International Management Ch. 4 Management A Practical Introduction Angelo Kinicki & Brian K. Williams

Learning objectives 1 Define Globalization Argue for and against globalization Explain the importance of international management Describe the three primary attitudes among international managers

Learning objectives 2 Explain why companies expand internationally Explain the economic and political-legal differences among countries and suggest how managers can adjust to these differences Name the three major regional economic organizations and describe their functions

Learning objectives 3 Argue why managers should understand cultural differences between countries Describe Hofstede’s four dimensions of national culture and their implications Suggest how managers should bridge cross-cultural gaps

4.1 Globalization: The Collapse Of Time & Distance WHAT IS GLOBALIZATION? Globalization is the trend of the world economy toward becoming a more interdependent system Today, we are witnessing a shrinking of time and space as air travel and the electronic media have made it easier for people around the world to communicate with each other We call this the global village Lecture Note: Challenge students to think of ways that globalization has affected every company—even those that don’t actively seek out foreign markets. What does this mean to managers?

4.1 Globalization: The Collapse Of Time & Distance IS GLOBALIZATION A GOOD THING? The global economy refers to the increasing tendency of the economies of the world to interact with one another as one market instead of many national markets Growth in jobs and income in one country means growth in jobs and income in other countries—a win-win situation However, global interdependency can be negative when negative events in one country generate negative events in other countries Outsourcing jobs also brings negative effects to the country that loses the jobs Lecture Note: Ask students to think about companies like Coca-Cola, MTV, and Starbucks that see the world as their market. Discuss how new technology like the Internet has affected their strategies.

4.1 Globalization: The Collapse Of Time & Distance Two types of firms are emerging in the world economy: mergers of huge companies into even bigger companies, and small, fast-moving start-up companies Companies in many industries are merging with other companies to be bigger, cross-border enterprises Almost any firm can operate globally today Thanks to the Internet and World Wide Web, small companies can get started more easily, and small companies can maneuver faster

4.1 Globalization: The Collapse Of Time & Distance WHY SHOULD YOU LEARN ABOUT INTERNATIONAL MANAGEMENT? International managers oversee the conduct of operations in, or with, organizations in foreign countries Operations can be multinational corporations (business firms with operations in several countries) or multinational organizations (nonprofit organizations with operations in several countries) Practical Action: Being a World Citizen: Learning to Be a Success Abroad Summary: This Practical Action explores how managers can make their travel abroad successful. Specifically, managers should be careful not to an “Ugly American” managers should learn about the host country before leaving managers should know appropriate behavior in the host country managers should be comfortable in their field managers should become at least minimally skilled in the local language.

4.1 Globalization: The Collapse Of Time & Distance You need to learn about international management because you may find yourself in any of the following situations: dealing with customers or partners from different cultures buying components, raw materials, or services from foreign suppliers working for a superior from a foreign country working in a foreign subsidiary or for a foreign firm located in another country

4.2 You & International Management There are three primary attitudes among international managers: managers who believe that their native country, culture, language, and behavior are superior to all others are ethnocentric managers managers who believe native managers in foreign offices best understand native personnel and practices, and so the home office should leave them alone are polycentric managers Geocentric managers accept that there are differences and similarities between home and foreign personnel and practices, and that they should use whatever techniques are most effective

4.3 Why & How Companies Expand Internationally WHY DO COMPANIES EXPAND INTERNATIONALLY? Firms expand internationally to take advantage of: 1. Availability of supplies - some companies have to go to foreign countries to get their supplies 2. New markets - when domestic demand declines, companies need to find new markets 3. Lower labor costs - manufacturing is cheaper where wages are lower 4. Access to finance capital - foreign financing, either private or through a government, can entice companies to go international 5. Avoidance of tariffs & import quotas - companies might establish a foreign subsidiary to avoid tariffs or quotas Practical Action: Global Outsourcing: Which Jobs Are Likely to Fall Victim to Offshoring? This Practical Action explores the outsourcing trend and finds that while outsourcing does cause jobs to leave the U.S., productivity gains are also responsible for the loss of white collar jobs, moreover. the U.S. is a beneficiary of the increased buying power of countries where jobs have gone. Jobs that are likely to be safe from outsourcing are those that involve face-to-face contact like an ER doctor, physical contact like a gardener, or a need to recognize complex patterns like a teacher. To keep your job at home, you need to promote teamwork and creativity, flexibility, and extend your education.

4.3 Why & How Companies Expand Internationally HOW DO COMPANIES EXPAND INTERNATIONALLY? There are five ways to expand internationally: 1. Global outsourcing - many companies engage in global outsourcing (using suppliers outside the country to provide goods and services) 2. Importing, exporting, & countertrading - a company that buys goods outside the country and resells them domestically is importing, while a company that produces goods domestically and sells them outside the country is exporting, and countertrading occurs when a firm barters for goods

4.3 Why & How Companies Expand Internationally 3. Licensing & franchising - licensing (when a company allows a foreign company to pay a fee to make or distribute the first company’s product or service) and franchising (when a company allows a foreign company to pay a fee and a share of the profits in exchange for using the first company’s brand name and a package of materials and services) are very similar 4. Joint ventures - when firms join forces to share the risks and rewards of starting a new enterprise together in a foreign country, they form a joint venture or strategic alliance 5. Wholly-owned subsidiaries - a foreign subsidiary that is totally owned and controlled by an organization is a wholly owned subsidiary

4.4 Economic & Political-Legal Differences HOW CAN MANAGERS ADJUST TO ECONOMIC DIFFERENCES IN OTHER COUNTRIES? Managers need to consider economic systems, economic development, infrastructure and resources, and currency exchange rates in foreign markets There are three types of economic systems: free market, command, and mixed

4.4 Economic & Political-Legal Differences 1. In a free market economy like the U.S., the production of goods and services is controlled by private enterprise and the interaction of the forces of supply and demand 2. In a command economy like North Korea, the government owns most businesses and regulates the amount, types, and prices of goods 3. In a mixed economy like many European countries, most of the important industries are owned by the government, but others are controlled by private enterprise

4.4 Economic & Political-Legal Differences There are two levels of economic development: Countries with high levels of economic development and generally high average incomes are developed countries Developing or less developed countries include countries with low economic development and low average incomes

4.4 Economic & Political-Legal Differences A country’s infrastructure consists of the physical facilities that form the basis for its level of economic development Thanks to cell phone service, many countries with poor communication infrastructure have been able to participate in the world economy The rate at which one country’s currency can be exchanged for another country’s currency is the exchange rate A change of just a few percentage points can have major implications for a company

4.4 Economic & Political-Legal Differences HOW CAN MANAGERS ADJUST TO POLITICAL-LEGAL DIFFERENCES IN OTHER COUNTRIES? Managers need to be aware of governmental systems and the potential for political risk Democratic governments rely on free elections and representative assemblies Totalitarian governments are ruled by a dictator, a single political party, or a special-membership group

4.4 Economic & Political-Legal Differences The risk that political changes will cause loss of a company’s assets or impair its foreign operations is called political risk Firms need to plan for instability and expropriation (government seizure of a foreign country’s assets) Companies need to be aware of laws that could affect how they do business in other countries like the U.S. Foreign Corrupt Practices Act which makes it illegal for employees of U.S. companies to bribe political decision makers in foreign nations

4.5 The World Of Free Trade: Regional Economic Cooperation WHAT IS FREE TRADE AND REGIONAL ECONOMIC COOPERATION? Free trade means that goods and services move among nations without political or economic obstruction When governments use regulations such as tariffs, import quotas, and embargoes to limit the import of goods and services, they are being protectionist Governments use barriers to protect domestic industries from foreign competition

4.5 The World Of Free Trade: Regional Economic Cooperation There are three main types of trade barriers: 1. Trade barriers in the form of a customs duty, or tax, levied mainly on imports are called tariffs 2. Trade barriers that limit the numbers of a product that can be imported are import quotas 3. Embargoes are complete bans on the import or export of certain products Groups of nations within a geographic region that have agreed to remove trade barriers with one another are called trading blocs or economic communities

4.5 The World Of Free Trade: Regional Economic Cooperation There are four major trading blocs: 1. The North American Free Trade Agreement or NAFTA was formed in 1994 between the U.S., Canada, and Mexico NAFTA’s goal is to eliminate 99 percent of tariffs on goods trade between members 2. The European Union was originally formed in 1957 and now includes 25 European countries The EU is the world’s largest free market

4.5 The World Of Free Trade: Regional Economic Cooperation 3. The group of 21 Pacific Rim countries whose purpose is to improve economic and political ties is called the Asia-Pacific Economic Cooperation or APEC APEC, founded in 1989, is working toward the elimination of trade barriers 4. Mercosur is the largest trade bloc in Latin America and has four core members—Argentina, Brazil, Paraguay, and Uruguay, and two associate members, Chile and Bolivia MERCOSUR has reduced tariffs by 75 percent

4.5 The World Of Free Trade: Regional Economic Cooperation Three organizations facilitate international trade: 1. The World Trade Organization (WTO) is designed to monitor and enforce trade agreements The WTO, which superseded GATT in 1995, has 146 members and covers trade in goods and services 2. The World Bank was established in 1944 to help rebuild Europe Today, it provides low-interest loans to developing nations for improving transportation, education, health, and telecommunications 3. The International Monetary Fund (IMF) is designed to assist in smoothing the flow of money between nations The IMF was instrumental in bailing out nations affected by the Southeast Asian financial crisis

4.6 The Importance Of Understanding Cultural Differences WHY SHOULD MANAGERS UNDERSTAND CULTURAL DIFFERENCES BETWEEN COUNTRIES? Culture is the shared set of beliefs, values, knowledge, and patterns of behavior common to a group of people Misunderstandings and miscommunications in international business often occur because of cultural misunderstandings In low-context cultures like Germany and the U.S., shared meanings are primarily derived from written and spoken words In high-context cultures like Japan and China, people rely heavily on situational cues for meaning when communicating with others

4.6 The Importance Of Understanding Cultural Differences Geert Hofstede identified four dimensions along which national cultures vary 1. individualism/collectivism describes how loosely or tightly people are socially bonded 2. power distance refers to how much people accept inequality in power 3. uncertainty avoidance describes how strongly people desire uncertainty 4. masculinity/femininity refers to how much people embrace stereotypical male or female traits

4.6 The Importance Of Understanding Cultural Differences Managers need to bridge cross-cultural gaps by understanding basic cultural across four areas 1. Language - more than 3,000 different languages are spoken in the world Managers can either speak their own language, use a translator, or learn the local language 2. Interpersonal space - how close people should be when communicating varies by culture Some cultures like the people of Latin America prefer a smaller interpersonal space, whereas others, like the people of Northern Europe prefer to be further apart

4.6 The Importance Of Understanding Cultural Differences 3. Time orientation - time orientation varies by culture Americans practice monochromatic time (a preference for doing one thing at a time) Arab cultures follow polychromatic time (preference for doing more than one thing at a time) 4. Religion - Christianity has the largest following with 2.1 billion adherents, Islam is next with 1.3 billion followers, then Hinduism, Buddhism, and Judaism Organizations need to consider the impact of religious differences on employee groups

Key terms 1 APEC Command Economy Culture Democratic governments Developed countries Dumping E-commerce Embargo Ethnocentric managers European Union (EU) Exchange rate Franchising Free-market economy Free Trade Geocentric managers Global economy Global village Globalization Hofstede’s model Import quota Infrastructure International Monetary Fund (IMF) Joint venture Less-developed countries

Key terms 2 Licensing Mercosur Mixed economy Multinational corporation (MNC) Multinational organization North American Free Trade Agreement (NAFTA) Outsourcing Privatization Trade Protectionism Trading Bloc World Bank World Trade Organization