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Lesson 3 International Management
Management Theory And Leadership Practice (MGT3304)
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Objectives: Describe globalization and identify good and bad aspects that result from increasing interdependence of world community. Explain why countries trade and how global international trade works. Analyze a country's suitability as a target for company global expansion and describe foreign business entry modes. Give examples of diferences that exist between countries and cultures.
What is globalization? Managing in today’s global economy ● Our economy is global, customers, competitors, employees, and suppliers could be located anywhere in world ○ Makes business environment more complex International challenges and opportunities ● Increasing prosperity and lower trade barriers helped many nations integrate into a global economy ○ As world’s economic output grew, volume of exports grew faster. Foreign direct investment (FDI) plays an ever-increasing role in global economy as companies invest overseas. Imports penetrate more deeply into world’s largest economies ● Growth of imports is a natural byproduct of growth of world trade and trend toward manufacturing components parts, or entire products, overseas before shipping them back home for final sale ● growth of world trade, FDI, and imports means that companies around globe are finding their home markets under attack from foreign competitors. ● Opportunities are greater because many formerly protected national markets are open for business. Potential for export and making direct investments overseas is greater today. Environment is more complex due to challenges for working in diferent cultures and coordinating globally dispersed operations ○ Environment is more competitive bc of cost-eficient overseas competitors ● Companies both large and small view world, not just their own country, as their marketplace ● US has no monopoly on international business ● Companies have dispersed their manufacturing, marketing, and research facilities to locations around globe where cose and skills conditions are most favorable ● Many small companies limit their international involvement to exporting, or sourcing from or setting up production facilities overseas ○ Others acquire existing small businesses to gain talent and access to new markets ● Bc trade allows each country to obtain more eficiently what it cannot as easily produce on its own, it lowers prices overall and makes more goods more widely available ○ Raises living standards and may broaden market for managers own product, both locally and abroad ● Trade makes new technologies and ,methods more widely available ● Collaborating with others on trade creates links btw people and cultures that can lead to cooperation in other areas ● Outsourcing: when an organization contracts with an outside provider to produce 1+ goods and services ● Ofshoring: specific type of outsourcing, companies move jobs to providers in another country, typically where wages are lower ● People think that high paying jobs are being lost to low cost countries overseas ● Cause of manufacturing employment in US decline is bc of innovation ● Automation technologies are replacing human beings in some jobs → companies need fewer workers to produce same quality of goods and services ● As ofshoring increases eficiency, it frees funds for expansion and additional employment ● Ofshoring is ofset when foreign companies hire workers in US ● Managers have some latitude, multiple options, and a variety of ways to make decisions that have both positive and negative business and human consequences ● Automation reduces labor costs, making it less necessary to move jobs overseas ● Managers who ofshore to save on wages → increasing wage rates and added costs of travel, training, supply chain disruption, quality control, language barriers, and resistance of some customers who prefer to deal with local personnel ● Inshoring: moving work back to US ● In deciding whether to ofshore, managers should not start out with assumptions that it will be cheaper for them to do so ● Factors to take into account: ○ What competitive advantage do products ofer?
■ Fast delivery, reliability, and customer contact = no ofshoring ■ Product widely available and standardized and only competitive advantage is price, lowest possible production cost is essential = ofshoring beneficial ○ Is business in its early stages of life? ■ Ofshoring maybe inappropriate bc managers need to stay close to business and its customers to solve problems ■ If more mature, managers can aford to consider moving some operations overseas ○ Can production savings be achieved locally? ■ Where automation is not feasible, then ofshoring becomes more attractive ○ Can entire supply chain be improved? ■ Is supply chain is already highly eficient or routine, and more savings are needed, then ofshoring can achieve eficiencies
Why and how do countries trade goods and services? ● US is the largest importer and second largest exporter ○ US imports a lot from Canada but exports almost as much ○ Sells pharmaceuticals, jet turbines, generators, aircrats, music, corn, cotton ● Net exports: annual diference between a country’s imports and exports ○ Trade surplus= + number, trade deficit= - number ● Doesn't make sense to make everything on your own if you can trade with other countries that have a comparative advantage ● Unsafe and unfair working conditions and environmental degradation = side efects of international trade ● International trade reshules jobs from 1 sector of economy to another (TV factory → restaurant) ○ What is good in the aggregate is not necessarily good for individuals ● North american free trade agreement (NAFTA): established in 1994 to drop trade barriers between Canada, US, and Mexico ○ Significantly increased US trade deficit and decrease number of manufacturing jobs ○ US economy boomed creating millions of jobs including manufacturing jobs and free trade has decreased prices of many goods ● Protectionism: placing high tarifs on imports and limiting number of foreign goods to protect local businesses ● World trade organization (WTO): getting countries to agree to specific rules and help settle disputes, favors rich countries and not doing enough to protect environment or workers ● Trade btw countries depends on demand for a country’ goods, political stability and interest rates and exchange rates ○ Exchange rates: how much your currency is worth when you trade it for another country’s currency ■ When dollar appreciates, it gets cheaper for US consumers to import foreign goods, and US exports to other countries get more expensive ● US imports rise and export fall ■ When dollar depreciates, foreign imports get more expensive which means they fall US exports to other countries get cheaper which means they rise ● Most currencies have loating exchange rates that change based on supply and demand ○ When US imports more products from mexico, they exchange dollars for pesos. is will increase demand for pesos, and peso will appreciate and dollar will depreciate ● Some countries have elected to peg their currency to another currency= when a countries central bank wants to keep exchange rate in a certain range, and they buy or sell currencies to keep it in that range ● Balance of payments: ○ Every country keeps an accounting statement = balance of payments that records all international transactions ■ Made up of 2 sub accounts: current account and financial/capital account ● Current account: records sale and purchase of goods and services, investment income earned abroad, and other transfers like donations and foreign aid ● Financial account: records purchase and sale of financial assets (stocks and bonds) ● eres a reason why low of goods and low of money are symmetric. If consumers, businesses, and government want to buy more stuf than their country is producing domestically, they have to import it. So there’s a trade deficit
makes a country a good target for global expan sion and what is best way to start operating abroad? of Business
● US industries that have benefited include capital goods suppliers, manufacturers of consumer durables, grain producers and distributors, construction equipment manufacturers, auto and financial industry which gained privileged access into a previously protected market ● 2018, Trump administration renegotiated trade agreement with leadership of Canada and mexico → US-Mexico-Canada agreement (UCMCA) ○ Major goal of renegotiation was to more evenly distribute benefits of trade agreement ● Brazil is largest economy in south america ● South american companies rely on innovation and technology, rather than simply cost advantages to compete in global marketplace ● 2010- “Start-up chile”, an accelerator for immigrants funded by chilean gov, helps high- potential entrepreneurs launch their start-up companies ● Central america-dominican republic free trade agreement (CAFTA-DR) → to promote US trade with central and south america ● Countries of south american have formed their own trading bloc (Mercosur) to promote trade within continent and middle east ● Economy of middle east is best known for its export of oil; supply most oil to world’s buyers most to asia ○ Main middle eastern supplier of US oil imports is saudi arabia ● US dependence on foreign oil has decreased since shale oil boom in texas, new mexico, north dakota, and alaska ● US businesses remain concerned about middle east bc activities there can shape price of oil
mode ● 5 basic ways to expand overseas are exporting, licensing, franchising, entering into a joint venture with a host-country company, and setting up a wholly owned subsidiary in host company ● Exporting Liscencing franchising Joint venture Wholly owned subsidiary
Scale economies Lower development costs Lower development costs Access to local knowledge Maintains control over technology
Consistent with pure global strategy
Lower political risk Lower political risk Shared costs and risk may be only option
Maintains control over operations
No low cost sites, high transportation costs, tarif barriers
Loss of control over technology
Loss of control over quality
Loss of control over technology and conlict btw partners
High cost high risk
● Exporting ○ Most manufacturing companies begin global expansion as exported and later switch to one of other modes ○ Advantages are: ■ Provides scale economies by avoiding costs of manufacturing in other countries ■ Is consistent with a pure global strategy ○ By manufacturing product in a centralized location and then exporting it to other national markets, company can realize substantial scale economies from its global sales volume ○ Drawbacks: ■ other countries might ofer lower cost locations for manufacturing product ● Alternative is manufacturing in a location where mix of costs and skills is most favorable and then export from that location to other markets ■ High transportation costs can make it uneconomical ■ Host countries can impose tarif barriers ● Trade arrangements work to minimize risk ● Licensing ○ International licensing: an arrangement by which a licensee in another country buys rights to manufacture a company’s product in its own company for a negotiated fee (royalty payments on # of units sold) ■ Licensee puts up most of capital necessary to get overseas operation going ○ Advantage: company need not bear costs and risk of opening up an overseas market ○ Problem: when a company licenses its technological expertise to overseas companies
■ Technology is basis of competitive advantage of many multinational companies ○ Licensing is a reasonable alternative when it is not feasible for a firm to operate on its own ● Franchising ○ Licensing is a strategy pursued primarily by manufacturing companies, franchising is used primarily by service companies ○ Company sells limited rights to use its brand name in return for a lump-sum payment and a share of franchisee’s profits ○ Franchisee has to agree to abide by strict rules regarding how it doe business ○ Franchisees put up capital and assume most of risk, local laws can limit this advantage ○ Disadvantage: quality control ■ Company’s brand name guarantees consistency in company’s product ● If overseas franchisees are less concerned about quality, impact can go beyond lost sales in local market to a decline in company’s reputation worldwide ● Joint ventures ○ Joint venture: a formal business agreement ○ Benefits: local partners knowledge of host country’s competitive conditions, culture, language, political systems, and business systems ■ Sharing of development costs and/or risks with local partner ○ Political considerations make Joint ventures only feasible entry mode ○ state-owned enterprises (SOEs)- attracting students and scholars from premier learning institutions ○ Problems: ■ Company runs risk of losing control over its technology to its venture partner ■ Companies may find themselves at odds with one another ● Conlict over who controls what within a joint venture is a primary reason many fail ○ To ofset these disadvantages, experienced managers strive to iron out technology, control, and other potential conlicts up front, when they first negotiate joint venture agreement ● Wholly owned subsidiaries ○ Wholly owned subsidiaries: an independent company owned by parent corporation, most costly method ○ Companies that use this approach must bear full costs and risks ■ Reduce risk of losing control over technology = preferred mode for semiconductor, electronics, and pharmaceutical industry ● Limited by extent to which gov of country where subsidiary is located will protect intellectual property (patents and trademarks) ■ Gives a company tight control over operations in other countries ● Necessary if company chooses to pursue a global strategy ○ Establishing a global manufacturing system requires world headquarters to have a high degree of control over operations of national afiliates ○ Usually accept centrally determined decisions about how to produce, how much, and how to price output for transfer among operations
How do countries and their cultures difer from one another? Working overseas ● When establishing operations overseas, headquarters executives can choose to send expatriates (individuals from parent country), use host-country nationals (natives of host country), and deploy third-country nationals (citizens of a country other that home country of host country) ○ Most corporations use all 3 ● Sending expatriates can cost 3-4x as employing host-country nationals ○ in many countries-particularly developing countries in which firms are trying to get an economic foothold-personal security of expatriates is a big issue. ■ Firms therefore may send their expatriates on shorter assignments, or avoid problem by not sending people to some countries and instead use chat, email, online collaboration platforms, conference calls, video conferences to communicate between international divisions. ●
● our problems oten stem from being oblivious to our own cultural conditioning. Most of us are unaware of how our own culture inluences our everyday behavior → we adapt poorly to situations that are unique or foreign to us. ○ some managers may act out of ethnocentrism-a tendency to judge foreign people or groups by the standards of one's own culture or group and to see one's own standards as superior, tendency may be unconscious ○ Or people may not recognize values underlying a local culture ■ Such assumptions are one reason people traveling abroad frequently experience culture shock= disorientation and stress associated with being in a foreign environment. ■ Managers are better able to navigate this transition if they are sensitive to their surrounding, including social norms and customs, and adjust their behavior to the new circumstances ● 4 types of diferences btw country cultures within multinational corporations: ○ Power distance: the extent to which a society accepts the fact that power in organizations is distributed unequally. ■ Power distance measures the extent to which people accept an unequal distribution of power across institutions, organizations, and people. ○ Individualism/collectivism: the extent to which people act on their own or as a part of a group. ■ Individualism is the tendency for people to look ater themselves and their immediate family, Less importance is given to society as a whole. ■ Collectivism pertains to how people in certain cultures subordinate their individual needs for the greater good of a group. ○ Uncertainty avoidance: the extent to which people in a society feel threatened by uncertain and ambiguous situations. ■ culture's comfort level with risk and ambiguity ○ Masculinity/femininity: the extent to which a society values quantity of life (e., accomplishment, money) over quality of life (e., compassion, beauty). ■ considered traditionally masculine and feminine values. ○ Short term vs long term orientation ■ Short-term societies, such as Ireland, are present-oriented, whereas long-term societies, such as the Czech Republic, are future-oriented ○ Indulgence vs restraint ■ Indulgent societies seek immediate gratification of needs. ■ Restrained societies regulate and control their behaviors based on social norms ● It is easy to stereotype, exaggerate, and overgeneralize diferences among countries ● Cross cultural management includes efective management of inpatriates-foreign nationals who are transferred to work at the parent company. ○ ese employees bring extensive knowledge about how to operate efectively in their home countries. ey also will be better prepared to communicate their organization's products and values when they return. ● Efective managers are sensitive to these issues and consider them when dealing with foriegn-national employees ● If managers are to function efectively overseas, they must understand how culture afects both how they are perceived and how others behave. ○ One of the most sensitive issues in this regard is how culture plays out in terms of ethics. Assessments of right and wrong get blurred as we move from one culture to another, as actions that are normal and customary in one setting may be unethical-even illegal-in another. ● encouraging ethical behavior must be done with not just domestic employees, but also overseas colleagues and partners, who may have their own expectations. ● five core values that most people embrace regardless of their nationality or religion: compassion, fairness, honesty, responsibility, and respect for others. ○ ese values lie at the heart of human experience and human rights and seem to transcend more superficial diferences between countries and regions → build more efective partnerships, across as well as within cultures. Perhaps as long as people understand that they share some core values, they can collaborate efectively despite their diferences ● challenge of managing across borders comes down to the practical philosophies and everyday systems developed for working with people. ○ International managers need to develop a portfolio of behaviors and methods adapted to diferent cultural situations. ese adjustments should not compromise the values, integrity, and strengths of their home- country cultures.
○ When managers understand and work efectively across cultures, they can capitalize on the opportunities that our global economy ofers.
Lesson 3 International Management
Course: Management Theory And Leadership Practice (MGT3304)
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