Institutional Context of Multinational Management (Business Environment) Chapter 3

Factors in the Business Environment Economic systems, privatization, and nationalization Laws and regulations that affect business Level of industrialization Religion Education Culture

Economic Systems Capitalist/market economy: production is decentralized to private owners Owners perform activities to make profits Socialist/command economy: production resources are owned by the state Production decisions centrally coordinated Mixed economy: combines aspects of capitalist and socialist economies – wide variety of mixed economies

Economic Systems (2) When government is more involved in the economy, there will be more regulations and restrictions on business Social goals, such as full employment, may be more important Example: It is more expensive to terminate employees or close a business facility in Europe than in the United States. Index of Economic Freedom compares the level of government regulation in different countries

Exhibit 3.2: Selected Country Scores on Index of Economic Freedom

Privatization Privatization is the sale of government- controlled enterprises to private investors Methods of privatization Issue stock in the enterprise Sell the enterprise to a company Sell the enterprise to individual investors

Privatization (2) Reasons for Privatization In developed countries, privatization helps companies become more competitive in the global economy. Developing countries often privatize companies to get more rapid economic growth. Many former Communist countries privatized their enterprises to make the transition to a market economy. This is one condition that countries must meet to join the European Union (EU). China now has a mixed economy, with both public and private enterprises.

Post-Communist Members of the EU Poland Hungary The Czech Republic Slovakia Slovenia Estonia Latvia Lithuania Bulgaria Romania Candidates Croatia Macedonia Croatia

Privatization Issues in Transition Economies Foreign investment was often needed to replace obsolete equipment and facilities. Some companies had to invest in infra-structure, such as roads and sewer lines. Privatized firms employed fewer people, which caused high unemployment Labor was often inexpensive. Workers were sometimes suspicious of business and hard to motivate. Enterprises devoted to military production often could not be made profitable and had to close.

Nationalization Nationalization is the conversion of a private enterprise to government ownership. The government may or may not pay the company's stockholders or investors for the enterprise. When no payment is made, the conversion is called expropriation.

Nationalization in Russia Russia privatized its energy industry in the 1990's and recently re-nationalized most of it. Russia just forced Shell and several other western companies to a controlling interest in the Sakhalin 2 oil project to the government energy monopoly (Gazprom) Russia has large oil reserves and the world's largest reserve of natural gas

Nationalization in South America Most government enterprises in South America were privatized in the 1980's. Socialist presidents have been elected in Bolivia, Ecuador, Venezuela, and Nicaragua. Venezuela just announced that it will privatize the telecommunication and electrical industries. Will compensation will be paid? Venezuela is likely to nationalize other industries. Bolivia and Ecuador have also nationalized some companies.

Industrialization Pre-industrial society: agriculture dominates the economic environment Industrial society: dominance of the secondary or manufacturing sectors Post-industrial society: emphasis on the service sectors

Exhibit 3.4: Distribution of Production Activities by Sectors

Implications of Industrialization There is a direct correspondence between industrialization and economic development Industrial societies favor growth and innovation Favorable environment for business Industrial societies present significant market size and growth

Industrialization Pre-industrial countries provide cheap labor and untapped markets People are often highly motivated to achieve a better life Post-industrial societies Emphasis on quality-of-life as opposed to economic achievement

Religion Christianity, Islam, Hinduism, or Buddhism are followed by almost 71% of the world’s population Religion affects ethics and worker behavior Know the implications of Islam, Hinduism, and Buddhism for business

Importance of Education Gives an idea of the skill level of workers in any society The more educated, the more skills workers have Companies look at educational attainment scores to determine the nature of the workforce

Organizations Alike: Globalization and Convergence Globalization is pushing organizations to be more similar Global customers and products Growing levels of industrialization and economic development Global competition and global trade

Globalization and Convergence Other convergence forces Cross-border mergers, acquisitions, and alliances Cross-national mobility of managers Internationalization of business education Caution: customers in different customers still have somewhat different preferences and needs.