transnational MNEs operate in this quadrant.
MNEs in every industry apply this matrix, but each does so on their own way. The following include examples from the entertainment, personal computer and automobile industry.
The Walt Disney Company is one of the most successful firms is in the entertainment industry. Disneyland Paris has national responsiveness and integration well-balanced. Many of the features in that park are also found in the other Disney parks throughout the world. The international emphasis that Disneyland Paris gives to each of its characters is an example of national responsiveness: Pinocchio is Italian, Cinderella is French and Peter Pan is British.
Sega is another firm in the entertainment industry which is an example of integration/national responsiveness. Sega is known for its Sonic video game character and intends to develop an amusement park that will allow the company to compete with firms like Disney. It wants to use simulators that are uniform in design and character (integration), but the games can be adapted to each country (national responsiveness), depending on the entertainment interest of the local crowd.
Most PC manufacturing firms compete on technology and price. They offer state-of-the-art machines and cut their costs by outsourcing components and improving assembly
efficiency.
In recent years US firms have been making progress in the Japanese market by
entering the market with low-priced units that were the same as those sold in another country (integration) but at sharply lower prices (national responsiveness). Microsoft for example, has written a special software version for the Japanese market. In addition, the strengthening yen lets US PC vendors further undercut the prices of their Japanese competitors.
Every car manufacturer produces cars that can be sold around the world (integration), but in most cases the design, engineering and manufacturing is changed to the needs of different locales (national responsiveness). Ford Motors’ Mondeo provides a good example. This car has uniform engineering standards and identical production tools are used at both European and US locations so that economies of scale can be maximized. At the same time it considers national responsiveness; Europeans like manual transmissions and demand cars that handle well while Americans like automatic drive and do not necessarily have to drive easy-to-handle cars.
Honda is another example, this company bends and stretches designs to fit market demands. Therefore, cars built in the US are longer and roomier while the same car built in Japan can be smaller and more compact.
The trade-off between integration and national responsiveness is very important to MNEs. Successful ones know that they should also concentrate on national
responsiveness instead of just globalization.
Economic decision making in the US becomes more decentralized and states and
provinces get more importance. The problem arises when the institutional structure and businesses in the country cannot operate in an efficient way, relative to global competitors.
Today, the US government is responsive to interest groups and lobbies. Many groups like environmentalists and social activists have a growing power. Examples of conflicts in business lobbying occur in trade remedy laws and in inward FDI.
It has been found that US corporations use countervailing duty (CVD) and antidumping (AD) laws as a competitive strategy to set up entry barriers against rival firms. So, at the time the US government negotiated free trade with Canada, individual US corporations used CVD and AD laws to help restrict Canadian imports. This is an example of US national interests being offset by selective producer interests.
Another concern is inward FDI. Japanese FDI is growing and some Americans are
concerned with this trend. There is a clash between Washington, who wants the
Japanese FDI to be screened and reduced and the state-level activity who wants the Japanese FDI for the jobs and tax base. The same thing happened in Canada thirty years ago. So, it is seen that the private sector needs to respond to a large amount of economic nationalism and its associated protectionist inefficiencies.
In 1989 there was a revolution in central Europe which resulted in the fall of the Soviet Union in 1991. Currently, the countries in central Europe are very poor and these nations will receive economic development probably through FDI rather than through joint ventures. The reason that FDI will work better is that Western companies can control their proprietary advantages through FDI and do not want the risk of joint ventures. In Eastern Europe and third world countries economic efficiency is what matters and therefore their emphasis will be on globalization, not on national responsiveness.
The reason for the success of Japanese MNEs is that they benefit from a highly
centralized home market economy. They could follow globalization strategies because their cultural, religious, social and political system is much more centralized than in other triad blocs. A radical restructuring might be possible in Japan, but not In America or Europe because their economic power is much more decentralized.
Japanese will continue to use this globalization strategy, but they may find difficulties in the decentralized environments of the US and Europe because marketing skills will be much more important than production skills. If MNEs from Europe and North America can learn from their past mistakes in sovereignty they might have a potential advantage over Japanese MNEs. They could become more nationally responsive, while Japan becomes locked in a “globalization only” strategy just as the world demands more national responsiveness.
The European Union currently consists of 25 countries of which 12 use the euro as their currency.
The EU goes back to the formation of the European Economic Community (EEC) in the late 1950’s. It was founded by six members: France, West Germany (Germany was separated in East and West at that time, in 1989 the Berlin Wall fell and Germany was one country again), Italy, Belgium, the Netherlands and Luxembourg. By the late 1990’s the EU had grown and included Austria, Finland, Great Britain, Ireland, Denmark, Greece, Spain, Sweden and Portugal. This was also known as EU-15. In may 2004, 10 countries entered the European Union: Estonia, Latvia, Lithuania, Czech Republic, Poland, Hungary, Slovakia, Slovenia, Cyprus and Malta.
The objectives of the EU are:
· No customs duties among member states.
· Elimination of obstacles to the free flow of import/ export of goods/services
among member states.
· Establishment of common customs duties regarding countries outside the
union.
· Free movement of persons and capital within the bloc.
· Acceptance of common agricultural policies, transport policies, technical
standards, health and safety regulations and educational degrees.
· Common measures for consumer protection
· Common laws to maintain competition throughout the union and to fight
monopolies and illegal cartels.
· Regional funds to encourage economic development of certain regions.
· Greater monetary and fiscal coordination among member states and certain
common monetary/fiscal policies.
In 1985, the EU adopted a White Paper which stated that by the end of 1992 a single unified European market should be achieved. Two years hereafter the Single European Act (SEA) was enacted. The Council of Ministers is one of the four major institutions of the EU. From every member state one minister will be part of the Council of Ministers and together they are responsible for making major policy decisions for the union. Previously, the votes had to be unanimous, but now most proposals pass with a majority of votes. Through this, the progress of economic and political integration among member countries became much faster. Will their eventually come a single European market (SEM)? This depends on the progress in the area of free movement of goods, changes in finance and banking, and the practice of government procurement.
From 1986, most customs duties between EU members have vanished. It was however possible for a country not to sell imported products because of technical, safety or other standards and regulations of that country. These country standards are phased out and substituted by common EU standards.
Administrative barriers are the refusal of food products because they contain additives and substitutes that are unhealthy for consumers. These barriers are also being replaced with common EU standards.
Fragmented local markets have been created by making use of differences in language between countries and by setting artificially high prices for goods. These differentials are being eliminated little by little with the growth of mail order houses, discount stores and e-commerce.
From 1990 there has been free movement of capital among members. There is also one equity market and stockbrokers can operate in every city within the EU. The combined capitalization of the EU is around 5 trillion; this is one-third of that of the US. This equity market has created tremendous opportunities like making it easier for companies to raise money by selling stock and giving investors more access to security issues.
In 2002, the euro had officially replaced the local currencies. Some believe that it will challenge the dominance of the US dollar of international trade and finance. At least it has helped create new opportunities for EU businesses and foreign MNEs doing business in the EU.
EU government procurements are responsible for close to 11 per cent of the EU’s
GDP. Previously, governments awarded contracts to national firms, but with the
originating of the SEM and the Government Procurement Agreement (GPA) this is
diminishing. This resulted in greater efficiency, lower cost and a stronger economic common market. On the other hand, it should be realized that companies lose their business to other EU countries that can provide lower cost.
The EU helps Europe to compete better with the other triad members. However, there are some EU countries that are currently at a competitive disadvantage.
EU labor laws make it difficult to fire employees. US companies have much greater freedom in the lay off of personnel. This means that US employees need to stay productive in order to be certain of their job. Japanese firms treat their employees as a fixed cost and therefore see no use in firing employees. In return, employees are grateful and willing to work hard for their companies.
The EU used to have the highest compensation for production workers. The wage was 14 per cent higher than in the US and 15 per cent higher than in Japan. By 2000, they reversed this and had the lowest labor costs in the triad. Much of the decrease is because of a decline in the value of the euro against the dollar. But European firms were also able to negotiate better contracts with labor unions and to lobby the government successfully for more flexibility.
EU countries were very behind with Investment spending. Rapid increases in wages in the 1980’s were not offset by increasing productivity so EU firms found themselves borrowing instead of investing. In the late 1980’s the EU government spending had risen to 50 percent of GDP (to a 30 per cent in the US and Japan). Therefore the taxes were raised, which limited funds and forced the interest rates to increase even more. Recently, government spending has been stabilized, but still there are many EU countries performing below the US level.
The educational system in the EU is not that good compared to the US and Japan. In the US a higher percentage of people attend college than in Europe or Japan. Further, the university curriculum in Europe is more theoretical than in either the US or Japan. Also, the European educational institutions are more rigid and less able to adapt to the needs of business. Therefore, European students are trained inappropriately for the European business and industry. This results in an extreme unemployment rate in the age group below 25.
So, the major challenge for Europe is to modify their educational systems so that
European students fit better in the business world. This is already partly done, by the introduction of a bachelor-master system in European universities.
Generally speaking, the EU is weaker than Japan or the US and there is likely to be an increase in acquisition and mergers among EU firms and companies outside the union. It is also likely that new technologies will be developed and that free trade agreements are made between the EU and other European countries that make it a stronger competitive market.
The EU is going to be a very competitive market in the future and it is therefore
important for MNEs that want to do business in the EU to conduct a strategic analysis. This analysis should focus on:
· Competitive nature of the industry.
· Location evaluation.
Careful market segmentation, increased R&D, and the use of mergers, acquisitions and alliances have helped to build market share and to improve competitive strength and are used as specific strategies. Essential in these strategies is competitive intelligence. This is achieved through two complementary parts:
· External gathering of information.
· Internal analysis of infrastructure.
Information about competitors can be found in government-controlled company
registration offices (Great Britain, Denmark, and Ireland). These offices provide
financial information on registered firms. Other useful information sources include the Department of Trade and Industry (DTI), trade associations, business information services, regional and local publications. In France, Germany and Italy, much competitive information can be found at local courthouses. Chambers of commerce in these countries are also excellent source of information because these organizations work very closely with business firms, which is not the case in the US. Central databases which are created by the EU Commission can be consulted to keep aware of changes in national legislation. These possible legal barriers are very important to know about in an environmental analysis as well as cultural and technical barriers to keep foreign competition away.
After this the MNE decides how to manage their infrastructure. Prescott and Gibbons have described four types of infrastructures that can be used successfully:
A. Coordinated infrastructure is used by companies that compete in similar
markets and business units share resources trying to increase overall sales.
(computer firms)
B. Market coordination infrastructure is used by companies that compete in
similar markets but do not share their resources with business units.
(companies with each operation set up as a separate independent business)
C. Resource sharing infrastructure is used by companies that compete in
dissimilar national markets but share their resources. (auto manufacturers)
D. Autonomous infrastructure is used by companies that compete in dissimilar
national markets and do not share resources. (highly diversified MNEs)
Many companies feel that they need to expand on a global level in order to stay
competitive. For example, in the early 1990’s North American auto suppliers saw their international market share drop from 32 to 28 per cent, whereas the European share rose from 30 to 39 per cent. As a result, US firms like General Motors and Ford Motor expanded in Europe by foreign direct investment and strategic alliances. Companies in other industries did the same thing and many find that regions and municipalities are encouraging this trend by providing investment incentives.
Subsidiaries are important incentives, but most MNEs doing business in the EU
consider them as one element in the evaluation process. Other conditions and costs include operational costs such as labor, utilities, transportation and distance from major markets.
The most important location factors, in order of importance, are:
· Access to customers
· Labor quality
· Expansion prospects
· Level of wage costs
· Attractive environment
· Access to suppliers
· Non-financial regional assistance
· Absence of restrictions for expansion
· Infrastructure
· Level of rents
· Public transportation.
When doing Business in the EU, a few strategy issues need to be considered:
· Overall strategic analysis
· Feasibility of exporting
· Value of strategic acquisitions and alliances
· Marketing considerations
· Manufacturing approaches
· Management considerations
When a strategy of doing business in the EU should be formulated there should be looked at both the process of globalization through economic integration and the need for a firm to be nationally responsive. We use the matrix that was already provided in the previous part, but now we also show which firms operate in what quadrants.
“Brussels” designed a strategy for European companies to move into quadrant 1. This strategy creates natural barriers to entry for outside companies and ensures success of local competitors.
Exporting companies operate in quadrant 4. US firms will find it difficult to export to Europe and to compete on economies of scale in the face of integration by rival firms in the EU. This new nature of competition will result in foreign firms to switch from exporting to FDI.
Those firms that will continue to export to the EU will have to think of a number of matters like customs duties, taxes and product standards. Goods that are exported to the EU are subjected by customs duties and taxes at the point of entry. Most of the times, these duties are based on the estimated value of the good. Alcohol, tobacco and gasoline are subjected to excise taxes. Another matter is that of product standards. Every product that enters the EU must meet standards and technical regulations and in many cases, products have to be modified before they gain EU entry.
Strategic acquisitions or alliances are the most popular ways to gain a position in the EU. Strategic alliances have the most chance of being successful when both parties keep the following in mind:
· When developing core businesses; acquisitions work better than alliances.
· When a firm wants to gain entry into a new geographic market or businesses
that overlap the core business; alliances are effective.
· Alliances between strong and weak firms do generally not work well.
· Alliances with the ability to move beyond initial expectations and objectives are the ones that last.
· Alliances have more chance of being successful when both firms hold the same amount of ownership.
Strategic alliances are more common then using acquisitions. There are several
important things to make these arrangements work: Each partner should complement each other. If both are good in R&D and bad in manufacturing for example, there is no synergy and they probably end up competing in stead of cooperating. Second, the goals of each group must be spelled out carefully, because they provide the base for overall direction.
Thirdly, the employees of both firms must get to know each other and each group must understand how the other operates. Further, the parties must hold frequent meetings and develop a trust.
As the EU comes closer to a true economic union, barriers disappear and competition will be fiercer. Therefore, marketing strategies are more focused on pricing and positioning.
The European Commission has predicted that prices of goods and services throughout the EU will decline. This will work because of 5 specific developments:
· Decreasing costs of doing business because the barriers have been removed.
· Opening up public procurement contracts to increase competition.
· Foreign investment that will increase production capacity.
· More enforcing of competition.
· Intensified competition brought about by economic reforms.
Price will become even more important when products in the EU will be more globally standardized because customers will develop similar tastes.
Some products like Coca-cola and Marlboro have a worldwide appeal, but most
products don’t. Therefore, “plan globally, act locally” will continue to be a good saying.
Direct marketing is probably also an interesting strategy. However, in Europe this kind of marketing is quite new and there are of number of challenges that MNEs face:
· A universal message will not work, because consumers speak different
languages.
· Direct-response telephone numbers in television spots is forbidden by the
German privacy laws.
· Information about potential clients is not easy obtainable.
· The infrastructure for this type of marketing is weak because credit cards and
toll-free numbers are still in their infancy stage.
Because country regulations are replaced by common EU regulations and standards it will be possible to produce uniform goods in the EU. Some of the major manufacturing considerations for those that are doing business in the EU are:
· Reducing costs.
· Building factory networks.
· Entering into R&D alliances.
The costs per unit can be drastically put down when the market consists of 375 million consumers. The cost of components is kept to a minimum and fixed costs can be spread over more units. Then costs per unit can be reduced and economies of scale can be achieved even when production has to be modified to local conditions. This can be done by the use of delayed differentiation, in which products are held similar until the last possible part of the assembly line where they should be adapted to local needs.
MNEs also use outsourcing and just-in-time inventory to reduce the cost of keeping inventory. Costs can also be controlled by redesigning the production process.
MNEs in Europe are now starting to create networks of factories that produce
components and finished goods. These networks are also integrated with software that can operate in many European countries without the need for modification. They allow the company to make production and distribution decisions, while at the same time satisfying the requirements of the different legal entities in the countries where they operate.
Another upcoming manufacturing strategy is participation in R&D programs. In the EU this is done through setting up alliances to share R&D expenses or trying to get some of the expenses funded by participating in cooperative R&D programs. The EU provides funding for innovations in (bio)technology and energy. The goal fo these programs is to encourage cooperation and to make Europe more competitive in the world market. The European Research Cooperation Agency is an R&D alliance that emphasizes projects in a wide area of fields.
Firms that are interested in participating in these programs have to carry out six
steps:
· Find out if the company is eligible for EU-funded programs.
· Have knowledge of the EU rules regarding rights of ownership and the
circulation of results.
· Choose the best location for an R&D center.
· Determine competitors and customers who are already participating in the
program.
· Gather recommendations for the firm’s EU and local management.
· Put together the company’s application for funding.
For managers it is important to consider that the EU still consists of different countries with different cultures. For example, Scandinavians find the quality of work life extremely important and the British find individual achievement important. French want a secure job and Germans place high value on both advancement and earnings. You see that there are a lot of cultural differences between the EU countries and that it is important for MNEs to have a global perspective as well as managers who are focused on country-specific needs.
Although there shouldn’t be barriers to entry the EU, it is important for international managers to know how to deal with them. The most common trade law barriers are countervailing duty laws (CVD) and antidumping laws (CD). (they have already been discussed in earlier parts). CVD is used as an entry barrier in the US and Europe makes use of AD as a barrier to entry. Both are import tariffs that are meant to protect domestic producers from dumping and subsidization by foreign governments.
There is strong evidence that both protection means are used in the US and EU. This is harming global business and goes at the expense of a liberalized trade and investment system.
The Ministry of Finance and the Ministry for economy, trade and industry had a big hand in the economic boom of Japan. The previous liberalized trade etc, and the latter controlled prices and currency. Amakudari, which is the temporary movement of certain political figures into business, was practiced in order to have consensus between the two previously stated ministries and other major players. Even though nowadays the corporations are gaining in power, the government is still very important.
There are also other factors which underlie Japan’s success. For instance, Japanese people have a low level of individuality, a strong sense of collectivism and they also have a very high level of uncertainty avoidance. They also prefer more objective kind of decision making. In companies and also in society certain virtues such as honor and sincerity play a major role and the educational system underlies that.
Economical Japan
The economical climate in Japan is very big and competitive. Like earlier stated, the governments relationship with businesses and its unique capital market and their Keiretsu(conglomerates of powerful companies), have been pillars of their success. Japans economy, productivity and the people’s wealth, make their country the second largest economy worldwide.
For some time, Japans domestic market was/is very closed, which led to conflicts with other nations, such as the USA. Japanese firms are especially specialized in the motor vehicles sector, consumer electronics and electronic parts. Michael porter has stated that local rivalry and customers, who are very demanding , are the main factors behind the emergence of competitive firms.
Japan and China and their FDI flows are increasing quickly, which could make them a powerhouse. The latter would enable dramatic growth in other parts of Asia. Both the countries complement each other. Japan has got the technology etc, while China offers very cheap labour. Moreover, China has got a huge market.
The following describes the business characteristics of Japan in more detail.
Through research it is shown that the power and success of the Japanese in the auto sector is the merit of their productivity. Research shows that Japanese car makers only need 55 % of time their western counterparts need to make a car. This enabled them to price the cars at a lower price.
The following are attributes that underlie the competitiveness of the manufacturers in Japan:
First of all, the attention to quality, TQM and QC (quality circles). Moreover, there are strong linkages between the suppliers and manufacturers, (keiretsu). Also, the ability to cut cost, automation using robots and kaizen(continuous focus on improvement)
The Japanese spend a lot of money on research and development.
An elaborated description of keiretsu is that it is a corporate grouping, in other words it is a tied groups of integrated businesses. There are two types of keiretsu, the horizontal (kinyu) and the vertical, which is the manufacturing one. The horizontal type is characterized by a central bank and sogo shosha, which is an international trading company. The horizontal version is an ‘outdated’ version, whereas the new vertical keiretsu is headed by large manufacturing companies.
In Japan, the retailing is mainly done by many small retailers. This enables face-to face selling, however, it is very costly. There is a kind of distribution hierarchy led by the keiretsu. However, nowadays this system is simplified, partially through the emergence of discount stores etc.
Around 25 percent of the world’s top 100 multinational companies are from Japan. The Japanese were sometimes falsely stereotyped as follows: for example, that the Japanese firms had the best managerial practices, or at the other end, the whole Japanese model has been criticized for their economical failures etc. The truth lies somewhere in between the two extremes.
The strengths of the Japanese firms were evident till 1980 and the weaknesses started showing thereafter. The Japanese firms can be divided into two groups. The first group is that of the companies which were not too dependent on the domestic market, they sold mainly outside Japan. Examples are Honda and Sony. The other group consists of the majority of the companies, which are very dependent on the domestic market and the Japanese culture. Examples are Nippon steel and Kajima. Fruin, a researcher, has detected several distinguishing attributes of Japanese firms, which are as follows: high productivity, functional specialization and manufacturing adaptability.
The following are the main characteristics of the Japanese management style: R&D, design, manufacturing and marketing are not so separated, lifetime employment, effective communication, managers have a more ‘teacher’ role, instead of solving a problem managers rather teach the employees how to do it well.
In the past decade, several big changes have occurred in Japan. Japan encountered difficulties as a result of the end of the economic growth, which took away their stability. These difficulties started showing at the start of the 90’s, but were masked through for example the value increase of the yen in comparison with other currencies. This economical slump has been accompanied by cultural problems between the modern way of living and the old way. This has led to a new younger generation of Japanese, who are termed as Shinjinrui( new human being). This mingling with the western cultures has also influenced the taste of the Japanese people.
The capital market has been restructured. The companies are raising capital from capital markets rather than from keiretsu share-holding and banking relationships. Private equity and venture capital are gaining popularity.
Pressure from inside Japan to deregulate has grown, combined with the changing
preferences of consumers and firms; it has led to huge increase in inward investments. European firms have also increased their FDI in Japan significantly. M&A, foreign firms buying up local firms, has been a major factor for the growing inward FDI. In order to be able to handle several difficulties, such as the growing domestic labour wage, the Japanese corporations had to restructure. Several of the major changes are described below.
The traditional system of the manufacturing and distribution keiretsu is declining. Big corporations are not giving any agreements, such as a volume of business over a long period of time, to suppliers; rather they encourage them to compete with other suppliers. This has led to cost being cut.
Also, a lot of work is being outsourced by the Japanese. Almost half of the Japanese branded cars are made outside Japan. Another change being implemented is the decline of lifetime employment and the emergence of new human resource practices. Also, diversification strategies are being implemented. Porter and co have analyzed the changes being implemented and have come up with a few guidelines for transforming Japanese firms:
They state that creating a long term, distinctive strategy is better than imitating close-rival strategy. Also, firms should expand the focus of operational effectiveness. Which means, improving the plant level productivity, as well as the office level productivity. Moreover, firms should learn the role of industry strategy in structure. Also, they should shift the focus from growth to profitability. A growth focus was only possible with the traditional system (keirestu), nowadays shareholder pressure will push for profitability focus. Also, firms should just focus on their core competences and let other firms do the rest. Moreover, firms should update the Japanese organizational model, which
means that the hierarchic system has to go, as well as the traditional internal practices. Finally, Porter and co state that the Japanese firms should move away from the incremental change, they should on the other hand become more flexible.
Canada
Canada has one of the highest standards of living in the whole world. It has a GDP of about 995 million dollars. Its main export products are food, energy and motor vehicles. Canada has been known for its food production; however the service section and major secondary industries have emerged. The main industries are located in central Canada. The western and eastern parts of the country still rely heavily on primary industries. The US has more FDI in Canada, more than any other country. Also, Canada invests a lot in the US. There are many similarities between the US and Canada, for example the consumer preferences; however there are also many difference. Canada’s economy contains mostly private companies, however some industries are characterized by government owned companies.
Nevertheless, the trend is moving towards more privatization. The Canadian industry consists for the main part of small firms.
Regulations:
The legislation in Canada is more or less the same as in the United States.
Competition in Canada is regulated; however there are no rules which guide mergers, monopolies and acquisitions.
Competition Act: This act prevents companies and individual persons to take actions which will result in less competition or even prevent competition.
Export permits are required if someone want to ship goods with strategic value.
Export is one of the most popular ways to do business in Canada.
The banking sector is dominated by six Canadian banks. All are controlled by the Central Bank. The tasks of the Central bank are as follows: It regulates credit and currency; it is responsible for the protection of the external value of the Canadian dollar and it regulates other things such as production.
The banks act according to the Bank Act. There are two types of bank acts, the first being Schedule A and the second Schedule B. The previous are the fully Canadian owned banks, and the latter are the foreign firms and the partially Canadian owned banks.
Canada Labor Code: this is a federal law which consists of matters such as wages etc. The Canadian workforce is heavily unionized. The working conditions are similar to the United States. The Investment Canada Act creates a nice climate for investments from other countries
Some major multinationals in Canada are for example, Bombardier and Onex
Corporation.
Canada is part of the NAFTA and the United States- Canada Free Trade Agreement (FTA). The latter was made in order to eliminate tariffs and the majority of other barriers to trade.
Even though Canada is a big country, the industries have short marketing channels with direct producer to user distribution. Also the industries are very geographically concentrated. The advertising media are television, radio, magazine etc. There are many US franchisers in Canada.
Mexico
Mexico is the third biggest country in Latin America. Its Economy is developing at a high speed, mostly because of new business connections with the United States. This has made the Mexican Economy the strongest in Latin America. The liberation politics of Carlos Salinas and the growing maquiladora industry are also big factors in the growing economy.
The investment climate is getting very nice. A big reason is the privatization campaign, also the new investment laws, which enables foreigners to hold major equity positions, is a big reason.
Labour is plentiful and inexpensive, however properly educated and skilled labour force is scarce in Mexico. In Mexico the labour force is heavily unionized.
Mexico is a member of the NAFTA, which reduced the trade barriers in Mexico. Also, it has as effect that the growth of several industries has increased. Mexico has been involved in several other developments in order to enable free trade and privatization. An example is the Free Trade Area of the Americas (FTAA). The above described developments have as result that the business and investment climate in Mexico are very favorable.
The petroleum industry is very important for Mexico. Also, the automotive industry is growing; Mexico is a car and truck producer. Overall it can be stated that the Mexican economy is heavily linked and dependable on the NAFTA and the United states in particular.
Non-triad nations are dependent on developing connections with the triad to prosper internationally. Although every country performs in a unique way, there are common developments.
The three most important ones are:
1. Privatization
2. Attracting FDI
3. Strategies that are designed to link the country with the triad.
Latin America is a rapidly growing region and Mexico’s experience has been very
helpful to regional integration and other Latin American countries will be following as in the Free Trade Agreement of the Americas (FTAA).
Chile has one of the strongest economies of Latin America. Its GDP grew from the 1980s and unemployment stayed at a low level. Further, the government was positive towards foreign investment and from 1974 to 1990 many companies that ones were nationalized were returned to the private sector.
The EU is the largest investor in Chile. After that, the NAFTA countries account for the largest per cent in FDI. Most of this FDI is concentrated in select industries like the mining industry (36.4 %) and the service industry (22%). Other significant investments are made in manufacturing, transportations, telecommunications and utilities. In recent years the investment in utilities has outpaced the investment in the mining industry, this was partly because the government had invested in infrastructure.
Chile is a relative small country and local companies therefore tend to be smaller than in Brazil or Mexico. Yet, the rapid growth of the country managed that sixteen Chilean MNEs are in the Financial Times top 100 of Latin American companies. In fact, Chile is a source of FDI to other Latin American countries.
Chile is doing well in labor. Their population is highly educated and their labor force is well-trained and skilled. About 12 per cent of the labor force is part of a union. These have increased power in the last years and achieved that employees are allowed to strike if a majority of employees approves. Also minimum monthly salaries are fixed by law and the government adjusts them on a periodic basis.
The government assures that Chile’s economic approach will stay free market driven and therefore Chile is a favorite investment area for MNEs. In linking itself to the triad, Chile relies on exports such as copper, forestry products and fruit. 56 percent of Chile’s exports are to triad countries. 22 percent goes to other Latin American countries. Chile’s imports are also mainly from these countries.
To put it in other words, Chile needs four double diamonds:
1. Chile-NAFTA
2. Chile-Mercosur (Argentina, Paraguay, and Uruguay)
3. Chile-EU
4. Chile-Asia.
The government of Brazil launched economic liberalization and reform in recent years. Most non-tariff import barriers are removed and the country moves toward trade integration, mostly with Argentina.
At the same time, Brazil has a host of problems. They have been running a trade deficit (more imports than exports) and the decision to devalue the currency has resulted in high interest rates and a slowdown of economic growth. Further, it had impact on its Mercosur partners: Argentina, Uruguay and Paraguay.
By 2001, Brazil seemed to be doing a lot better, but a number of economic encounters reduced Brazil’s economic prospects. The Brazilian Real depreciated 20 per cent in 10 months and this accounts for the country’s energy crises. The energy supply was not able to keep up with the growth in demand and this resulted in 30 per cent reduction of energy consumption, imposed by the government.
The US economic slowdown in 2001 and the economic crises in Argentina also
affected the Brazilian economy. Most Brazilian imports and exports are with these countries.
Brazil has been able to negotiate major amounts of FDI into the country. Foreign MNEs have preferred to set up operations in the largest market of Latin America, rather then have to export to Brazil and face trade barriers.
The EU is the largest investor in Brazil (46.8%) and the US is the second largest
source of FDI (24.2%)
The size of the economy, the amount of natural resources and the government’s
protecting policy have all contributed to the development of Brazil’s MNEs. 41 Brazilian companies are in the Latin American top 100. Brazil’s oil reserves have resulted in the emergence of the oil company Petrobas, which is the largest Latin American company. Brazil’s utilities and telecommunication companies are also among the largest in Latin America. Brazil is also one of the familiar examples of technology and skill transfers from MNEs to local producers. This has made Brazil a major exporter of auto parts and has allowed the development of other industries.
MNEs say that the Brazilian labor force is quite good, but many firms have to offer training because of the country’s poor educational system. From 1988 employees are allowed to strike, but there are some restrictions to it such as protection of essential services.
The government has been slow in reducing inflation and the deficit, but because of its
huge economic market it keeps attracting to MNEs. At the same time Brazil is
interested in linking itself to the US and EU markets via increased trade.
Pacific countries constitute a large geographic area and sometimes, a rapidly growing market. China for example, has the largest population in the world and in recent years the nation’s economy has done much better than casual observers realize. Exports are higher than imports and inflation and at the same time, the Chinese government has moved towards privatization and encouraging entrepreneurial efforts. The country’s economy is slightly smaller than Japan’s and about half of the US. Obviously, China is a major economic power. In particular southern China has been a very booming economy.
40 Per cent of China’s GDP comes from trade and FDI. However, critiques argue that this is not fast enough.
There are a number of reasons why MNEs want to do business in China. One is the growing market for industrial and consumer goods. Second is the rapid economy growth, which increases the country’s purchasing power as well as it modernizes infrastructure. Though, MNEs should be on their guards, because China’s government is very unpredictable and can suddenly increase political risk (for example: the Tiananmen Square massacre).
China’s labor costs are very low, about 10 per cent of that in more industrialized Pacific countries such as Taiwan. Therefore it is very popular for multinational investment. However, it has been greatly criticized for using prison labor to manufacture goods for export. The country is now making changes in human rights, but many are skeptic about China’s willingness to change.
The business environment in China is different from other Pacific countries because of its communist government. Therefore it is very important for an MNE to find a good domestic partner. Price reductions and special sales terms are unlikely to make Chinese buy products of poor quality; they simply want the best quality available.
In addition, it is important to remember that China has a predominantly planned
economy. The government determines the imports and exports. China has a great trade surplus with the US and it is very likely that the US government will limit Chinese imports.
India has one of the highest population densities in the world; 1 billion people on 1.3 million square miles. They had a quite prosperous growth in the 1990s with the highest growth in the service and manufacturing sectors. FDI was expected to be quite high, but because of high economic and political uncertainty, they fell short of expectations.
It was very time consuming and frustrating for MNEs to try and make FDI in India. However, recently the political climate has changed and the government is trying hard to attract foreign investment.
A primary attraction of India is the large middle class, this market contains over a 100 people. The lower middle class, about 200 million people, is another significant market niche. Another attraction is the effort by the government to make things easier for foreign investors. One of the major reasons why the government has done this is because it realized that its economic growth depends on foreign capital. At the same time MNEs should remain cautious because India can change its policies back, which can result in the firm losing a lot of money. However, this chance is not so big, because India does not want to fall behind China and is therefore likely to “welcome” MNEs.
South Korea had rapid economic growth over the last 20 years. The private sector dominates business, although the government influence is considerable. Also, interest rates have been rising and there is an increase in bankruptcies.
Despite the same type of resistance to foreign firms that is present in Japan,
companies keep investing in South Korea. Most investments are made in chemicals, electronics and machinery. The reason why doing business in South Korea is so attractive comes from a growing economy and an increase in disposable income. The disadvantages of doing business here is the difficulty to break into the market and to develop alliances that can compete with local companies.
Names that come from South Korea are Samsung, Hyundai and Daewoo and they are one of the largest developing MNEs in the world.
Korean Chaebols: diversified conglomerates, which are very traditional and family owned. However, the trend is now moving towards privatization. The Korean chaebols and the Japanese sogo shosha are similar in development (early governmental support etc.)
MNEs face labor shortages and there are laws that provide labors with minimum
working conditions, collective bargaining and labor arbitration disputes.
Liberalization policies:
These are governmental policies which move toward free trade and privatization of state owned firms etc. Lower and eliminating trade barriers and tariff is part of these policies
Because of labor unrest in recent years, wages have been pushed up and this resulted in the increase in the cost of exported goods, and therefore some firms saw their sales drop immensely. Now, Korean companies are trying to become productive again and efforts are designed to protect the local market and to generate exports. This resulted in South Korea regaining a competitive status and linking itself strongly to the triad.
Singapore has seen strong economic growth, but had a bit of a downturn in 2001 (due to the US). At that time, the government encouraged foreign investment and made it easy for MNEs to enter business in Singapore. Investments were made heavily with the US as Singapore’s largest investor.
Productivity has been rising sharply and therefore it is difficult to find good personnel (everyone already has a job) and unemployment is extremely low. Most workers in industrial plants are in a union, but there has been some unrest because there is talk of paying new employees a lower wage than existing personnel. Because of its geographic size and limited labor force, Singapore is required to pick the right business niches. The main targets of interest are: manufacturing, transportation and financial services.
Africa
Africa is the continent which hosts the worlds least developed pack of countries. It is, then, not surprising that the inward FDI is very low, because the investment climate is very bad in Africa. Also, political instability, weak infrastructure, very poor skilled labour force etc have aso a hand in the low FDI and economic growth of Africa. The small amount of FDi which flows into Africa is mainly attracted by some of the resources which can be found in Africa. Examples are gold, oil, diamonds and platinum.
Flying Geese model
This is a model, which suggests that Asian countries are following Japan in the sense of the development paths. However the other Asian countries are at different stages along this path. They follow the lead of Japan.
Eastern Europe has moved from a communist to a market system. This has resulted in a lot of downfall. National currencies have lost their value, purchasing power has declined, agricultural and industrial outputs have declined and unemployment has risen. The region needs FDI from triad members and needs to access their markets for exports.
Eastern Europe faces two major challenges:
1. Resisting the temptation to fall back in communism to control inflation and
unemployment.
2. Accept that FDI brings foreign ownership and control of local operations,
which Eastern Europeans are not accustomed to.
In 1991 the Soviet Union did not exist anymore and instead there came:
“Commonwealth of Independent States”. Russia has a huge size and a very bad
economic condition and therefore has the most difficulty in facing the above
challenges.
Russia is currently undertaking price reform. In many areas the free-market forces takes over: no more administered prices and subsidies. These developments had major effects on the economy. It even got worse. By the end of the 1990s Russia’s foreign debt had risen from 115 billion dollars to 145 billion dollars. When the International Monetary Fund helped, the economy recovered substantially. Also the high price of oil had allowed the government to finance infrastructure, which was very much needed.
Privatization of the industry is also a major undertaking. This is the key to economic growth but progress in this area is difficult because management skills and capital are lacking.
There are some MNEs doing business in Russia, but the FDI from the triad is relatively small and it will remain so until profits are proportional with the political risk in Russia. Joint ventures are also rising within Russia, for example Aeroflot, a major Russian Airline, has 42 joint ventures.
Concerning the future, MNEs are confronted with grand changes in the international business environment. Especially the area of the creation of effective strategies is one of great importance and needs to be considered by multinationals when doing business in the future. Companies now engage in “going where the action is” and establish new business relationships with suppliers, customers, competitors, and gov ernments in order to increase their efficiency. This often leads firms to implement location-focused
strategies.
Location-focused strategies include several important factors, such as:
· Going international is essential, if a company strives for success. Setting up their operations in different countries allows them to stay competitive, conduct research, and observe their competitors. By doing so, the firm has the ability to maintain a good overview over its market and the occurring changes.
· If a business decides to establish their operations in several different nations, it may help them to gain knowledge and experience which they can adapt in other markets. This additional know-how provides further benefits to the company insofar that the firm is likely to adapt this strategy in other locations where small companies have been profitable.
· Companies that expand to other countries sometimes have multiproduct-lines which are also called “centers for excellence” and may be spread worldwide. These centers help firms to achieve global leadership for certain product lines and determine the degree of globalization of an enterprise.
In order for a firm to create and employ new strategies, research is an important factor. Sometimes research may be based on a very broad range, and as a result some theories cannot be generalized and applied to certain situations.
Research theories may be created in different ways. One is to build up theories first and then test it. Another way is to test theories in order to reconfirm earlier findings.
The answer to the question of how and why MNEs succeed may be given by research that concentrates on strategies of companies. Furthermore, research also acts as a tool to help understand and forecast future developments in the economic environment.
Strategic Fit – the idea in strategic management that an enterprise should align its resources so that it matches with the environment.
Firm-Specific Advantages (FSAs) – Certain benefits or strengths of a company, which create its competitive advantage. Factors such as equipment, employees, or technology may be relevant in creating FSAs.
Country-Specific Advantages (CSAs) – Strengths of a country that are based on factors such as geographic location, workforce, resources, cultural factors, governmental policies, industrial clusters, its competitive environment, and other characteristics.
Often, multinationals create their strategies based on the relations between FSAs and CSAs that are available for the company.
When it comes to strategy formulation, a competitive advantage matrix may be helpful. With this tool, relative strengths and weaknesses of FSAs and CSAs can be discovered. For example, if a business holds strong firm-specific advantages, and if there are also strong country-specific advantages available, a business has a grand possibility of reaching a competitive advantage compared to its rivals.
In the competitive advantage matrix, especially the strategies of cost leadership, differentiations, and focus are of importance. More factors that need to be taken into account are that if there are changes in the trading environment, this will have an influence on the relative CSAs of the company. Furthermore, if the enterprise is structured as a conglomerate, it may be functional to position each division or product line independently since they might need different kinds of strategies.
Future strategies have many new aspects that are of grand importance:
· Strategies tend to be based increasingly on trust and shared support of
companies, rather than on old-fashioned business-client relationships in which firms simply set conditions of conducting business without collaboration. This helps meeting the needs of the businesses’ customers, suppliers, and competitors.
· Many companies will reduce the amount of suppliers in order to build up a group of trustworthy and reliable business relationships, and thereby give the suppliers more responsibility. A close working relationship facilitates understanding each other’s strategies, thus working problems can be minimized.
· Network partners may be helpful when developing new materials and components
for the firm.
· Sellers will interact more directly with their customers in order to build up good relationships.
Flagship Firms – MNEs that are globally competitive and act as international benchmarks. In a flagship firm, customers and the company usually have a close relationship which is a crucial factor in business to be successful.
· Joint ventures, technology transfers, as well as market sharing agreements are
common networks that are increasingly created between international
competitors to improve business.
· Governments become more and more important because they may help
support legislations concerning, for example, workforce, technology
development, and exports.
Five Partners – a network arrangement that includes a flagship firm, key suppliers, key competitors, key customers, and non-business infrastructure (e.g. universities, governments).
When dealing with the international environment, political factors need to be considered since they may grandly effect actions taken by multinationals. Some of those factors are:
· Open markets, in which free trade is possible, are often favored by
businesspeople. Contradictorily, they are supporters of policies that give foreign
firms a large disadvantage.
· Some foreign companies are trying to convince their governments to negotiate better access to the US market in order for the companies to be able to, for example, expand their trade relations, as well as enjoy less trade barriers.
· Political risk is another factor that affects international business. Especially smaller nations tend to increasingly apply free-market models, engage in privatization, and support foreign investment in order to improve their economic situation. There is a possibility to decrease political risk by collaborating in free trade agreements.
In general, the economic environment provides a lot of opportunities for
multinationals:
· There is increasing privatization taking place in several countries, which gives companies the potential to acquire already existing businesses, and therefore gain additional profits.
· The development of new goods and services will support the establishment of new markets since customers are constantly interested in the latest developments.
· Competition is increased by the growing use of the internet worldwide. As a result, costs are lowered and new potential customers all over the world can be attracted.
· The realignment and reorganization of markets are helpful instruments, if companies have problems staying competitive in the fast-changing economies.
· Exports are essential for many firms. Costs may be lessened due to lower wages in foreign countries, foreign markets are being opened up, and the efficiency in several businesses is being enhanced.
Overall, in order to be successful, MNEs should create their new strategies according to the particular market they are operating in.
When dealing with international business, frameworks created by different institutions may sometimes be contradictory. For example, the NAFTA, as well as the EU strive for trade and investment liberalization, and a safeguarded business environment for their member nations. This action singles out third country companies and makes trade with them more difficult. In addition, when comparing the NAFTA and the EU, it becomes clear that the EU is much more integrated in economic, political, and social matters.
International Business – consists of international transactions (e.g. trade (exports and imports) and foreign direct investment). It is very useful in order to satisfy the needs of companies and private households.
Multinational Enterprises (MNEs) – these are organizations that have their headquarters in one particular country, but do business in one or more other country. This creates an extended arena for international trade since it supports international business.
Exports – these are goods and services that are being produced in one country and then traded to another country. In order to maintain a positive balance of trade, a company should always export more than it imports.
Imports – this includes goods and services that are being produced in one country and then brought in by another country. In case of imports exceeding exports in one country, a trade deficit will be the result on the nation’s trade balance.
The basis of international business is trade which contributes to the understanding of MNE strategies and practices. The world’s most exporters are also the world’s biggest importers. Exports and imports are the motor of international trade and enhance worldwide interaction among countries and businesses. If they were to decrease, the world economy would suffer grandly from that.
Foreign Direct Investment (FDI) – FDI are equity funds invested in other countries by MNEs.
FDI is often used by organizations to gain a foothold in other markets by obtaining firms in different countries or by operating in foreign markets.
Especially companies from the US have invested greatly into several countries (Western Europe, Latin and North America and Japan). FDI is an essential factor when it comes to international trade because it helps, for example, less developed countries to establish worldwide trade relationships.
Triad – these are geographic areas (the US, the EU and Japan) that play a crucial role in international trade. They are responsible for most of the trade and investments that take place worldwide. Further, when the US is important as a triad member, Mexico and Canada are usually included into the considerations.
North American Free Trade Agreement (NAFTA) – The NAFTA is a free trade agreement between the US, Canada and Mexico which was founded in 1994. It has the purpose to abolish trade and investment barriers between those three nations.
Concerning the triad, the US has the world’s largest economy. Followed by the EU, whose collective GDP is larger than that of the US or Japan. Japan is the greatest economy in Asia and is a grand investor into the US and the EU. Countries from the triad practice more trade and FDI than any other economy.
The global environment has rapidly been changing in recent years and the
reasons for this fact are:
A - A slowdown in the triad economies
B - The introduction of additional trade regulations
C - The impact of technology
D - More small and medium-sized multinationals
A - In the 1990s the US held a fast growing and healthy economy and became the most competitive nation in the world. After the Clinton-era, the triad and other countries started to suffer from economic problems.
Organization for Economic Cooperation and Development (OECD) – an
organization with 30 moderately wealthy member countries that assists its members, if economic difficulties evolve. This is done in form of a forum in which economic problems and their solutions may be discussed.
B – The development of a liberalization in trade and investment helped organizations in the triad countries to improve their profits in open markets. In case of a trade conflict between countries, international organizations were formed to regulate international trade.
World Trade Organization (WTO) – the WTO is a worldwide organization that was founded in 1995. It deals with the rules of trade and smoothing out conflicts among member countries; furthermore, the WTO is allowed to enforce its decisions.
General Agreement on Tariffs and Trade (GATT) – the GATT is a trade organization that was created in 1947. Its purpose was to liberalize trade and negotiate trade concessions among member countries
Nowadays the WTO implements the provisions of GATT. If conflicts arise among member countries, the WTO supports problem solving. If nations disagree with decisions made by the WTO, harsh consequences such as trade retaliation may be the result. Due to trade liberalization though, disputes among countries should be eliminated because it encourages international business transactions.
C – Technology is a constantly developing area and especially communication technology is of great importance to many businesses and in certain markets. The use of computers, the internet, as well as cellular technology makes it possible for firms to remain in continuous contact with their office and their customers. This enhanced communication is essential for individuals since it eases conducting business. Through technology the production of goods and services is enhanced. Shorter production periods as well as less defect goods can be ensured due to the “Six Sigma” quality programs. These are quality measurements that have been created in order to ensure high quality, as well as remove performance difficulties.
D – Small and medium-sized enterprises (SMEs) – the definition varies depending on the country. In the US, SMEs have up to 500 employees; in Japan SMEs in industry have up to 300 employees, those in the wholesale industry have up to 150 employees, and those in the retail industry up to 50 employees. In the EU SMEs employ between 11 and 200 individuals and the company’s sales are less than 40 billion US $. The World Bank benchmark for developing countries is set from 11 to 150 employees, and sales of under 5 billion US $.
Due to the fact that many SMEs have a well-trained workforce, are highly innovative and apply the latest technology, they can compete effectively and are very flexible in comparison to larger firms. These points are important for SMEs because they rely heavily on their customers and therefore focus on cost control and quality.
Facts about MNEs:
· Mainly, MNEs earn their revenues either within the country they are located
in or by selling in locales that are close by.
· MNEs need to implement strategies that are regionally applicable and not
worldwide in order to be successful. They need to carefully adapt their
strategies to the local markets. MNEs should also have a high sensitivity to
local consumers rather than having only one global strategy. This is due to
differences in countries, their cultures, and therefore their needs and
preferences.
· Achieving sustainable long-term profits or building political advantages has
become impossible for MNEs because of the grand rivalry among firms in
regional and triad competition. A possible solution of this problem is for
enterprises to engage in strategic alliances (explained below) in order to
penetrate local markets and increase profits.
· MNEs have to alter their products for regional markets in order to receive adequate profits. Depending on the preferences of certain countries, the product needs to be adapted to them.
· An MNE’s success is mainly drawn from creating and executing strategies
on a regional and local basis.
Strategic Alliance – this is a relationship between two or more businesses in order to attain a communal advantage. This has become popular since MNEs started to recognize the importance of creating regional and local strategies.
In order for a business to stay competitive it needs to be continuously innovative. The ability of a firm to gain success by doing so depends on four determinants developed by Michael Porter:
· Factor conditions: Land, labour and capital. A country will export goods and services that make most use of the factor conditions with which it is moderately well supplied. If a country has a rather large and uneducated workforce, more goods will be exported that are extremely labour-intensive. If the workforce is very well educated, more goods and service will be produced that tap the intellectual capabilities of the employees. Factor conditions constantly need to be upgraded for upholding a competitive position.
· Demand conditions: According to Porter, a country’s competitive edge is
maintained in the presence of a strong local demand for its goods and services. This helps the seller understand what buyers wish for. Moreover, a local seller is more sensitive to impending changes and can therefore adjust and innovate for the market before more distant competitors can take action.
· Related and supporting industries: Suppliers that are closer located to the producer often offer lower-cost inputs that are not provided to more distant competitors. Additionally, suppliers have a good understanding of the industry environment and therefore can both forecast and react to changes. By sharing this information with the producer, a competitive position can be maintained.
· Firm strategy, structure, and rivalry: A firm’s managerial system (domestic rivalry, management, organization, and the establishment of a firm) plays a major role for a national advantage. Furthermore, a company’s managerial system needs to be adapted to the specific country where it is applied. If the management practices of industries, which are supported by the national environment, are suited to their industries’ sources of competitive advantage, nations tend to perform well. Moreover, national goals are important since the preferences of nations differ. Some favour rapid results, some long-term development. The fact that countries with leading world positions often have many local rivals shows that domestic rivalry should also be taken into account.
· Domestic rivalry supports improvements in the other three influences (factor conditions, demand conditions, and related and supporting industries) and geographic concentration enhances the relations of the four separate determinants.
Strategic Management – managerial actions including strategy formulation,
implementation, evaluation, and control. Also assessment of organizational strengths and weaknesses and environmental analysis of internal and external circumstances is a task in strategic management.
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international management waiswa wilson mwanja contributed on 29-04-2020 19:32
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