International Management

1. International Management Managing Political Risk Decision-Making and Negotiations

2. Nature of International “Risk” • Three main categories of risk which effect international business managers • Unstable ethnic, religious and military conflicts • Including the types of threats within Political Risk • Climatic extremes that threaten the health and safety of nonresident travelers • Topographical extremes that endanger personal safety, communications and transportation. • Significant volume of information is available • Requirements of “due dilligence” • http://www.stern.nyu.edu/globalmacro/Geopolitics/PolRisk.htm • http://www.aon.com/risk-services/political-risk-map2/thank_you.html

3. Additional Internet Sites • http://www.imf.org/ • http://www.transparency.org • http://www.duke.edu/~charvey/Country_risk/couindex.htm • http://lcweb2.loc.gov/frd/cs/cshome.html • http://www.economist.com/displayStory.cfm?Story_ID=383472 • http://www.intracen.org • http://www.itools.com/research-it/research-it.html • http://www.access.gpo.gov/su_docs/ • http://www.prsgroup.com/yearbook/yearbook.cfm • http://www.grai.com/ • http://www.ntu.edu.sg/library/stat/statdata.htm • http://www.duke.edu/~charvey/Country_risk/pol/pol.htm

4. Conditions Favoring Corruption • Concentration of decision-making power: non-democratic regimes • Lack of government transparency in decision-making • Large amounts of public capital involved in a project • Self-interested closed cliques and "old-boy" networks • Weak rule of law • Poorly-paid government officials • An apathetic and uninterested, or gullible and easily led demos that does not scrutinize the political process sufficiently From: http://www.answers.com/topic/political-corruption

5. 5 Most Corrupt Countries (1998 Data) 1. Cameroon 2. Paraguay 3. Honduras 4. Nigeria 5. Indonesia Government Corruption

6. 2009 Corruption Ratings? http://www.forbes.com/2009/03/18/most-corrupt-countries-bizcountries09-business-washington-corrupt-countries_slide.html

7. Most Corrupt Azerbaijan Bangladesh Bolivia Cameroon Indonesia Kenya Nigeria Pakistan Russia Tanzania Uganda Ukraine Least Corrupt Australia Canada Denmark Finland Iceland Luxembourg Netherlands New Zealand Norway Singapore Sweden Switzerland Corruption (2001 Data from Transparency International)

8. 2007 2009? http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table

9. Political Risk (From Perc Library)http://www.asiarisk.com/library5.html Importance of Degree of difficulty Country political risk of doing business 1. China 68.55 6.33 2. Hong Kong 62.32 3.61 3. Vietnam 56.54 5.75 4. Philippines 56.32 5.83 5. Taiwan 54.20 4.78 6. South Korea 50.24 5.62 7. Thailand 48.70 5.59 8. Indonesia 48.41 6.27 9. Malaysia 42.00 5.35 10. US 32.19 2.89 11. Japan 31.79 4.97 12. Singapore 27.07 3.50 1 Measured as a percentage of total country risk. (Balance of Economic and Political) 2 Graded on a zero to 10 scale, with zero being the best grade possible, or an extremely hospitable business environment, and a 10 the worst grade possible, or a very difficult business environment

10. Macro Analysis of Political Risk • Purpose: To review the major political decisions likely to affect all business conducted in a country • Examples • Tightening controls on flow of foreign currency • Bureaucratic legal systems • Requiring foreign investors to establish joint ventures with local partners

11. Micro Analysis of Political Risk • Purpose: government policies that influence selected sectors of the economy or specific foreign business • Examples • Industry regulation • Taxes on specific types of business activity • Restrictive local taxes

12. Political Risks • Transfer Risks - policies that limit the transfer of capital, payments, production, people, and technology in or out of a country • Tariffs on exports or imports • Operational Risks - policies that constrain the management and performance of local operations • Price controls and financing restrictions • Ownership control risks - polices that inhibit ownership or control of local operations • Foreign ownership limitations

13. Managing Political Risk (cont.) • General Nature of Investment • Conglomerate investment • Type of high-risk investment in which goods or services produced are not similar to those produced at home • Vertical investment • Production of raw materials or intermediate goods that are to be processed into final products • Horizontal investment • MNC investment in foreign operations to produce the same goods or services as those produced at home • Special Nature of Investment • Determined by economic activity, technological sophistication, and pattern of ownership

14. Managing Political Risk (cont.) • Quantifying the Variables in Managing Political Risk • Identify important factors and compare the results from different geographic locales • Factors typically reflect the political and economic environment • Formulating Appropriate Response • Relative bargaining power • MNC attempts to garner greater bargaining power than the host country • Proprietary technology not available to the host country is one source of relative bargaining power

15. High D E B C Bargaining Power A Low Initial investment Time Bargaining Power Over Time Fig. 10.3 Subsidiary’s bargaining power Intervention occurs Host nation’s bargaining power

16. Managing Political Risk (cont.) • Formulating Appropriate Risk (cont.) • Integrative techniques • Help the overseas operation become a part of the host country’s infrastructure • Produce as much locally using local suppliers • Create joint ventures with local companies • Develop effective labor-management relations • Protective and defensive techniques • Discourage the host government from interfering in operations • Encourage nonintegration of the enterprise in the local environment • Do little local manufacturing • Limit the responsibility of local people • Conduct all research and development outside of the country

17. High 20 (11,14) (16,6) Integrative techniques Moderate 10 (7,10) (14,3) Low 1 1 10 20 Low Moderate High Protective/defensive techniques Integrative and Protective andDefensive Techniques by Firms in Select Industries Low or stable technology United logistic, labor transmission Advanced management skill Dynamic high technology

18. The Nature of Investment • 1. Conglomerate investment- Theproduction of goods or services dissimilar to those produced at home • High risk • 2. Vertical investment- production of raw materials or intermediate goods that are to be processed into final products • Moderate risk • 3. Horizontal investment- production of goods or services similar to those produced at home • Low risk

19. V Low Low Low IV Special investments III II I High High High Conglomerate High High High General investments Vertical Low Low Low Horizontal Transfer Operational Ownership control A Three-Dimensional Frameworkfor Assessing Political Risk

20. Special Nature of Investment • Economic Activity consists of: • primary sector (agriculture, forestry, etc.) • Highest risk factor • industrial sector (manufacturing operations) • Lowest risk factor • service sector (transportation, finance, etc.) • Moderate risk factor

21. Technological Sophistication • Science-based industries • High risk factor • Non-science-based industries • Lower risk factor

22. Patterns of ownership • Wholly owned businesses • High risk factor • Partially owned businesses • Lower risk factor

23. Integrative Techniques • Designed to help overseas operations become part of the host country’s infrastructure • Examples • Developing good relations with host government • Producing products locally • Creating joint venture • Participating in local research and development

24. Protective & Defensive Techniques • Designed to discourage the host government from interfering in operations • Examples • Doing little local manufacturing • Conducting little local research and development • Limiting responsibility of local personnel • Diversifying production in a number of countries

25. Organizational Consequence of Internationalization Aircraft Cameras Electronics Computers Telecommunications Aerospace High Autos Steel Clothing Packaged goods Pressure for Globalization Synthetic fibers Cement Low Low High Pressure for Local Responsiveness

26. Initial Division Structure Used for Initial Entry into International Markets • Exporting • Common first choice for manufacturers of technologically advanced products • Firm can charge premium price due to little competition • Subsidiary • A common for handling finance-related businesses or other operations that require an on-site presence from the start

27. Subsidiaries During the Early Stage of Internationalization CEO Home Office Departments Production Marketing Finance Personnel V.P. International Operations Overseas Subsidiaries France Japan Egypt Australia Argentina

28. International Division Structure • Advantages • Takes burden off the CEO • Receives top management attention • Promotes overall unified approach • Develops internationally experienced managers • Disadvantages • Separating domestic and international managers may cause differing objectives • Home office may not be able to allocate resources globally, thereby penalizing growth

29. International Division Structure CEO Home Office Departments Production Marketing Finance Personnel Domestic Division Domestic Division Domestic Division Domestic Division International Division Operating Divisions Australia Japan Italy Office Operations Government Relations Marketing

30. Global Product Division Domestic divisions are given worldwide responsibility for product groups • Advantages • Helps to manage diversity • Able to cater to local needs • Marketing, production, and finance can be co-ordinated on a product-by-product global basis • Disadvantages • Duplication of facilities and staff personnel • Managers may pursue attractive short-term sites instead of long-term sites • Managers spend to much time trying to tap local instead of international markets

31. Global Product Division Structure CEO Production Marketing Finance Personnel Product Division A Product Division B Product Division C Product Division D Product Division E South America Africa Europe Australia Far East Great Britain France Germany Italy Netherlands Production Marketing Finance Personnel

32. Global Area Division Based on geographic rather than product orientation • Advantages • Reduces cost per unit • Caters to local markets • Makes rapid decisions to accommodate environmental changes • Disadvantages • Difficulty reconciling a product emphasis with geographic orientation • Ignores new research and development by division groups

33. Global Area Division Structure CEO Home Office Departments Production Marketing Finance Personnel Operating Divisions North America South America Europe Asia Africa Great Britain France Germany Italy Netherlands

34. Global Functional Division Worldwide operations based primarily on function and secondarily on product • Advantages • Emphasizes functional expertise • Tight centralized control • Relatively lean managerial staff • Disadvantages • Difficulty co-coordinating manufacturing and marketing • Difficulty managing multiple product lines • Only CEO can be held accountable for profits

35. A Global Functional Structure CEO Production Marketing Finance Domestic Production Product A Product B Product C Product D Foreign Production Product A Product B Product C Product D Domestic Production Product A Product B Product C Product D Foreign Production Product A Product B Product C Product D

36. Mixed Organization Structures Combines global product, area, and functional divisions to supplement its primary structure with a secondary one, and perhaps a tertiary (third) one • Advantages • Allows organization to create the specific type of design to meet its needs • Disadvantages • Complexity increases • Difficulty arises in co-ordinating personnel

37. A Multinational Matrix Structure CEO Production Marketing Finance Personnel North America Industrial Goods Europe Manager, Industrial Goods North America Manager, Industrial Goods Europe

38. Meeting the Challenges of Globalization • Synergy - (2 + 2 = 5) • whole is greater than the sum of its parts • Organizational Synergy • Pooling knowledge across regions • Sharing resources to meet world-wide needs • Pooling purchases for greater negotiating power • Coordinating strategies to become more efficient • Vertically integrating to be more cost effective • Creating new businesses

39. Strategies: • Mutual adjustment • Use of direct, technically skilled supervisors • Use of integrative leadership • Technical training provided in-house • Use of standard milestones in work design • Flexible design standards Organizing for Product Integration

40. Information Technology Key Questions: • Which information systems are needed? • Are investments are worthwhile? • How does technology fit into management’s strategic thinking ? • How should users and specialists connect within the company? • How do you design systems to improve organizational performance?

41. Organizational Characteristics3 most critical for international operations • Formalization • The use of defined structures used in decision making, communicating, and controlling • Objective - written descriptions • Subjective -informal controls • Specialization • The assigning of individuals to specific, well-defined tasks • Horizontal specialization • Vertical specialization • Centralization • Management system in which important decisions are made at the top

42. Structural Deficiency Symptoms • Decisions are delayed or lacking in quality • Organization does not respond innovatively to a changing environment • Too much conflict from departments being at cross purposes is evident

43. Relate “Structure” to “Culture” • How do cultural dimensions affect structural dimensions? • Are some structures inherently more effective in some cultures?

44. INTERNATIONAL DECISION MAKING British are highly decentralized French tend to be centralized Germans are fairly centralized Swedes are also centralized Japanese decide by consensus

45. CENTRALIZATION Large company Homogeneous product lines Large capital investment High degree of technology DECENTRALIZATION Small company Heterogeneous product lines Small capital investment Moderate to low degree of technology FACTORS AFFECTING DECISION MAKING See Table 12-1, p 333

46. Centralization and Decentralizationof Decision Making in Subsidiary Operations Adapted from Table 11–1: Factors That Influence Centralization or Decentralization of Decision Making in Subsidiary Operations

47. Comparing Decision Making • Co-determination • Legal system requiring workers and management to discuss major decisions • Ringisei • From Japan; decision making by consensus • Tatemae • Japanese; “doing the right thing” accoring to norms. • Honne • Japanese: What one really wants to do

48. TQM DECISIONS U.S. workers value individual recognition and praise Japanese use continuous improvement of quality Rewards and Recognition Manufacturing U.S. has greatly improved the quality of their cars Japanese prefer group rewards

49. QUALITY OLD MYTH • Quality is the responsibility of the people in the Quality Control Department • Training is costly • It is human to make mistakes • Quality improvements are made in small, continuous steps • Quality improvement takes time • Haste makes waste • Suppliers need to be price competitive

50. QUALITY NEW TRUTH • Quality is everyone’s job • Training does not cost, it saves • Total customer satisfaction is a standard that should be vigorously pursued • In improving quality, both small and large improvements are necessary • Quality does not take time, it saves time • Thoughtful speed improves quality • Suppliers need to be quality competitive