CHAPTER 4: MANAGING IN THE GLOBAL ECONOMY Raja Nerina Raja Yusof

Learning Outcomes Define globalization and explain the forces that drive globalization. Discuss the implications of globalization to managers from the aspect of political-legal, economic, technological and social cultural environments. Define a multinational company and identify optional methods for entering foreign markets. Discuss the advantages and disadvantages of different entry methods for a multinational company. Explain the four international business strategies for international businesses or multinational companies.

Learning Outcomes Define expatriate managers and explain how its role differs from a domestic manager. Identify the main characteristics of a successful expatriate manager. Define expatriate failure and discuss the top reasons for expatriate failures. Discuss the trends of international business and how managers may be impacted by these trends.

The International Environment Globalization Defined as the shift toward a more integrated and interdependent world economy. What happens in one country will most probably impact other countries with whom it has a close relationship. For example, European Union (EU) was heavily hit by the Eurozone Crisis in 2008, the United States (US) also felt the heat because it was a major trading partner of EU.

Drivers of Globalization 1. Reduced trade barriers and investment restrictions Establishment of WTO in 1995 has sped up reduction of trade barriers Establishment of regional economic integrations – ASEAN, APEC, etc. 2. Development of Technology The Internet and World Wide Web Modern transportation technology – airplanes and shipping vessels 3. Convergence of global tastes and preferences Global brands becoming household names i.e., McDonald’s is in 119 countries globally

Implications of Globalization Political and Legal Changes of political systems - i.e. totalitarianism to democracy Managers need to understand the changes in policy Economic More countries going for open economy – Laos, Vietnam, Russia, etc. Managers need to embrace changes that come with an open economy Socio-cultural Convergence of taste and preferences of global consumers Managers need to monitor changes in socio-cultural trends Technological Dynamic inventions from international collaborations Managers need to be updated on current technological knowledge

Multinational corporations (MNCs) Defined as companies which undertake productive activities outside the country in which they are incorporated and establish presence in more than two countries. Have also been known as MNEs (multinational enterprises) or TNCs (transnational corporations).

Entry Modes of International Business There are many ways of penetrating a new market, among them are: Exporting Licensing Joint venture Strategic alliance Wholly-owned subsidiary

Exporting Products/raw materials that are produced in the home country are transported to a host country to be sold The lowest risk among the entry methods Exporters also can realize experience and location economies by mass producing products in one location for the purpose of exporting Transportation costs such as shipping and air cargo can be very expensive and present the risk of accidents

Licensing Arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee A specialized form of licensing is franchising A very quick way of expanding and marketing your business globally However, licensors might have a tough time keeping track of the quality, performance and marketing of their licensed products in the host countries Risks their products to be imitated or copied by their own licensees which in the end will create competitors to them in the future

Joint venture When two or more companies decided to cooperate with each other to produce or provide certain services, with each partner contributing a certain portion of capital to the agreement. A joint venture is usually the entry method by which companies use to penetrate into a foreign country using foreign direct investment (FDI). Joint ventures with local companies help foreign companies to learn and adapt to the local laws and cultural requirements. However, when the partners’ objectives are no longer similar, there tend to be conflicts and battles between the parties involved regarding ownership and control of resources of the joint venture.

Strategic alliance Any cooperative agreements between potential or actual competitors Includes equity-based and non-equity based cooperative agreements Examples such as joint ventures (equity based) and licensing, marketing alliances, R&D contracts (non-equity based), etc.

Contractual Agreements Exhibit 4.1: Scope of Strategic Alliance Choice of Entry Mode Non-Equity Mode Exports Contractual Agreements Equity Mode Joint ventures Wholly Own Subsidiary Adapted from Hill, Wee & Udayasankar (2012). International Business: an Asian Perspective. McGraw-Hill: New York.

Wholly-Owned Subsidiary When a foreign firm invests into a subsidiary in a host country without any partners, which means that it owns 100 percent of the subsidiary. Suitable for companies that need full control of their business in the foreign market. Allows the company to retain the full profit without having to share it with partners. However, this means that costs, risks or losses are also born fully by the company. Can be applied using either greenfield investment or acquisition.

International Business Strategies Global Strategy Transnational Strategy International Strategy Multidomestic strategy High Pressures for Cost Reduction Low High Pressures for Local Responsiveness

International Business Strategies International Strategy Global Strategy Multidomestic Strategy Transnational Strategy

International Strategy A company takes the products produced in the home country and sell them internationally with minimal local customization Company may centralize all research and development (R&D) functions in the home country However, the company may duplicate certain functions such as manufacturing and marketing in each of its host countries

Global Strategy Company is concerned mostly on the reduction of costs, and less on localizing or adapting to the host country’s culture Focuses on achieving global economies of scale in its operations Decision making is left mainly to home country since subsidiaries role are mainly to implement strategies developed by the home country Examples of industries – automobiles, semiconductors, electronic products, etc.

Multidomestic Strategy Opposite of global strategy Company’s foreign subsidiaries are independent from home country Adapting to the local culture and exploiting opportunities in the host country Home country will give subsidiary more freedom to implement their own way of doing business and adopts a decentralized approach of managing its assets and capabilities Examples of industry – retailing, consumer packaged goods, etc.

Transnational Strategy An ideal strategy that tries to balance both the needs to reduce costs as well as to localize products to the home country’s culture Its subsidiaries rely more on each other in terms of knowledge and resources Different subsidiaries have their own role in a specialized capacity, and thus in the end they need to cooperate closely with each other to produce the products and services

Expatriate Managers Expatriates are citizens of one country who are working in another country; usually managerial level employees Need to have cultural intelligence - comprehension or understanding that cultures among countries differ and that they have impacts on the way business is performed and operated in the countries involved Need to avoid ethnocentrism - the tendency to believe in the inherent superiority of their own culture compared to other cultures

Characteristics of Successful Expatriate Managers Flexibility Open-mindedness Curiosity Cultural sensitivity Adventurous

Expatriate Failure Defined as premature return of an expatriate from a foreign assignment. Top reasons: 1. Inability of spouse to adjust. 2. Manager’s inability to adjust. 3. Other family problems. 4. Manager’s personal or emotional maturity. 5. Inability to cope with larger overseas responsibilities. 6. Difficulties with new environment. 7. Lack of technical competence.

Trends in International Business Trend for businesses to venture overseas is increasing – aggressively search for market and resources MNCs from developed countries going into emerging countries – previously to China but now to rising countries such as Vietnam and Cambodia Interdependence of countries - financial crises, natural disasters, political turmoil and wars in one country can impact international business operations of other countries