Mgt 485 Chapter 10 Managing Political Risk and Negotiations

Mgt Response from HON Intntl. We don't currently sell anything to Hobis, may have years ago or something. I would say that our values haven't changed since the company's inception in the 1940s and while our current CEO/Chairman will give up his CEO title this year, there won't be any vision/values changes. Perhaps an even more aggressive pursuit of profitable growth opportunities, but our core stakeholder focus will remain the same. [James] Might it be reasonable to assume that this increases the economic imperative (emphasis of profitability over flexibility and responsiveness to individual countries and cultures)? [ES] Seems reasonable at first glance, but I don't think so. It's not like say Pepsi, where one size fits all. There is no pan-European office furniture company, for example. Some may be strong in 2 or 3 countries, but you HAVE to be responsive to culture on an individual basis to be effective. [James]

Mgt Follow-up with HON Intntl. Our (my) thinking was based on a Multi-National company’s approach at orienting their strategy according to one or more (in combination) of the four areas: Economic Imperative (Strategy based on Cost, differentiation, segmentation) Political Imperative (Country responsive strategies - protect local market niches) Quality Imperative (TQM - customer focus) Administrative Co-ordination (Strategic decisions based on individual situations) This relates to the strategic perspective adopted by firms (somewhat based on leadership philosophy, but also affected by the product / market mix) Ethnocentric (Allows the values and interests of the parent company to guide the strategic decisions) Polycentric (Tailored to suit the cultures of the countries where the MNC operates) Regiocentric (Leads a firm to try to blend its own interests with those of its subsidiaries on a regional basis) Geocentric (Tries to integrate a global systems approach to decision making) Based on the documentation we found on the web site, we categorized HON industries as being predominately Regiocentric (since we did not feel your products required major adaptations to satisfy cultures (compare to food products). We also felt that three of your vision statements strongly suggested a strategic approach towards the economic imperative, one directly speaking to the quality imperative, and two that could be interpreted as speaking to the political imperative (including protecting your workforce in your home country). Your comment of an aggressive pursuit of economic opportunity, I now take to be more a matter of how you define your economic pursuit rather than placing it as a higher level of importance in the total balance of operations.

Mgt Additional Internet Sites         

Mgt Figure Country Risk Iraq Indonesia Russia Colombia Venezuela Mexico Philippines India China Poland Czech Republic South Korea Greece Taiwan Hong Kong Singapore

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

Mgt 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

Mgt 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

Mgt 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

Mgt 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

Mgt A Three-Dimensional Framework for Assessing Political Risk TransferOwnership control Operational Low High Low II I IV III V Special investments Conglomerate Vertical Horizontal General investments Fig p. 288

Mgt 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

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

Mgt 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

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

Mgt 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

Mgt 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

Mgt  Technological Sophistication consists of: – Science-based industries  High risk factor – Non-science-based industries  Lower risk factor

Mgt  Patterns of ownership consist of: –Wholly owned businesses  High risk factor –Partially owned businesses  Lower risk factor

Mgt 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

Mgt 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

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

Mgt “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

Mgt  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

Mgt 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