1. CHAPTER 4: MANAGING IN THE GLOBAL ECONOMY
Raja Nerina Raja Yusof

2. Learning Outcomes
Define globalization and explain the forces that drive globalization.
Discuss the implications of globalization to managers from the aspect of political-legal, economic, technological and social cultural environments.
Define a multinational company and identify optional methods for entering foreign markets.
Discuss the advantages and disadvantages of different entry methods for a multinational company.
Explain the four international business strategies for international businesses or multinational companies.

3. Learning Outcomes
Define expatriate managers and explain how its role differs from a domestic manager.
Identify the main characteristics of a successful expatriate manager.
Define expatriate failure and discuss the top reasons for expatriate failures.
Discuss the trends of international business and how managers may be impacted by these trends.

4. The International Environment
Globalization
Defined as the shift toward a more integrated and interdependent world economy.
What happens in one country will most probably impact other countries with whom it has a close relationship.
For example, European Union (EU) was heavily hit by the Eurozone Crisis in 2008, the United States (US) also felt the heat because it was a major trading partner of EU.

5. Drivers of Globalization
1. Reduced trade barriers and investment restrictions
Establishment of WTO in 1995 has sped up reduction of trade barriers
Establishment of regional economic integrations – ASEAN, APEC, etc.
2. Development of Technology
The Internet and World Wide Web
Modern transportation technology – airplanes and shipping vessels
3. Convergence of global tastes and preferences
Global brands becoming household names
i.e., McDonald’s is in 119 countries globally

6. Implications of Globalization
Political and Legal
Changes of political systems - i.e. totalitarianism to democracy
Managers need to understand the changes in policy
Economic
More countries going for open economy – Laos, Vietnam, Russia, etc.
Managers need to embrace changes that come with an open economy
Socio-cultural
Convergence of taste and preferences of global consumers
Managers need to monitor changes in socio-cultural trends
Technological
Dynamic inventions from international collaborations
Managers need to be updated on current technological knowledge

7. Multinational corporations (MNCs)
Defined as companies which undertake productive activities outside the country in which they are incorporated and establish presence in more than two countries.
Have also been known as MNEs (multinational enterprises) or TNCs (transnational corporations).

8. Entry Modes of International Business
There are many ways of penetrating a new market, among them are:
Exporting
Licensing
Joint venture
Strategic alliance
Wholly-owned subsidiary

9. Exporting
Products/raw materials that are produced in the home country are transported to a host country to be sold
The lowest risk among the entry methods
Exporters also can realize experience and location economies by mass producing products in one location for the purpose of exporting
Transportation costs such as shipping and air cargo can be very expensive and present the risk of accidents

10. Licensing
Arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee
A specialized form of licensing is franchising
A very quick way of expanding and marketing your business globally
However, licensors might have a tough time keeping track of the quality, performance and marketing of their licensed products in the host countries
Risks their products to be imitated or copied by their own licensees which in the end will create competitors to them in the future

11. Joint venture
When two or more companies decided to cooperate with each other to produce or provide certain services, with each partner contributing a certain portion of capital to the agreement.
A joint venture is usually the entry method by which companies use to penetrate into a foreign country using foreign direct investment (FDI).
Joint ventures with local companies help foreign companies to learn and adapt to the local laws and cultural requirements.
However, when the partners’ objectives are no longer similar, there tend to be conflicts and battles between the parties involved regarding ownership and control of resources of the joint venture.

12. Strategic alliance
Any cooperative agreements between potential or actual competitors
Includes equity-based and non-equity based cooperative agreements
Examples such as joint ventures (equity based) and licensing, marketing alliances, R&D contracts (non-equity based), etc.

13. Contractual Agreements
Exhibit 4.1: Scope of Strategic Alliance
Choice of Entry Mode
Non-Equity Mode
Exports
Contractual Agreements
Equity Mode
Joint ventures
Wholly Own Subsidiary
Adapted from Hill, Wee & Udayasankar (2012). International Business: an Asian Perspective. McGraw-Hill: New York.

14. Wholly-Owned Subsidiary
When a foreign firm invests into a subsidiary in a host country without any partners, which means that it owns 100 percent of the subsidiary.
Suitable for companies that need full control of their business in the foreign market.
Allows the company to retain the full profit without having to share it with partners.
However, this means that costs, risks or losses are also born fully by the company.
Can be applied using either greenfield investment or acquisition.

15. International Business Strategies
Global Strategy
Transnational Strategy
International Strategy
Multidomestic strategy
High
Pressures for Cost Reduction
Low
High
Pressures for Local Responsiveness

16. International Business Strategies
International Strategy
Global Strategy
Multidomestic Strategy
Transnational Strategy

17. International Strategy
A company takes the products produced in the home country and sell them internationally with minimal local customization
Company may centralize all research and development (R&D) functions in the home country
However, the company may duplicate certain functions such as manufacturing and marketing in each of its host countries

18. Global Strategy
Company is concerned mostly on the reduction of costs, and less on localizing or adapting to the host country’s culture
Focuses on achieving global economies of scale in its operations
Decision making is left mainly to home country since subsidiaries role are mainly to implement strategies developed by the home country
Examples of industries – automobiles, semiconductors, electronic products, etc.

19. Multidomestic Strategy
Opposite of global strategy
Company’s foreign subsidiaries are independent from home country
Adapting to the local culture and exploiting opportunities in the host country
Home country will give subsidiary more freedom to implement their own way of doing business and adopts a decentralized approach of managing its assets and capabilities
Examples of industry – retailing, consumer packaged goods, etc.

20. Transnational Strategy
An ideal strategy that tries to balance both the needs to reduce costs as well as to localize products to the home country’s culture
Its subsidiaries rely more on each other in terms of knowledge and resources
Different subsidiaries have their own role in a specialized capacity, and thus in the end they need to cooperate closely with each other to produce the products and services

21. Expatriate Managers
Expatriates are citizens of one country who are working in another country; usually managerial level employees
Need to have cultural intelligence - comprehension or understanding that cultures among countries differ and that they have impacts on the way business is performed and operated in the countries involved
Need to avoid ethnocentrism - the tendency to believe in the inherent superiority of their own culture compared to other cultures

22. Characteristics of Successful Expatriate Managers
Flexibility
Open-mindedness
Curiosity
Cultural sensitivity
Adventurous

23. Expatriate Failure
Defined as premature return of an expatriate from a foreign assignment.
Top reasons:
1. Inability of spouse to adjust.
2. Manager’s inability to adjust.
3. Other family problems.
4. Manager’s personal or emotional maturity.
5. Inability to cope with larger overseas responsibilities.
6. Difficulties with new environment.
7. Lack of technical competence.

24. Trends in International Business
Trend for businesses to venture overseas is increasing – aggressively search for market and resources
MNCs from developed countries going into emerging countries – previously to China but now to rising countries such as Vietnam and Cambodia
Interdependence of countries - financial crises, natural disasters, political turmoil and wars in one country can impact international business operations of other countries