International Management Managing Political Risk Decision-Making and Negotiations

Nature of International “Risk” Three main categories of risk which effect international business managers Unstable ethnic, religious and military conflicts Including the types of threats within Political Risk Climatic extremes that threaten the health and safety of nonresident travelers Topographical extremes that endanger personal safety, communications and transportation. Significant volume of information is available Requirements of “due dilligence” http://www.stern.nyu.edu/globalmacro/Geopolitics/PolRisk.htm http://www.aon.com/risk-services/political-risk-map2/thank_you.html

Additional Internet Sites http://www.imf.org/ http://www.transparency.org http://www.duke.edu/~charvey/Country_risk/couindex.htm http://lcweb2.loc.gov/frd/cs/cshome.html http://www.economist.com/displayStory.cfm?Story_ID=383472 http://www.intracen.org http://www.itools.com/research-it/research-it.html http://www.access.gpo.gov/su_docs/ http://www.prsgroup.com/yearbook/yearbook.cfm http://www.grai.com/ http://www.ntu.edu.sg/library/stat/statdata.htm http://www.duke.edu/~charvey/Country_risk/pol/pol.htm

Conditions Favoring Corruption Concentration of decision-making power: non-democratic regimes Lack of government transparency in decision-making Large amounts of public capital involved in a project Self-interested closed cliques and "old-boy" networks Weak rule of law Poorly-paid government officials An apathetic and uninterested, or gullible and easily led demos that does not scrutinize the political process sufficiently From: http://www.answers.com/topic/political-corruption

Government Corruption 5 Most Corrupt Countries (1998 Data) 1. Cameroon 2. Paraguay 3. Honduras 4. Nigeria 5. Indonesia

2009 Corruption Ratings? http://www.forbes.com/2009/03/18/most-corrupt-countries-bizcountries09-business-washington-corrupt-countries_slide.html

Corruption (2001 Data from Transparency International) Most Corrupt Azerbaijan Bangladesh Bolivia Cameroon Indonesia Kenya Nigeria Pakistan Russia Tanzania Uganda Ukraine Least Corrupt Australia Canada Denmark Finland Iceland Luxembourg Netherlands New Zealand Norway Singapore Sweden Switzerland

2007 2009? Rank Country 1. Myanmar Somalia 2. Iraq 3. Haiti 4. Tonga Uzbekistan 5. Afghanistan Chad Sudan 6. Congo, Democratic Republic Equatorial Guinea Guinea Laos 2007 2009? http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table

Political Risk (From Perc Library) http://www. asiarisk. com/library5 Importance of Degree of difficulty Country political risk of doing business 1. China 68.55 6.33 2. Hong Kong 62.32 3.61 3. Vietnam 56.54 5.75 4. Philippines 56.32 5.83 5. Taiwan 54.20 4.78 6. South Korea 50.24 5.62 7. Thailand 48.70 5.59 8. Indonesia 48.41 6.27 9. Malaysia 42.00 5.35 10. US 32.19 2.89 11. Japan 31.79 4.97 12. Singapore 27.07 3.50 1 Measured as a percentage of total country risk. (Balance of Economic and Political) 2 Graded on a zero to 10 scale, with zero being the best grade possible, or an extremely hospitable business environment, and a 10 the worst grade possible, or a very difficult business environment

Macro Analysis of Political Risk Purpose: To review the major political decisions likely to affect all business conducted in a country Examples Tightening controls on flow of foreign currency Bureaucratic legal systems Requiring foreign investors to establish joint ventures with local partners

Micro Analysis of Political Risk Purpose: government policies that influence selected sectors of the economy or specific foreign business Examples Industry regulation Taxes on specific types of business activity Restrictive local taxes

Political Risks Transfer Risks - policies that limit the transfer of capital, payments, production, people, and technology in or out of a country Tariffs on exports or imports Operational Risks - policies that constrain the management and performance of local operations Price controls and financing restrictions Ownership control risks - polices that inhibit ownership or control of local operations Foreign ownership limitations

Managing Political Risk (cont.) General Nature of Investment Conglomerate investment Type of high-risk investment in which goods or services produced are not similar to those produced at home Vertical investment Production of raw materials or intermediate goods that are to be processed into final products Horizontal investment MNC investment in foreign operations to produce the same goods or services as those produced at home Special Nature of Investment Determined by economic activity, technological sophistication, and pattern of ownership

Managing Political Risk (cont.) Quantifying the Variables in Managing Political Risk Identify important factors and compare the results from different geographic locales Factors typically reflect the political and economic environment Formulating Appropriate Response Relative bargaining power MNC attempts to garner greater bargaining power than the host country Proprietary technology not available to the host country is one source of relative bargaining power

Bargaining Power Over Time Fig. 10.3 Subsidiary’s bargaining power Bargaining Power Low High D E Intervention occurs A B C Host nation’s bargaining power Initial investment Time

Managing Political Risk (cont.) Formulating Appropriate Risk (cont.) Integrative techniques Help the overseas operation become a part of the host country’s infrastructure Produce as much locally using local suppliers Create joint ventures with local companies Develop effective labor-management relations Protective and defensive techniques Discourage the host government from interfering in operations Encourage nonintegration of the enterprise in the local environment Do little local manufacturing Limit the responsibility of local people Conduct all research and development outside of the country

Integrative and Protective and Defensive Techniques by Firms in Select Industries Integrative techniques Low 1 High 20 Moderate 10 Low or stable technology (11,14) United logistic, labor transmission (16,6) (7,10) Advanced management skill (14,3) Dynamic high technology Low Protective/defensive techniques Moderate High 1 10 20

The Nature of Investment 1. Conglomerate investment - The production of goods or services dissimilar to those produced at home High risk 2. Vertical investment - production of raw materials or intermediate goods that are to be processed into final products Moderate risk 3. Horizontal investment - production of goods or services similar to those produced at home Low risk

A Three-Dimensional Framework for Assessing Political Risk II I IV III V Special investments Low High Conglomerate Vertical Horizontal investments General High Low Transfer Ownership control Operational

Special Nature of Investment Economic Activity consists of: primary sector (agriculture, forestry, etc.) Highest risk factor industrial sector (manufacturing operations) Lowest risk factor service sector (transportation, finance, etc.) Moderate risk factor

Technological Sophistication Science-based industries High risk factor Non-science-based industries Lower risk factor

Patterns of ownership Wholly owned businesses High risk factor Partially owned businesses Lower risk factor

Integrative Techniques Designed to help overseas operations become part of the host country’s infrastructure Examples Developing good relations with host government Producing products locally Creating joint venture Participating in local research and development

Protective & Defensive Techniques Designed to discourage the host government from interfering in operations Examples Doing little local manufacturing Conducting little local research and development Limiting responsibility of local personnel Diversifying production in a number of countries

Organizational Consequence of Internationalization Aircraft Cameras Electronics Computers Telecommunications Aerospace High Autos Pressure for Globalization Steel Clothing Packaged goods Synthetic fibers Cement Low Low High Pressure for Local Responsiveness

Initial Division Structure Used for Initial Entry into International Markets Exporting Common first choice for manufacturers of technologically advanced products Firm can charge premium price due to little competition Subsidiary A common for handling finance-related businesses or other operations that require an on-site presence from the start

Subsidiaries During the Early Stage of Internationalization CEO Home Office Departments Production Marketing Finance Personnel V.P. International Operations Overseas Subsidiaries France Japan Egypt Australia Argentina

International Division Structure Advantages Takes burden off the CEO Receives top management attention Promotes overall unified approach Develops internationally experienced managers Disadvantages Separating domestic and international managers may cause differing objectives Home office may not be able to allocate resources globally, thereby penalizing growth

International Division Structure CEO Home Office Departments Production Marketing Finance Personnel Domestic Division Domestic Division Domestic Division Domestic Division International Division Operating Divisions Australia Japan Italy Office Operations Government Relations Marketing

Global Product Division Domestic divisions are given worldwide responsibility for product groups Advantages Helps to manage diversity Able to cater to local needs Marketing, production, and finance can be co-ordinated on a product-by-product global basis Disadvantages Duplication of facilities and staff personnel Managers may pursue attractive short-term sites instead of long-term sites Managers spend to much time trying to tap local instead of international markets

Global Product Division Structure CEO Production Marketing Finance Personnel Product Division A Product Division B Product Division C Product Division D Product Division E South America Africa Europe Australia Far East Great Britain France Germany Italy Netherlands Production Marketing Finance Personnel

Based on geographic rather than product orientation Global Area Division Based on geographic rather than product orientation Advantages Reduces cost per unit Caters to local markets Makes rapid decisions to accommodate environmental changes Disadvantages Difficulty reconciling a product emphasis with geographic orientation Ignores new research and development by division groups

Global Area Division Structure CEO Home Office Departments Production Marketing Finance Personnel Operating Divisions North America South America Europe Asia Africa Great Britain France Germany Italy Netherlands

Global Functional Division Worldwide operations based primarily on function and secondarily on product Advantages Emphasizes functional expertise Tight centralized control Relatively lean managerial staff Disadvantages Difficulty co-coordinating manufacturing and marketing Difficulty managing multiple product lines Only CEO can be held accountable for profits

A Global Functional Structure CEO Production Marketing Finance Domestic Production Product A Product B Product C Product D Foreign Production Product A Product B Product C Product D Domestic Production Product A Product B Product C Product D Foreign Production Product A Product B Product C Product D

Mixed Organization Structures Combines global product, area, and functional divisions to supplement its primary structure with a secondary one, and perhaps a tertiary (third) one Advantages Allows organization to create the specific type of design to meet its needs Disadvantages Complexity increases Difficulty arises in co-ordinating personnel

A Multinational Matrix Structure CEO Production Marketing Finance Personnel North America Industrial Goods Europe Manager, Industrial Goods North America Manager, Industrial Goods Europe

Meeting the Challenges of Globalization Synergy - (2 + 2 = 5) whole is greater than the sum of its parts Organizational Synergy Pooling knowledge across regions Sharing resources to meet world-wide needs Pooling purchases for greater negotiating power Coordinating strategies to become more efficient Vertically integrating to be more cost effective Creating new businesses

Organizing for Product Integration Strategies: Mutual adjustment Use of direct, technically skilled supervisors Use of integrative leadership Technical training provided in-house Use of standard milestones in work design Flexible design standards Organizing for Product Integration

Information Technology Key Questions: Which information systems are needed? Are investments are worthwhile? How does technology fit into management’s strategic thinking ? How should users and specialists connect within the company? How do you design systems to improve organizational performance?

Organizational Characteristics 3 most critical for international operations Formalization The use of defined structures used in decision making, communicating, and controlling Objective - written descriptions Subjective -informal controls Specialization The assigning of individuals to specific, well-defined tasks Horizontal specialization Vertical specialization Centralization Management system in which important decisions are made at the top

Structural Deficiency Symptoms Decisions are delayed or lacking in quality Organization does not respond innovatively to a changing environment Too much conflict from departments being at cross purposes is evident

Relate “Structure” to “Culture” How do cultural dimensions affect structural dimensions? Are some structures inherently more effective in some cultures?

INTERNATIONAL DECISION MAKING British are highly decentralized French tend to be centralized Germans are fairly centralized Swedes are also centralized Japanese decide by consensus

FACTORS AFFECTING DECISION MAKING CENTRALIZATION Large company Homogeneous product lines Large capital investment High degree of technology DECENTRALIZATION Small company Heterogeneous product lines Small capital investment Moderate to low degree of technology See Table 12-1, p 333

Centralization and Decentralization of Decision Making in Subsidiary Operations Adapted from Table 11–1: Factors That Influence Centralization or Decentralization of Decision Making in Subsidiary Operations

Comparing Decision Making Co-determination Legal system requiring workers and management to discuss major decisions Ringisei From Japan; decision making by consensus Tatemae Japanese; “doing the right thing” accoring to norms. Honne Japanese: What one really wants to do

Rewards and Recognition TQM DECISIONS U.S. workers value individual recognition and praise Japanese use continuous improvement of quality Rewards and Recognition Manufacturing U.S. has greatly improved the quality of their cars Japanese prefer group rewards

QUALITY OLD MYTH Quality is the responsibility of the people in the Quality Control Department Training is costly It is human to make mistakes Quality improvements are made in small, continuous steps Quality improvement takes time Haste makes waste Suppliers need to be price competitive

QUALITY NEW TRUTH Quality is everyone’s job Training does not cost, it saves Total customer satisfaction is a standard that should be vigorously pursued In improving quality, both small and large improvements are necessary Quality does not take time, it saves time Thoughtful speed improves quality Suppliers need to be quality competitive

TYPES OF CONTROL Direct/Indirect Internal/External

INTERNAL dominating attitude bordering on aggressiveness towards the environment focused on self, function, one’s own group, and one’s own organization discomfort when the environment seems “out of control” or changeable Win some, lose some EXTERNAL flexible attitude, willing to compromise and keep the peace focused on others such as customers, partners, and colleagues Comfort with waves, shifts, and cycles, which are regarded as “natural” Win together, lose apart

Direct vs. Indirect Controls Direct Controls Involves face-to-face or personal meetings to monitor operations Ex.) Monthly management meetings Ex.) Visits by top executives to overseas affiliates or subsidiaries Indirect Controls Use reports and other written forms of communication to control operations Ex.) Monthly operating reports that are sent to the home office Ex.) Balance sheet, income statement, cash budgets

The Controlling Process Methods by which MNCs control overseas operations Most combine direct and indirect controls Some prefer heavily quantifiable methods – others more qualitative approaches Some prefer decentralized approaches – others greater centralization

CONTROL IN U.S. MNCs Control in U.S. MNCs focuses more on the quantifiable, objective aspects of a foreign subsidiary Requires more precise plans and budgets Requires large central staffs and centralized information processing capability

CONTROL IN EUROPEAN MNCs Requires a high level of company-wide understanding and agreement regarding appropriate behavior Requires more decentralization of operating decisions Requires more capable expatriate managers who are willing to spend long periods of time abroad

The Controlling Process Types of Control Internal and External Control MNC will focus on the things that it does best Management wants to ensure there is a market for the goods and services it offers First the company needs to find out what the customers want and be prepared to respond appropriately This requires an external control focus Internal and external perspectives of control – one is often given more attention than the other.

The Impact of Internal and External-Oriented Cultures on the Control Process Adapted from Table 11–3: The Impact of Internal and External-Oriented Cultures on the Control Process

The Controlling Process Types of Control Direct Controls The use of face-to-face or personal meetings for the purpose of monitoring operations International Telephone and Telegraph (ITT) holds monthly management meetings at its New York headquarters Meetings are run by the CEO of the company Reports are submitted by each ITT unit manager throughout the world Problems are discussed, goals set, evaluations made, and actions taken to help the unit to improve its effectiveness

The Controlling Process Types of Control Direct Controls Other examples Top executives visit overseas affiliates or subsidiaries to learn firsthand the problems and challenges facing the unit and to offer assistance By determining who to send overseas to run the unit, MNCs can directly control how the operation will be run Designing a structure that makes the unit highly responsive to home-office requests and communications ensures MNCs that all overseas operations are run in accord with central management’s desires

The Controlling Process Types of Control Indirect Controls The use of face-to-face or personal meetings for the purpose of monitoring operations International Telephone and Telegraph (ITT) holds monthly management meetings at its New York headquarters Meetings are run by the CEO of the company Reports are submitted by each ITT unit manager throughout the world Problems are discussed, goals set, evaluations made, and actions taken to help the unit to improve its effectiveness

The Controlling Process Types of Control Indirect Controls The use of reports and other written forms of communication to control operations at subsidiaries Financial statements Statements prepared to meet the national accounting standards and procedures prescribed by the host country Statements prepared to comply with the accounting principles and standards required by the home country Statements prepared to meet the financial consolidation requirements of the home country

CONTROL TECHNIQUES Financial Performance Quality Performance Personal Performance

Types of Control Input Processes Output Feedforward control Anticipates problems Concurrent control Corrects problems as they happen Feedback control Corrects problems after they occur

FINANCIAL PERFORMANCE Based on profit and return on investment Profit = Total Revenues - Total Exp Using Financial Performance alone when controlling a subsidiary for effective performance can be misleading

Brainstorming session Experimental production runs QUALITY PERFORMANCE Taguchi Method: Brainstorming and a few experiments seek to quickly find the problem. Production problem Brainstorming session Employ Taguchi Confirm results Experimental production runs

PERSONAL PERFORMANCE 1. Success attracts the best people--and the best people sustain success 2. The top companies know precisely what they are looking for 3. These firms see career development as an investment, not a chore 4. Whenever possible, these companies promote from within 5. Performance is rewarded

The Negotiation Process Planning Interpersonal relationship building Exchanging task-related information Persuasion Agreement

“Do’s” and “Don’ts” of Negotiation Do not identify the counterpart’s home culture too quickly Beware of western bias toward “doing” Try to counteract the tendency to formulate simple, stable images Do not assume that all aspects of culture are equally significant Do not overestimate your familiarity with your counterpart’s culture

Managing International Negotiations Cultural Differences Affecting Negotiations Must understand the other party’s communication patterns, time orientation, and social behaviors Society’s culture plays a major role in determining the effectiveness of a negotiating approach U.S. negotiators often differ from negotiators in many other countries Negotiation Tactics Location For important matters, neutral site preferred Time Limits Important when one party is under a time constraint

Managing International Negotiations Negotiation Tactics (cont.) Buyer-Seller Relations Negotiators from different countries perceive outcomes of negotiations differently For example, desire to come out on top Bargaining Behaviors Use of Extreme Behaviors Initial bargaining position Promises, Threats, and Other Behaviors Designed to influence the other party Behaviors often are greatly influenced by the culture Nonverbal Behaviors