What is different about operating abroad?

1. What is different about operating abroad? Culture and Politics

2. % % % % Operating Margins for 147 of the Fortune Global 500 Source: Gestrin, OECD

3. What is different about operating abroad? • Geographic distance • Different economic conditions and currency • Different language, culture, and institutions • Different governments

4. Geographic distance • Increases transport costs Perishability Services • Increases management costs

5. Economic conditions and currency • Level of economic development • Income inequality • Currency • Foreign exchange risk if currency is not at Purchasing Power Parity

6. Big Mac Index of Currencies % Undervalued Relative to US $ % Overvalued Relative to US $ Source: Economist, based on July 2008 prices

7. 1975 77 79 81 83 85 87 89 91 Real trade-weighted dollar exchange rateppp=100 Source: Goldman Sachs

8. Why persistent deviations from PPP? • PPP assumes arbitrage equalizes exchange rates • Barriers to arbitrage prevent convergence • Trade barriers, transport costs, tax differences • Untraded inputs • Price of untraded inputs slow to converge Hence exchange rates can deviate from PPP for long periods • Most efficient way to hedge against persistent PPP deviations is local production/procurement

9. Culture and Politics Home Country Host Country Local Firms 2 1 Subsidiary manager Subsidiary employees Customers Headquarters 4 1 2 3 Press Government • Communication of goals and directives/interpretation of behavior • Communication/Negotiation • Communication/negotiation • 4. Marketing mix adaptation

10. Cost of foreignness: the dumb foreigner syndrome • Management • Politics • Marketing and communication

11. Business takes place within societal rules • These rules determine how the game is played and who wins and loses • Rules can be explicit (laws) or implicit (customs) • Rules both affect and are affected by business • This is true both at home and abroad, but foreigners are at a disadvantage because they do not know, cannot impact, and often cannot accept

12. The social group in which rules are enforced can vary • family • Tribe • Region/province • country • Multicountry grouping (EU) • world

13. The rules of the game determine.. • Employer-employee relationships (management costs) • Firm-firm relationships • Firm-government relationships • Firm-customer relationships

14. We will now look at… • Cultural differences and their impact on intra and inter-organizational relationships • Cultural and institutional differences and their impact on relationships with non-business actors (political risk) • Cultural and environmental differences and their impact on relationships with consumers (product and service adaptation)

15. Different Language and Culture • Language • Spoken and silent • Impact on international business • Culture • Dimensions of culture • Impact on international business

16. Language • Spoken and written language • Silent language

17. Communication across languages • Perceptual gaps • Encoding/Decoding gaps (translation errors)

18. Seller in country A Buyer in country B Buyer’s field of experience Seller’s field of experience Sender Encoder Receiver Decoder Message Medium Culture Culture Choice of words Choice of symbols Meaning Choice of words Choice of symbols Understanding

19. Silent language • Silence • Color • Time • Space • Things

20. Meanings of color Source: Jacobs/Keown/Worthley/Ghymn (1991), p. 24.

21. Language impacts… • management • Information loss • “Language bias” • marketing

22. What is Culture? • Learned • Integrated • Shared

23. Stereotypes • Useful as a starting point • National cultural traits are normally distributed

24. Stereotyping Americans French Direct, Honest Rude Indirect Tactful

25. Artefacts and products Norms and values Basic assumptions - implicit - explicit A Model of Culture

26. Hofstede’s Cultural Dimensions • Surveyed 116,000 employees from 70 countries • Highlighted four dimensions of culture • Power distance • Uncertainty avoidance • Individualism • Masculinity/femininity

27. Power distancethe extent to which less powerful members of institutions and organizations accept that power is distributed unequally

28. IndividualismTendency of people to look after themselves and their immediate family only

29. Masculinity/FeminityA masculine society is one where the dominant values in society are success, money, and things

30. Uncertainty AvoidanceExtent to which people feel threatened by ambiguous situations

31. Values of Hofstede’s Dimensions

32. Masculinity-Femininity and Uncertainty Avoidance (for 50 countries and 3 regions) Weak uncertainty avoidance Feminine Weak uncertainty avoidance Masculine Strong uncertainty avoidance Feminine Strong uncertainty avoidance Masculine

33. Power Distance and Uncertainty Avoidance (for over 50 countries and 3 regions) Small power distance Strong uncertainty avoidance(vintage market) Large power distanceWeek uncertainty avoidance (family) Small power distance Strong uncertainty avoidance Feminine (well-oiled machine) Large power distance Strong uncertainty avoidance (pyramid of people)

34. Power Distance and Individualism-Collectivism (for 50 countries and 3 regions) Small power distanceLow individualism Large power distanceLow individualism Large power distance High individualism Small power distance High individualism

35. High-context culture Japanese Arab Greek Spanish Italian English French American Scandinavian German German-Swiss Low-context cultures

36. Impacts of culture • Cultural traits • Differences between cultural traits: cultural distance

37. Many people lack cultural self-awareness • “We are the world” • Middle Kingdom • The World (World Series) • Everybody is like us (or should be)! • Just be sincere and it will show through

38. Cultures have the advantages of their disadvantages and the disadvantages of their advantages

39. Cultural frictions are a major, but underestimated, management problem in international business They greatly impair the implementation of global strategies • global marketing coordination • technology transfer • Joint ventures and mergers and acquisitions

40. Unclear that cultures are converging • Management practices are not universal • Accounting • Motivation techniques • Decision making

41. Impact of cultural differences on management • Authority and delegation • Communication • Job scope

42. Managers in Latin American affiliates of MNEs (as percent of total managers)

43. HRM • Recruitment • Socialization • Performance appraisal • Compensation and rewards

44. Executive pay*1996, $000s Source: Towers Perrin *Total remuneration for chief executive officer

45. Firm-to-firm relationships • Legalistic or social • Personal or impersonal

46. Adaptation problem is harder with values than with customs • Customs are explicit and easier to imitate • Values are implicit and must be inferred • Ignorance of local values create the most problems • Federal Express in Germany • Mitsubishi and Toyota in US

47. Coping with cultural differences • Try to make sense of it • Sleep over it • Question friends and colleagues • It’s not all about you! • Keep your sense of humor

48. The U-curve of cross-cultural adjustment Degree of Adjustment Mastery Honeymoon Adjustment Culture Shock SOURCE: Black, J.S. & M. Mendenhall. 1991.”The U-Curve adjustment hypothesis revisited: A review and theoretical framework.” Journal of International Business Studies, Vol. 22 second quarter, pp. 225-247.

49. Culture and Politics Home Country Host Country Local Firms 2 1 Subsidiary manager Subsidiary employees Customers Headquarters 4 1 2 3 Press Government • Communication of goals and directives/interpretation of behavior • Communication/Negotiation • Communication/negotiation • 4. Marketing mix adaptation

50. Governments… • Buy and subsidize or penalize • Regulate (competition, employment, pollution) • Set standards (technical, health) • Set tariff and non-tariff barriers