1. Global management BMO1102 Management and Organisation Behaviour.
Week 8, Part 1;
Global management

2. What is global business?
After this lecture and reading chapter 8 of the textbook, you should be able to:
Discuss the impact of global business and the trade rules and agreements that govern it.
Business is the buying and selling of goods or services. Buying this textbook was a business transaction. So was selling your first car. So was getting paid for babysitting or for mowing lawns. Global business is the buying and selling of goods and services by people from different countries.

3. What is global business?
The buying and selling of goods and services by people from different countries.

4. The impact of global business
Multinational corporation
A corporation that owns businesses in two or more countries.
Direct foreign investment
A method of investment in which a company builds a new business or buys an existing business in a foreign country.
Today, there are multinational corporations, nearly times as many as in To appreciate the impact of global business, consider direct foreign investment. Direct foreign investment is a method of investment in which a company builds a new business or buys an existing business in a foreign country.

5. Foreign investment in Australia and Australian direct investment abroad
Source: Australian Bureau of Statistics, Australian Economic Indicators, February 2003, cat. no

6. Foreign investment in Australia
Investment coming into Australia totalled over
AUS $2 billion.

7. Trade barriers Tariff Quotas Voluntary export restraints
Non-tariff barriers
Government import standards
Historically, governments have actively used trade barriers to make it much more difficult or expensive (or sometimes impossible) for you to buy imported goods. Protectionism is the use of trade barriers to protect local companies and their workers from foreign competition.
A tariff is a direct tax on imported goods. Like the Australian government’s 7.5% duty on imported textiles, clothing and footwear from China, tariffs increase the cost of imported goods relative to that of domestic goods.
Non-tariff barriers are non-tax methods of increasing the cost or reducing the volume of imported goods. There are five types of non-tariff barriers: quotas, voluntary export restraints, government standards, government subsidies and custom valuation/classification.
Quotas are specific limits on the number or volume of imported products. Voluntary export restraints are similar to quotas in that there is a limit on how much of a product can be imported annually. The difference is that the exporting country rather than the importing country imposes the limit. However, the ‘voluntary’ offer to limit imports usually occurs because of the implicit threat of forced trade quotas by the importing country.
Many nations also use subsidies, such as long-term, low-interest loans, cash grants, and tax deferments, to develop and protect companies in special industries. European and Japanese governments have invested billions of dollars to develop airplane manufacturers and steel companies, while the US government has provided subsidies for manufacturers of computer chips. Not surprisingly, businesses complain about unfair trade practices when other companies receive government subsidies. Customs classification is a classification assigned to imported products by government officials that affects the size of a tariff and the imposition of imported goods.
Government subsidies
Customs valuation/classification

8. Trade agreements General Agreement on Tariffs and Trade
Regional trading zones
General Agreement on Tariffs and Trade
Maastricht Treaty of Europe
NAFTA
ASEAN and APEC
CAFTA
Because of the trade barriers described, buying imported goods has often been much more expensive and difficult than buying domestic goods. During the 1990s however, the regulations governing global trade were transformed. The most significant change was that 124 countries agreed to adopt the General Agreement on Tariffs and Trade (GATT). Although GATT was replaced by the World Trade Organisation (WTO) in 1995, the changes made continue to encourage international trade.

9. GATT
GATT made it easier and cheaper for consumers in all countries to buy foreign products.
Tariffs were cut 40 per cent on average worldwide by 2005.
Tariffs were eliminated in 10 specific industries.
Stricter limits were put on government subsidies.
GATT established protections for intellectual property.
Trade disputes between countries now are fully settled by arbitration panels from the WTO.
Through tremendous decreases in tariff and non-tariff barriers, GATT made it much easier and cheaper for consumers in all countries to buy foreign products.
First, by the year 2005, GATT cut average tariffs worldwide by 40 per cent. Second, GATT eliminated tariffs in ten specific industries: beer, alcohol, construction equipment, farm machinery, furniture, medical equipment, paper, pharmaceuticals, steel and toys.
Third, GATT put stricter limits on government subsidies. For example, GATT put limits on how much national governments can subsidise company research in electronic and high-technology industries. Fourth, GATT protects intellectual property such as trademarks, patents and copyright. Protection of intellectual property has been an increasingly important issue in global trade because of widespread product piracy. Finally, trade disputes between countries are fully settled by arbitration panels from the WTO.

10. World Trade Organisation
Fact File provides an overview of the WTO and its functions.
Web link
Adapted from Fact File

11. Maastricht Treaty of Europe
Formed in 1992 with 12 European countries.
Total membership is now 27 countries.
Transformed these countries into the European Union, forming one economic market and one common currency (the euro).
Opened up and simplified trade among member nations.
In 1992, the countries of Belgium, France, Germany, Italy, Luxembourg, the Netherlands, Denmark, Ireland, United Kingdom, Greece, Portugal and Spain implemented the Maastricht Treaty of Europe. The purpose of this treaty was to transform their 12 different economies and 12 currencies into one common economic market, called the European Union, and one common currency, the euro. Austria, Finland and Sweden are now members, too. Other recent members include Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, Bulgaria and Romania.
Prior to the treaty, trucks carrying products were stopped and inspected by customs agents at each border. Furthermore, since the required paperwork, tariffs and government product specifications could be radically different in each country, companies often had to file 12 different sets of paperwork, pay 12 different tariffs, and produce 12 different versions of their basic product to meet various government specifications.
Today, the total membership is 27 countries, and Croatia, Macedonia and Turkey are now being considered for membership.
Web link

12. NAFTA
North American Free Trade Agreement between Canada, United States and Mexico.
Liberalises trade among these three nations.
Eliminates most tariffs and barriers.
NAFTA, the North American Free Trade Agreement between the United States, Canada and Mexico, went into effect on 1 January More than any other regional trade agreement, NAFTA liberalises trade between countries so that businesses can plan for one market, North America, rather than for three separate markets: the US, Canada and Mexico. One of NAFTA's most important achievements was to eliminate most product tariffs and prevent Canada, the United States and Mexico from increasing existing tariffs or introducing new ones.
Since NAFTA went into effect, both Mexican and Canadian exports to the US have doubled. US exports to Mexico and Canada have doubled too.
Web link

13. ASEAN and APEC
ASEAN
Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
APEC
Australia, Canada, Chile, China, Hong Kong, Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, United States, and ASEAN members (except Cambodia, Laos and Myanmar).
ASEAN, the Association of South East Nations, and APEC, Asia-Pacific Economic Cooperation, are the two largest and most important regional trading groups in Asia.
ASEAN is a trade agreement between Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – a market of more than 558 million people. US trade with ASEAN countries is sizable, exceeding $153 billion a year.
The United States is ASEAN's largest trading partner, while the member nations of ASEAN are the United States’ fifth largest trade group. ASEAN member countries have agreed to create an ASEAN free trade area beginning in 2015 for the six original countries and in 2018 for the newer member countries.
APEC is a broader agreement that includes Australia, Canada, Chile, the People’s Republic of China, Hong Kong, Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States, and all the members of ASEAN except Cambodia, Laos and Myanmar. APEC is a broader agreement of 21 member countries, with a combined GDP of over $19 trillion. APEC countries began reducing trade barriers in 2000, but it will take until 2020 for all the reductions to be completely phased in.
Web Link

14. Consumers, trade barriers and trade agreements
The strength of your currency determines how much you can buy. Some countries can buy more with their money.
The US marketplace is easiest for foreign companies to enter. The competitive market between domestic and foreign companies keeps prices low.
International studies find that American consumers get much more for their money than any other consumers in the world. So while US incomes are lower, they still buy more for the average American. One reason for this is that the US marketplace has been one of the easiest for foreign companies to enter.
More importantly, the high level of competition between foreign and domestic companies that creates these choices helps to keep prices low in the US. It is precisely this lack of choice, and the low level of competition, that keeps prices higher in countries that have not been as open to foreign companies and products. Free Trade Agreements increase consumer choice, competition and purchasing power.

15. Consumers, trade barriers and trade agreements
Decrease price of: food
clothing
necessities
luxuries
Increase: choices competition purchasing power
Free trade agreements

16. Consistency or adaptation?
Global consistency
When a multinational company has offices/plants in different countries and uses the same rules, guidelines, policies and procedures.
Local adaptation
When a multinational company modifies its rules, guidelines, policies and procedures to adapt to differences in foreign customers, governments and regulatory agencies.
Global consistency means that when a multinational company has offices, manufacturing plants and distribution facilities in different countries, it will run those offices, plants and facilities based on the same rules, guidelines, policies and procedures. Managers at company headquarters value global consistency, because it simplifies decisions.
Local adaptation is a company policy to modify its standard operating procedures to adapt to differences in foreign customers, governments and regulatory agencies. Local adaptation is typically more important to local managers who are charged with making the international business successful in their countries.
Multinational companies struggle to find the correct balance between global consistency and local adaptation. If they lean too much toward global consistency, they run the risk of using management procedures poorly-suited to a particular country‘s markets, cultures and employees. However, if companies focus too much on local adaptation, they run the risk of losing the cost efficiencies and productivity that result from using standardized rules and procedures throughout the world.

17. Consistency or adaptation
A blend of consistency and adaptation makes the ‘Pop Idol’ TV show format successful around the world.
American Idol is the US version of a British show called Pop Idol. Even though the format is generally the same, the producers have had to make changes as they export the show to more and more countries. For example, in Germany, the word ‘idol’ has Nazi connotations, so the producers changed the name to Germany Seeks the SuperStar.
iStockphoto

18. VW and Porsche seal merger deal
Beyond the book
VW and Porsche seal merger deal
Volkswagen and Porsche have agreed to merge and create an automotive giant.
This will cement the carmaker’s position as the top European manufacturer with more than employees worldwide and a production of 6.4 million cars per year.
Other company brands include Audi, Bentley, Bugatti and Lamborghini.
Source:

19. Forms for global business
Cooperative contracts
Strategic alliances
Exporting
Wholly owned affiliates
Global new
ventures
Historically, companies have generally followed the phase model of globalisation. This means that companies made the transition from a domestic company to a global company in sequential phases.
When companies produce products in their home countries and sell those products to customers in foreign countries, they are exporting.
When an organisation decides to expand its business globally, but does not want to make large financial commitments to do so, it will sign a cooperative contract with a foreign business owner, who pays the company a fee for the right to conduct that business in his or her country. There are two kinds of cooperative contracts: licensing and franchising.
Under a licensing agreement, a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce its product, sell its service, or use its brand name in a particular foreign market.
A franchise is a collection of networked firms in which the manufacturer or marketer of a product or service, the franchisor, licenses the entire business to another person or organisation, the franchisee.
Companies forming strategic alliances combine key resources, costs, risks, technology and people. The most common strategic alliance is a joint venture, which occurs when two existing companies collaborate to form a third company. The two founding companies remain intact and unchanged, except that together, they now own the newly created joint venture.
Approximately one-third of multinational companies enter foreign markets through wholly owned affiliates. Unlike licensing, franchising or joint ventures, wholly owned affiliates are 100 per cent owned by the parent company.
However, three trends have combined to allow companies to skip the phase model when going global. With sales, employees and financing in different countries, global new ventures are new companies founded with an active global strategy.

20. Exporting Advantages Less dependence on home market sales.
Greater degree of control over research, design and production decisions.
Advantages

21. Exporting Disadvantages
Many exports are subject to tariff and non-tariff barriers.
Transportation costs can increase price.
Companies may depend on foreign importers for product distribution.
Disadvantages

22. Cooperative contracts
Licensing
A domestic company receives royalty payments for allowing another company to produce its product, sell a service or use its brand name in a specified foreign market.
Franchising
A collection of networked firms in which the manufacturer or marketer of a product/service licenses the entire business to another person or organisation.

23. Licensing Advantages Disadvantages
Allows companies to earn profits without investing more money.
The licensor invests in production equipment and facilities.
Helps companies avoid tariff and non-tariff barriers.
Advantages
Disadvantages
Licensor gives up control over quality of the product or service sold by the foreign licensee.
Licensees can eventually become competitors.

24. Franchising Advantages Disadvantages
Fast way to enter foreign markets.
Good strategy when a company’s domestic sales have slowed.
Advantages
Disadvantages
Franchisors face a loss of control.
Franchising success may be culture-bound.

25. Strategic alliances
Strategic alliance
An agreement in which companies combine key resources, costs, risk, technology and people.
Joint venture
A strategic alliance in which two existing companies collaborate to form a third, independent company.
Companies forming strategic alliances combine key resources, costs, risks, technology and people. The most common strategic alliance is a joint venture, which occurs when two existing companies collaborate to form a third company. The two founding companies remain intact and unchanged, except that together, they now own the newly created joint venture.

26. Joint ventures Advantages
Help companies avoid tariff and non-tariff barriers to entry.
Participating companies bear only part of the costs and risks.
Advantageous to smaller local partners.
Advantages

27. Joint ventures Disadvantages Companies must share profits.
Joint venture represents a merging of four cultures.
With equal ownership, power struggles and a lack of leadership may occur.
Disadvantages

28. Wholly owned affiliates (build or buy)
Advantages
Parent company receives all of the profits and has complete control.
Disadvantages
Expense of building new operations or buying existing business.
Losses can be immense if the venture fails.
Approximately one-third of multinational companies enter foreign markets through wholly owned affiliates. Unlike licensing, franchising or joint ventures, wholly owned affiliates are 100 per cent owned by the parent company.

29. Global new ventures Quick, reliable air travel.
Low-cost communication technologies.
Critical mass of experienced businesspeople.
Companies used to evolve slowly from small operations selling in their home markets to large businesses selling to foreign markets. As companies went global, they usually followed the phase model of globalisation. Recently, however, three trends, as shown on this slide, have combined to allow companies to skip the phase model.

30. Common factors of global new ventures
Global vision is developed and communicated.
Several foreign markets are entered at the same time.
Although there are several kinds of global new ventures, all share two common factors. First, the company founders successfully develop and communicate the company’s global vision. Second, rather than going global one country at a time, new global ventures bring a product or service to several foreign markets at the same time.

31. Global management BMO1102 Management and Organisation Behaviour.
Week 8, Part 2;
Global management

32. Where to go global? Explain how to find a favourable business climate.
After this lecture and reading chapter 8 of the textbook, you should be able to:
Explain how to find a favourable business climate.
Discuss the importance of identifying and adapting to cultural differences.
Explain how to successfully prepare workers for international assignments.
Deciding where to go global is just as important as deciding how your company will go global.

33. Finding the best business climate
Access to growing markets
Location
to build
Minimal political risk
When going global, companies try to find countries or regions with promising business climates. An attractive global business climate positions the company for easy access to growing markets, is an effective but cost-efficient place to build an office or manufacturing site, and minimises the political risk to the company.

34. Growing markets Purchasing power Degree of global competition
comparison of a standard set of goods and services in different countries
more means greater growth potential.
Degree of global competition
the number and quality of companies already in the market.
Two factors help companies determine the growth potential of foreign markets: purchasing power and foreign competitors. Purchasing power is measured by comparing the relative cost of a standard set of goods and services in different countries. Consequently, countries with high levels of purchasing power are good choices for companies looking for attractive global markets.
The second part of assessing growing global markets is to analyse the degree of global competition, which is determined by the number and quality of companies that already compete in foreign markets.

35. Choosing an office/manufacturing location
Qualitative factors
work force quality
company strategy.
Quantitative factors
kind of facility
tariff and non-tariff barriers
exchange rates
transportation and labour costs.
Companies do not have to establish an office or manufacturing location in each country they enter. They can license, franchise or export to foreign markets, or they can serve a larger region from one country. Thus, the criteria for choosing an office/manufacturing location are different from the criteria for entering a foreign market.
Rather than focusing on costs alone, companies should consider both qualitative and quantitative factors. Two key qualitative factors are work force quality and company strategy. Work force quality is important because it is often difficult to find workers with the specific skills, abilities and experience that a company needs to run its business.
Quantitative factors, such as the kind of facility being built, tariff and non-tariff barriers, exchange rates, and transportation and labour costs, should also be considered when choosing an office/manufacturing location.

36. World’s best cities for business
Sources: ‘European Cities Monitor 2006’, Cushman & Wakefield, 13 February 2007; K. Badenhausen, ‘Best Places for Business and Careers’, 17 February 2007; ‘Shanghai, Beijing, Shenzhen Top 3 in Best City Survey’, Fortune China, 13 February 2007; R. Sridharan, ‘Best Cities, Really?’ Business Today,13 August 2006, 62; ‘Miami Is the Best City for Doing Business in Latin America, According to AmericaEconomia Magazine’, PR Newswire, 24 April 2003.

37. Choosing a location: multilingual work forces
Beyond the book
Choosing a location: multilingual work forces
Workers in the Netherlands are the most linguistically gifted in Europe, with 73 per cent speaking two languages, 44 per cent speaking three languages, and 12 per cent speaking more than three. Furthermore, for call centre workers in the Netherlands, over 60 per cent have university or advanced degrees in technology or management.

38. Minimising political risk
Political uncertainty
risk of major changes in political regimes.
Policy uncertainty
risk associated with changes in laws and government policies directed at businesses.
Strategies
avoidance
control
cooperation.
When conducting global business, companies should attempt to identify two types of political risk: political uncertainty and policy uncertainty.
Political uncertainty is associated with the risk of major changes in political regimes that can result from war, revolution, death of political leaders, social unrest or other influential events. Policy uncertainty refers to the risk associated with changes in laws and government policies that directly affect the way foreign companies conduct business. This is the most common form of political risk in global business and perhaps the most frustrating.
Several strategies can be used to minimise or adapt to the political risk inherent to global business. An avoidance strategy is used when the political risks associated with a foreign country or region are viewed as too great. If firms are already invested in high-risk areas, they may divest or sell their businesses. If they have not yet invested, they will likely postpone their investment until the risk shrinks. Control is an active strategy to prevent or reduce political risks. Firms using a control strategy will lobby foreign governments or international trade agencies to change laws, regulations or trade barriers that hurt their business in that country.
Another method for dealing with political risk is cooperation, which makes use of joint ventures and collaborative contracts, such as franchising and licensing. Although cooperation does not eliminate the political risk of doing business in a country, it does limit the risk associated with foreign ownership of a business.

39. Long-term political risk in the Middle East
Exhibit 8.5 shows the long-term political risk for various countries in the Middle East (higher scores indicate less political risk).
Source: ‘Chapter 1: Political Outlook’, UAE Business Forecast Report, st Quarter, 5–10.

40. Becoming aware of cultural differences
National Culture
The set of shared values and beliefs that affect the perceptions, decisions and behaviour of the people from a particular country.

41. Becoming aware of cultural differences
Cultural dimensions (Geert Hofstede)
Power distance
Individualism
Masculinity and femininity
Uncertainty avoidance
Short-term/long-term orientation
National culture is the set of shared values and beliefs that affect the perceptions, decisions and behaviour of the people from a particular country. The first step in dealing with culture is to recognise that there are meaningful differences in national cultures. Geert Hofstede has spent 20 years studying cultural differences in 53 countries. His research has identified five consistent cultural dimensions across countries.
Power distance is the extent to which people in a country accept that power is distributed unequally in society and organisations. Individualism is the degree to which societies believe that individuals should be self-sufficient. In individualistic societies, employees put loyalties to themselves first, and loyalties to their company and work group second.
Short-term/long-term orientation addresses whether cultures are oriented to the present and seek immediate gratification, or to the future and defer gratification. Not surprisingly, countries with short-term orientations are consumer driven, whereas countries with long-term orientations are savings driven.
Masculinity, and its opposite, femininity, capture the difference between highly assertive and highly nurturing cultures. Masculine cultures emphasise assertiveness, competition, material success and achievement, whereas feminine cultures emphasise the importance of relationships, modesty, caring for the weak and quality of life.
The cultural difference of uncertainty avoidance is the degree to which people in a country are uncomfortable with unstructured, ambiguous and unpredictable situations.
After becoming aware of cultural differences, the second step is deciding how to adapt your company to those cultural differences. Unfortunately, studies investigating the effects of cultural differences on management practice point more to difficulties than to easy solutions.

42. Hofstede’s five cultural dimensions
Source: G. H. Hofstede, ‘Cultural Constraints in Management Theories’, Academy of Management Executive 7, no. 1 (1993): 81–94.

43. Hofstede’s model dimensions for selected countries
Source: Geert Hofstede and Gert Jan Hofstede, ‘Cultures and Organizations: Software of the Mind’. Revised and Expanded 2nd Edition. New York: McGraw-Hill USA, 2005, ISBN ,

44. Cultural differences Recognise cultural differences.
Decide how to adapt your company to those differences.
Do not base adaptations on outdated and incorrect assumptions about a country’s culture.
Cultural differences affect perceptions, understanding and behaviour. The steps on understanding different cultures are listed above. However, cultural differences are based on averages. Therefore, you should not assume that overall cultural statements about a society automatically apply to an individual.

45. Preparing for an international assignment
Expatriate
Someone who lives and works outside his or her native country.

46. Preparing for an international assignment
Language and cross-cultural training
Consideration of spouse, family and dual-career issues
The average cost of sending an employee (an expatriate) on a three year international assignment is $1 million. Between 5 to 20 per cent of American expatriates sent abroad by their companies will return to the US before they have completed their assignment. Failure in those assignments can be quite expensive. The chances for success in an international assignment can be increased through language and cross-cultural training, as well as consideration of spouse, family and dual-career issues.

47. Language and cross-cultural training
Documentary training
Cultural simulation
Expatriates who receive predeparture language and cross-cultural training make faster adjustments to foreign cultures and perform better on international assignments. Unfortunately only a third of managers receive any kind of training.
Documentary training focuses on identifying specific critical differences between cultures. Next, cultural simulation allows practice at adapting to cultural differences. Field experiences place trainees in an ethnic neighborhood for three to four hours to talk to residents about cultural differences.
Field experiences

48. Spouse, family and dual-career issues
Adaptability screening
Intercultural training
A number of companies have found that adaptability screening and intercultural training for families can lead to more successful overseas adjustment. Adaptability screening is used to assess how well managers and their families are likely to adjust to foreign countries. Language and cross-cultural training is also important for the families of expatriates.