1-1 Managing in the Global Environment Karol I. Pelc NOTE: Some lecture materials are based on or adapted from the C. A. Bartlett and P. W. Beamish textbook “Transnational Management” McGraw-Hill 2011, and use some slides for that book. Those lectures are marked with a dual copyright note. Copyright © 2012 Karol Pelc; Copyright © 2011 McGraw-Hill Irwin

1-2 Lecture 1 The process of globalization 1 Copyright © 2012 Karol Pelc; Copyright © 2011 McGraw-Hill Irwin

Initial questions: 1. What are potential advantages of business globalization ? 2. What are potential risks and negative effects of business globalization? 3. Can globalization be avoided? Why or why not? 1-3 Copyright © 2012 Karol Pelc; Copyright © 2011 McGraw-Hill Irwin

Substantial direct investment in foreign countries (not just an export business) Active management of these offshore assets (not simply holding them as a passive financial portfolio) Management integration of operations located in different countries 1-4

Multiple operating environments Diverse pattern of consumer preferences, channels, legal frameworks, etc. Political demands and risks Need to mesh corporate strategy with host country policies 1-5

Global competitive game Multiple markets, new strategic options Currency fluctuation and exchange risk Economic performance measured in multiple currencies Organizational complexity and diversity Need to manage complex demands across barriers of distance, time, language and culture 1-6

Largest MNEs are as large as (and perhaps more influential than) mid-sized countries Exxon Mobil value-added 2006: $112 billion Hungary value-added 2006: $113 billion Some industries completely dominated by MNEs, including automobiles, computers and soft drinks 1-7

Traditional motivations Market seeking: Fill capacity, develop scale Resource seeking: Secure supplies, exploit factor cost differences Emerging motivations Competitive positioning (or “global chess”): Need global operations to pre-empt others, secure profit sanctuaries Global scanning: Access emerging trends, new technologies and best skills worldwide 1-8

1-9 International Expansion Motivation Market and Resource Seeking Secure raw materials Exploit factor cost differences Protect exports Provide growth Market and Resource Seeking Secure raw materials Exploit factor cost differences Protect exports Provide growth Competitive Positioning Match competitors Capture global scale Preempt markets Play “Global Chess” Competitive Positioning Match competitors Capture global scale Preempt markets Play “Global Chess” Global Scanning/ Learning Global intelligence scan Access scarce knowledge Recruit skills, expertise Global Scanning/ Learning Global intelligence scan Access scarce knowledge Recruit skills, expertise Pre s/80s 90s/00s

International Capital Theories: FDI driven by return equalization, portfolio diversification Location Theories: FDI driven by countries’ comparative advantage Product Cycle Theory: FDI driven by firms’ management of the global product life cycle Oligopolistic Behavior Theories: FDI driven by firms’ search for, or defense of, competitive advantage Internalization Theory: FDI driven by organizations’ internal transaction efficiency (hierarchy vs. markets) Eclectic Theory: FDI driven by many shifting forces 1- 10

Foreign countries must offer location-specific advantages To motivate the company to invest there Company must have strategic competencies or ownership-specific advantages To counteract its relative unfamiliarity with foreign markets Company must have organizational capabilities To get better returns from leveraging strengths internally rather than through external market mechanisms such as contracts and licenses 1- 11

Classic internationalization process: Incremental process of increasing commitment and understanding of foreign market (Uppsala Model) Today many companies short-cut this process In an Internet Age, many are even “Born Global” 1- 12

Export Indirect Direct (e.g. agent) Controlled (e.g. sales branch) Contractual License Franchise Management/Service Contracts Cooperation Agreements Investment Greenfield Acquisition Joint Venture Capital Participation

1- 14 Process of Internationalization Export (agent or distributor) Wholly-owned subsidiary Franchising Licensing Indirect Export High Low Amount of resources committed to foreign market Control over foreign activities Joint venture (local partner)

Multinational Perspective : Overseas markets a portfolio of local opportunities; managed as a decentralized federation International Perspective: Leverages its domestic capabilities worldwide; managed as a coordinated federation Global Perspective : Views world as a single unit of analysis; operations managed centrally Transnational Perspective : Simultaneously responds to local needs, global demands, and cross-border learning opportunities; managed as an integrated network 1- 15

1- 16 Evolving Mentality High Global Integration Low National Responsiveness High Global International Multinational Transnational

Forces for cross-border integration and coordination Forces for national differentiation and responsiveness Forces for worldwide innovation and learning 1-17

Economies of Scale Economies of Scope Factor Costs Increasingly Liberalized Environment for Trade Expanding Spiral of Globalization 1-18

Cultural differences Consumer tastes and preferences Ways of doing business National infrastructure Technical standards (e.g., voltage, TV broadcast, etc.) Distribution channels (e.g., supermarkets vs. bazaars ) Government demands National laws and regulations Host country pressures and demands Local competitors Appeal to nationalism 1-19

1-20 Relations with host government Motivators Strategic viability: global competitiveness Operational viability: profit Objectives Freedom to integrate operations globally Ability to market and ability to transfer resources freely across borders Measures (primarily financial) Profit ROI Market share Motivators National independence: social, economic, political International competitiveness Objectives Protect national sovereignty from external influence Capture global benefits of export markets, efficient industrial base, leading edge technology Measures (social/economic/political) Social cost/benefit Political return Industrial policy “fit” MNCHost Government

Increased need for rapid and coordinated worldwide innovation driven by : Shortening product life-cycles Increased cost of R&D Emergence of global technology standards Competitors’ ability to develop and diffuse innovation globally 1-21

Strength of forces vary by industry; three typical models Global industries (consumer electronics) Multinational industries (branded packaged goods) International industries (telecom) 1-22

1-23 Global & National Forces: Industry Effect Global Integration National Responsiveness Consumer Electronics Telecom Switching Branded Packaged Products Cement

1- 24 SUMMARY 1.Multinational Enterprise (MNE) and multinational management; Influence on global economy 2. Internationalization of business: motives, means and process 3. Foreign Direct Investment (FDI): theories 4. Evolving perspectives on internationalization 5. Global and national forces in globalization process