1. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Chapter 2 Managing in a Global Environment

2. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 2 Learning Objectives After reading this chapter, you should be able to: Describe the changing pattern of international business. Identify major factors affecting international business. Determine key decisions firms face when contemplating foreign expansion. Differentiate the various ways firms can enter foreign markets. Identify alternative ways of managing a foreign operation. Recognize the key human resource policies that firms can develop to help expatriates succeed. Understand the ethical and social responsibility implications of doing business in different countries.

3. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 3 The Changing Pattern of International Business Changing world output and world trade picture  The U.S. no longer dominates the world economy  Large U.S. multinationals no longer dominate international business  The centrally planned communist economies that made up roughly half the world suddenly become accessible to Western businesses  The global economy has become more knowledge- intensive

4. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 4 The Changing Pattern of International Business (continued) Lowered trade barriers  General Agreement on Tariffs and Trade (GATT)  World Trade Organization (WTO) Integrated Economic Markets  The European Union (EU)  The North American Free Trade Act (NAFTA)  Central American-Dominican Republic Free Trade Agreement (CAFTA)  The Association of Southeast Asian Nations (ASEAN)  The Asia Pacific Economic Cooperation (APEC)

5. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 5 The Changing Pattern of International Business (continued) Global consumer preferences  Tastes and preferences are converging  Presence of mass media, exposure to goods from various countries, and standardized products Globalized production  Cost efficiency

6. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 6 Example of Globalized Production Of the $20,000 sticker price of a General Motors Automobile LeMans: –$6,000 goes to South Korea, where the car was assembled –$3,000 goes to Japan for sophisticated high-tech parts (engines, transaxles, electronics) –$800 goes to Taiwan, Singapore, and Japan for small parts –$500 goes to Great Britain for advertising and marketing services –$1,000 goes to Ireland for data processing –$7,600 goes to GM and its external professional firms in the United States

7. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 7 The Changing Pattern of International Business (continued) Technological innovations  Advances in communications, information processing, and transportation technology  Fiber optics, wireless technology, the Internet and World Wide Web, and satellite technology Management across cultures  Adaptation to business strategies, structures, operational policies, and human resource programs

8. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 8 Major Factors Affecting International Business General business environment Legal system  Common law  Civil law  Muslim law Economic environment Cultural environment  Culture shock

9. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 9 Dimensions of Culture Power Distance Individualism Uncertainty Avoidance Masculinity / Femininity Long-term/ Short-term Orientation

10. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 10 Hofstede’s Framework  Power Distance Degree to which influence/control are unequally distributed among individuals within a particular culture  Uncertainty Avoidance Degree to which members of a society attempt to avoid ambiguity, risk, and indefiniteness of future  Individualism / Collectivism Extent to which society expects people to take care of themselves and their immediate families The degree to which individuals believe they are masters of their own destiny 3.5

11. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 11 Hofstede’s Framework (cont.) Tendency of group members to focus on the common welfare and feel loyalty toward one another  Masculinity/Femininity Degree to which acquisition of money and material things is valued versus quality of life 3.6

12. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 12 POWER DISTANCE HIGH – Malaysia, Mexico, Venezuela, Arab Countries, India, Singapore MODERATE – Thailand, Portugal, Greece, South Korea, Taiwan, Spain, Japan LOW – United States (38/53), Finland, Norway, Sweden, New Zealand, Denmark

13. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 13 UNCERTAINTY AVOIDANCE HIGH – Greece, Portugal, Belgium, Japan, Peru, France MODERATE – Taiwan, Arab Countries, Thailand, Iran, Finland LOW – United States (43/53), India, Great Britain, Sweden

14. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 14 INDIVIDUALISM /COLLECTIVISM HIGH – United States (1/53), Australia, Great Britain, New Zealand, Denmark, Sweden, France MODERATE – Japan, Iran, Brazil, Arab Countries, Greece LOW – Columbia, Venezuela, Panama, Guatamala

15. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 15 INDIVIDUALISM-COLLECTIVISM Please indicate you level of agreement or disagreement with each of the following statements using the following scale: Strongly Disagree Neither Disagree nor Agree Strongly Agree ` 1 2 3 4 5 6 _____ 1. I would rather struggle through a personal problem by myself than discuss it with my friends. _____ 2. I do my own things without minding about my colleagues/co-workers, when I am among them. ______3. I like to live close to my close friends. ______4. I would pay absolutely no attention to my close friends’ views when deciding what kind of work to do.

16. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 16 ______5. We ought to develop the character of independence among students, so that they do not rely upon other students’ help in their schoolwork. ______6. It is a personal matter whether I worship money or not. Therefore, it is not necessary for my friends to give my advice. ______7. There is everything to gain and nothing to lose for classmates to group themselves together for study and discussion. ______8. Classmates’ assistance is indispensable to getting a good grade at school. ______9. If you work, and you have to choose between (A) getting along very well with your co-workers, and (B) being very competent and efficient in doing the job, what combination of the two aspects would you like best? (Use the scale below to make your response for this question.) 1 = 100% A2 = 80% A, 20%B3 = 60% A, 40%B 4 = 40% A, 60%B5 = 20% A, 80%B6 = 100% B

17. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 17 _____10. Man is a social animal that cannot flourish and grow without identifying himself with some group. _____11. Some of life’s greatest satisfactions are found in working cooperatively with others. _____12. Individuals do not really fulfill their human potentials unless they involve themselves deeply in some group. _____13. It is often more gratifying to work for the accomplishment of a goal held by a group to which one belongs than to work for the attainment of a purely personal goal. _____14. In life an individual should for the most part “go it alone’ assuring oneself of privacy, having time to oneself, attempting to resist being influenced by others. _____15. It is just as important to work toward group goals and adhere to the established rules of the group as it is to gratify one’s individual desires.

18. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 18 COLLECTIVISM SCORING ITEMS 1, 2, 4, 5, 6, 9, AND 14 ARE REVERSED SCORED 6 = 1 5 = 2 4 = 3 3 = 4 2 = 5 1 = 6

19. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 19 CULTURAL VALUES Variable United States Taiwan Collectivism 57.72 66.78 Femininity4.47 4.77 Masculinity4.95 4.65 Power Distance2.19 1.98 Uncertainty Avoidance 3.18 3.56

20. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 20 Entry Strategy and Strategic Alliances Four key decisions of a firm contemplating foreign expansion: –Which countries to enter –When to enter –Scale of involvement –How to enter

21. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 21 Choosing Foreign Countries The appeal of a particular country is likely to be greater when: The size of the domestic market is large The present wealth of consumers in that market is high and projected to grow in the future The needed resources are readily available The firm’s product offerings are suitable to a particular market A positive business environment exists

22. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 22 When to Enter Foreign Countries and Scale of Involvement When to Enter  First-mover advantages  Pioneering costs Scale of Involvement  Lowest if the firm simply decides to export its products to the foreign location  Highest if the firm decides to have a wholly owned subsidiary in the foreign country

23. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 23 Modes of Entry Exporting Turnkey Project Licensing Franchising Strategic Alliance Joint Venture Wholly Owned Subsidiary

24. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 24 Modes of Entry Exporting – entering new markets by sending products to other countries, still maintaining production facilities within the domestic borders Turnkey projects – specialized type of exporting, where the firm handles the startup of the company and a local client is then handed the key Licensing – entering new markets by transferring the rights to produce and sell products overseas to a foreign firm

25. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 25 Modes of Entry Franchising – entering new markets in which the franchise pays a fee for using the brand name and agrees to follow the standards and rules Joint venture – means of entering new markets where two or more independent firms agree to establish a separate firm Strategic alliance – cooperative arrangements between competitors or potential competitors from different countries Wholly owned subsidiary – entering new markets in which a firm fully owns its subsidiary in foreign countries

26. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 26 Various Modes of Entry Choices Loss of competitive advantage Potential quality control problems Limited ability to use profits in one country to increase competition in another country Quick expansion Lower development costs and risks Lower political risk Franchising Loss of competitive advantage Limited ability to use profits in one country to increase competition in another country Quick expansion Lower expenses and risks Lower political risk Licensing Competition from local client Loss of competitive advantage Access to closed markets Turnkey Project No low cost sales High transportation costs Potential tariffs Economies of scale Lower foreign expenses Exporting DisadvantagesAdvantagesMode of Entry

27. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 27 Various Modes of Entry Choices (continued) Loss of competitive advantage Potential overestimation of partner’s capabilities Access to closed markets Pooled resources increase partner’s capabilities Complementary skills & assets Strategic Alliance Large capital outlay Lack of local knowledge Increased risk Maximum control over proprietary knowledge/ technology Greater strategic flexibility Efficiencies of global production system Wholly Owned Subsidiary Potential for conflict of interest Loss of competitive advantage Knowledge of local markets Lower development costs and risk Access to closed markets Joint Venture DisadvantagesAdvantages Mode of Entry

28. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 28 Examples of Strategic Alliances General Electric – Snecma of France Toshiba – IBM Mitsui – General Electric GM – Daewoo Texas Instrument – Compel Communications Canon – Hewlett-Packard Mitsubishi – Caterpillar

29. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 29 Automobile Companies Ford – Astin-Martin, Jaguar, Land Rover, Mazda, Volvo Daimler-Chrysler – Mercedes-Benz, Jeep (Mitsubishi) GM – Fiat, Hummer, Isuzu, Opel, Saab, Subaru, Suzuki, (Toyota)

30. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 30 Basic Approaches to Managing an International Subsidiary Ethnocentric Approach Polycentric Approach Geocentric Approach

31. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 31 Why International Assignments End in Failure Career blockage – the feeling that working abroad has gotten their career sidetracked, while people back home are climbing the corporate ladder Culture shock – the inability to adjust to a different cultural environment Lack of pre-departure cross-cultural training – little if any is offered to expatriates before going to a different country.

32. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 32 Why International Assignments End in Failure Overemphasis on technical qualifications – the expatriate may lack cultural adaptability, even though they have the technical skills Getting rid of a troublesome employee – provides the ability to solve interpersonal conflict, but at a huge expense to the company Family problems – inability or unwillingness of the expatriate’s family to adapt to life in another country

33. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 33 Key HR Management Factors for Global Firms Selection  Selection criterion should include cultural sensitivity Training  Length of assignment determines depth of training  Cross-cultural training is critical to success Career Development  International assignments should be part of career advancement plan Compensation and Benefits  Incentives and quality-of-life concerns

34. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 34 Three Approaches to Cross- cultural Training Impression Approach Affective Approach Information-Giving Approach

35. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 35 Ethics and Social Responsibility Globalization greatly increases the possibility that managers will face an ethical dilemma. Different cultures have different notions of right and wrong. U.S. Foreign Corrupt Practice Act (1977). Many firms and industry groups have developed their own codes of conduct for foreign operations.