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Basics of International Management

OTTO-VON-GUERICKE-UNIVERSITY MAGDEBUR G BEIJING NORMAL UNIVERSITY. Prof. Dr. Birgitta Wolff, Marjaana Rehu, M.A. Otto-von-Guericke-University, Germany. Basics of International Management. 1. Globalization of Economic Activities 2. Institutional Environment of International Business

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Basics of International Management

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  1. OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING NORMAL UNIVERSITY Prof. Dr. Birgitta Wolff, Marjaana Rehu, M.A. Otto-von-Guericke-University, Germany Basics of International Management

  2. 1. Globalization of Economic Activities 2. Institutional Environment of International Business 3. Business Risks from a New Institutional Economics Perspective 4. Multinational Corporations 5. Entering Foreign Markets: Choosing the Organizational Form 6. External Growth Strategies 7. International HR Management 8. Cross-Cultural Business Negotiations 9. Project: The Ruritanian Electronics Negotiation Outlook

  3. 1. Globalization of Economic Activities The Theory of Absolute Advantage Adam Smith [1776] The Theory of Comparative Advantage David Ricardo [1819] The Theory of Factor Proportions Eli Heckscher and Bertil Ohlin The Competitive Advantage of Nations Michael Porter (Czinkota/Ronkainen/Moffett (2000), International Business. Update 2000, Fort Worth et al., p. 156.)

  4. 1.1 Motives for Firms to go International 1. Globalization of Economic Activities (according to Czinkota et al. [2000], p. 368)

  5. 1.2 Drivers of Globalization 1. Globalization of Economic Activities What drives Globalization? A Technological Triggers B Institutional Triggers

  6. 1.2.2Drivers of Globalization: Institutional Change 1. Globalization of Economic Activities Hill, C. W. L. (2000): International Business, 3thd ed., Boston et al.

  7. 1.2.2Drivers of Globalization: Institutional Change 1. Globalization of Economic Activities Hill, C. W. L. (2000): International Business, 3thd ed., Boston et al.

  8. Institutional Framework  „Framework effects“ ShiftParameters Strategic  „The same“ management tools might induce different effects in different environments. Contractual Governance BehavioralAttributes EndogenousPreferences  Behavioral expectations can vary much more when crossing framework borders. Individual 2. Institutional Environment of International Business Three layers of analysis [Cf. Williamson (1996), The institutions and governance of economic development and reform, in: Williamson, O. E. (1996), The mechanisms of governance, New York, p. 326.]

  9. 2.1 Explicit Institutional Environment InstitutionalEnvironment  „refers to the background constraints, or ‚rules of the game‘“ formal, explicitrules informal, oftenimplicit rules 2. Institutional Environment of International Business e.g.constitutions,laws e.g.social conventions,norms The institutional environment forms the framework in which human actiontakes place. It defines property rights and how they can be transferred. [cf. Klein, P. G. (2000), The New Institutional Economics, p. 3, http://encyclo.findlaw.com/0530book.pdf, pp. 458 ff.;cf. Wolff, B. (1999): Anreizkompatible Reorganisation von Unternehmen, Stuttgart, p. 197 ff.]

  10. 2.2 Implicit Institutional Environment Expectations Expectations Expectations Expectations about Partner‘s Behavior about Partner‘s Behavior about Partner‘s Behavior about Partner‘s Behavior Asymmetric Information on Partner‘s Asymmetric Information on Partner‘s Asymmetric Information on Partner‘s Asymmetric Information on Partner‘s Environment Environment Environment Environment • • • • Preferences/Capabilities Preferences/Capabilities Preferences/Capabilities Preferences/Capabilities • • • • 1. Realize: Known Differences Known Differences Known Differences Known Differences Unknown Differences Unknown Differences Unknown Differences Unknown Differences ¹ (‚Ignorance‘) (‚Ignorance‘) (‚Ignorance‘) (‚Ignorance‘) (‚Ignorant Ignorance‘) (‚Ignorant Ignorance‘) (‚Ignorant Ignorance‘) (‚Ignorant Ignorance‘) g f 1 1 Create Awareness Create Awareness Create Awareness Create Awareness (Learning) (Learning) (Learning) (Learning) 2. Identify: 2. Identify: Exact Definition of Problem Exact Definition of Problem Exact Definition of Problem Exact Definition of Problem D D = ? = ? 2. Institutional Environment of International Business Impact of different frameworks on expectations about another player‘s behavior gx=your decision in x fx=your decision in x 1. Realize: 1. Realize: g1(g0) f1(g0) ¹ ¹ g f 1 1 2. Identify: D = ?

  11. 2.2 Implicit Institutional Environment 2. Institutional Environment of International Business Reducing risks resulting from diverging expectations

  12. 2.2 Implicit Institutional Environment 2. Institutional Environment of International Business InstitutionalEnvironment formal, explicitrules informal, oftenimplicit rules dominant principle solves problems ofcoordination and motivation by altering the payoff structure in eachgame solves problems of coordination and motivation by repeating the game (social rewards and sanctions) Formal rules and informal rules are not necessarily substitutes, but complements.They influence each other.

  13. 2.3 Institutional Frameworks in a Globalized World WTO, World Bank, IMF, UNCTAD, OECD, DAC,BIS, EFTA, EBRD, G10, G7, Paris Club, Group 77, ... ASEAN EU 2. Institutional Environment of International Business A common „roof“ for world trade? cf. e.g. Tayeb, M. (2000), International Business. Theories, Policies and Practices, Harlow et al. p. 69 ff.

  14. 3. Business Risks from a New Institutional Economics Perspective Terminology: Difference between uncertainty and risk • Uncertainty:*- caused by many factors, with unpredictable outcomes, • immeasurable,- no possibility to assign proba- bilities Risk:* - measurable (often financial) effect of uncertainty,- high levels of uncertainty in- crease risk,- possibility to calculate probabilities „the possibility of suffering harmor loss, or a course involving un-certain danger or hazard“** [* cf. Tayeb, M. (2000), International Business. Theories, Policies and Practices, Harlow et al. p. 344 f.; ** Eitemann et al. (2001), Multinational Business Finance,5th ed., p. 470.]

  15. 3.1 Endogenous Risks Institutional Framework Source ofexogenous risks Source ofexogenous risks ShiftParameters Strategic Contractual Governance Source ofendogenous risks BehavioralAttributes EndogenousPreferences Individual 3. Business Risks from a New Institutional Economics Perspective Possible sources of risks by levels

  16. 3.1 Endogenous Risks 3. Business Risks from a New Institutional Economics Perspective Roots of risks: Asymmetric information and specific investment [cf. e.g. Wolff (1995), Contractual Problems in Market Relations, in: Bernitz/Hallström (eds.), Principles ..., Stockholm.]

  17. 3.2 Exogenous Risks Institutional Framework Source ofexogenous risks ShiftParameters Strategic Contractual Governance Source ofendogenous risks BehavioralAttributes EndogenousPreferences Individual Source ofexogenous risks 3. Business Risks from a New Institutional Economics Perspective Recap: Possible sources of risks by levels

  18. 3.2 Exogenous Risks PoliticalRisk CulturalRisk Types ofexogenous risks ininternational Business EconomicRisk 3. Business Risks from a New Institutional Economics Perspective Explicit Implicit

  19. Financial Community Owners Political Groups Activist Groups Govern-ments Customers Firm Customer Advocate Groups Suppliers Unions Competitors Trade Associ-ations Employers 4. Multinational Corporations What shapes an multinational corporation?  corporationas a nexus ofcontracts

  20. 4.1. What exactly is a Multinational Corporation? 4. Multinational Corporations Multinational corporation  „enterprises that own or control production or service facilities outside the country in which they are based“ (United Nations in Czinkota et al.: 395) • quantitative criteria • must have operations in at least two • countries (sometimes subsidiaries in • even 6 or more countries are required) • proportion of overall revenue generated abroad: 25-30 percent is most often cited • involvement in foreign markets should be substantial enough to make a difference in decision making or • the owners of the corporation must be of • several nationalities • qualitative criteria • management must consider the firm as multinational and must act accordingly (view their domestic operations as part of worldwide operations) • ...

  21. 4.1. What exactly is a Multinational Corporation? 4. Multinational Corporations Property rights allocation as a determinant of governance structure [cf. Picot, A./Wolff, B. (1994), Institutional economics of public firms and administrations, in: JITE, Vol. 150, No. 1 (March), p. 218.]

  22. 4.2 Creating Competitive Advantage 4. Multinational Corporations What is a competitive advantage? • something that is extremely important to the customer • refers to the fact that some companies perform better than other ones even though they act in the same environment Creation of competitive advantages? • creation and securing of sustainable success of an company/corporation Orientationtowards markets Orientationtowards resources • evaluation of environmental opportunities andthreats: PORTER‘s five competitive forces • evaluation of the country‘s competitiveness • resource-based view • core competencies

  23. 4.2.1Porter‘s Five-Forces-Model PotentialEntrants explicit and implicitinstitutional framework Threat of newentrants Bargaining powerof buyers MultinationalCorporation Suppliers Buyers Bargaining powerof suppliers Substitutes Threat of substituteproducts or services endogenous andexogenous risks 4. Multinational Corporations [cf. Porter, Michael E. (1998a): The Competitive Advantage of Nations, Hampshire, London. p. 4 Porter, M. E. (1998b): Competitive Strategy. Techniques for Analysing Industries and Competitors, New York. p,. 4ff

  24. 4.2.2 Role of Home Countries for Competitive Advantage: Porter‘s »Diamond« Chance Firm Strategy,Structure andRivalry Homecountry FactorConditions DemandConditions firms gain competitiveadvantage where their home base allows and supports the most rapid accumulation of specialized assets and skills Govern-ment Related andSupportingIndustries 4. Multinational Corporations

  25. Market entry  involves twointerdependent decisions Location? Mode of control? 5. Entering Foreign Markets: Choosing the Organizational Form Where:Choosing the right location How:Choosing the right form

  26. Choice of Location Firm specific variables Framework variables 5. Entering Foreign Markets: Choosing the Organizational Form Where: Choosing the right location  location as a variable affecting global competitiveness of firms because of location bound assets Resource SeekingMarket Seeking Efficiency Seeking Strategic Asset Seeking Country risk analysis  Exogenous risks

  27. Purchasing Purchasing R&D R&D Manufacturing Manufacturing Sales Sales Customer Service Customer Service Country Suppliers Customers A B C D E 1. 2. 2. 1. 2. 1. Support Level Support Level Legend: Weak Medium Strong 5. Entering Foreign Markets: Choosing the Organizational Form Disintegration of the Value Chain [Cf. Wiegand, R./Picot, A./Reichwald, R. (1997): Information, Organization and Management, Chichester et al, p. 363.]

  28. 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form Alternative Modes of Foreign Market Entry Internal strategies: Using your own assets 1. Exporting 2. Licensing 3. Franchising 4. Joint Ventures 5. Sales Office 6. Production Plant 7. Full Scale Subsidiaries 8. Turnkey contracts External strategies: Combining your and your partners‘ assets Corporate Networks Strategic Alliances ( „International Management II“) Reference: Hill (2000)

  29. AdverseSelection Moral Hazard T0 T2 T3 T1 A+B strike a deal(contract) A pro-duces B sells abroad B collects the profit and pays A (fixed amount) 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form 1. Export:Domestic production and administrative control, Example: Selling Miele washing machines in Russia A: Miele Corp; B: local appliance store Time

  30. AdverseSelection Moral Hazard Time T0 T2 T3 T1 A +B strike a deal A delivers product concept B pro-duces and sells B collects the profit and pays A (fixed amount for the license) 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form 2. Licensing:A licensor grants the rights to intangible property to another entity (the licensee) for a specified period; the licensor receives a fee. Example: Selling cell phone technoloy to a Chinese Mobil Phone Company A: Motorola Corp.; B: Chinese partner

  31. T0 T2 T3 T1 A +B strike a deal A delivers business concept B pro-duces and sells B collects the profit and pays A (fixed amount for the franchise) AdverseSelection Moral Hazard 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form 3. Franchising:Involves longer-term commitments than licensing; is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchiser agree to abide by strict rules as to how it doesbusiness. Example: Selling McDonalds Franchise to a German entrepreneur A: McDonalds Corp.; B: German partner Time

  32. Hold-Up (A: risk; esp. if B is player and arbitrator/rule maker at the same time) Adverse Selection Moral Hazard T0 T2 T3 T1 A+B strike a deal A+B invest A+B share the profit A+B pro-duce and sell 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form 4. Joint VentureEntails establishing a firm that is jointly owned by two or more otherwise independent firms (most typical is „50/50 venture“) Example: Starting brick factory in China A: Austrian Corp.; B: German partner

  33. T0 T2 T1 A produces at home, transports to foreign sales office, and sells A collects profits and transfers them ‚home‘ A invests abroad 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form 5. Sales Office Example: DaimlerChysler opens a car shop in Egypt A: DC Country Hold-Up (may not be allowed to retrieve inv.) Country hold-up(A maybe not allowed to export profits)

  34. T0 T2 T1 A invests abroad A produces and sells A collects profits and transfers them `home` 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form 6. Production Plant Example: DaimlerChysler opens a car factory in South Africa A: DC Country Hold-Up (may not be allowed to retrieve inv.) Country hold-up(maybe not allowed to export profits)

  35. T0 T2 T1 A creates A‘ A‘ producesand sells A‘ collects profits and transfers them to A (not internal) 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form 7. Full-Scale Subsidiary:The firm owns 100 percent of the stock; two possible ways: setting up a new operation or acquiring an established firm. Country Hold-Up (may not be allowed to retrieve inv.) Country Hold-Up(maybe not allowed to export profits)

  36. 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form 8. Turnkey Contract:The contractor agrees to handle every detail of the project for a foreign client including the training of operating personnel. Example: Selling a power plant to Chinese Energy Corporation A: Siemens Corp.; B: Chinese partner Adverse Selection Hold Up Moral Hazard T4 T0 T2 T3 T1 A +B strike a deal A delivers completetechnology B learns B collects the profit and pays A (fixed amount for the project) End of project, B produces and sells

  37. 5.2 Alternative Modes of Foreign Entry 5. Entering Foreign Markets: Choosing the Organizational Form [Hill (2000), p. 443.]

  38. 5.2 Alternative Modes of Foreign Entry: Opportunities and Risks Domestic [%] 100 1. Export 2. Licensing 3. Franchising 4. Joint Venture & Strategic Alliances 5. Sales Office 6. Production Plant 7. Full Scale Subsidiary 8. Turnkey Contract 100 0 Foreign [%] 5. Entering Foreign Markets: Choosing the Organizational Form Property rights allocation in expansion strategies

  39. 6. External Growth Strategies Many Franchising Licensing Consortium Number of Partners Strategic Alliance Joint Venture Modified from: Daniels, J. D./Radebaugh, L. H. (2000): International Business: Environments and Operations, 9th ed., p. 497. Sales Office None Prod. Plant Export Subsidiary OWNERSHIP CONTINUUM Equity (more ownership) Nonequity (less ownership) Sharing

  40. 6. External Growth Strategies Joint Venture T0 T2 T3 Time T1 A+B make a deal to cooperate in project (e.g. 50:50) A+B negotiate P Price P due:A+B collect and share (½  each) A+B deliver their contributions (½ C each) Corporate Alliance T0 T2 T3 T1 Time A+B make a deal to cooperate in project A+B negotiate PA and PB A+B collect and and divide PA and PB A+B deliver their contri-butions at cost CA and CB Example: Subway System in Singapore

  41. 6.1 Potential Benefits of Collaborative Ventures 6. External Growth Strategies Benefits of Corporate Collaborations Shared Risks Shared Knowledge and Expertise Synergy & Competitive Advantage Easier Market Entry modified from: Griffin, R. W./Pustay, M. W. (1999): International Business. A Managerial Perspective, 2nd ed., p. 453.

  42. 6.2 Advantages and Disadvantages of Corporate Collaborations 6. External Growth Strategies

  43. 6.3 Potential Pitfalls of Corporate Collaborations 6. External Growth Strategies Challenges „Textbook Problem“: Incompati- bility of Partners Access to Information Distribu- tion of Earnings Loss of Autonomy* Incompati- bility of Partners (modified from: Griffin, R. W./Pustay, M. W. (1999): International Business. A Managerial Perspective, 2nd ed., p. 469.) * Further Ref.: www.cio.com/archive/enterprise/101599_ic_content.html Adverse Selection Moral Hazard Moral Hazard Hold-Up ‚Normal Uncertainty‘ Economic Problem: Better Forecasting, Sufficient Flexibility Signaling, Screening Property Rights Allocation Property Rights Allocation ‚Hostages‘, Integration

  44. 7. International HR Management How do institutional frameworks influence work relations and, thus, HRM-practices? Institutional Framework ShiftParameters Strategic A Business Economist‘s Field of Interest Corporate Governance Behavioral Attributes EndogenousPreferences Source: Williamson (1994), p. 326 Individual Characteristics

  45. 7.1 How Intercountry Differences Affect HRM 7. International HR Management Cultural factors Differing cultures require different HR practices among a firm’s subsidiaries, e.g. implementation of different incentive plans. ( Hofstede) Culture (implicit framework) Labor cost factors Worldwide diffe-rences in hourly compensation costs, hours worked per week, severance pays, vacation time, etc. Economic factors E.g.: Productivity and efficiency in SOEs in contrast to firms competing in a market (e.g. full employment at the expense ofefficiency) Intercountry Differences Affect HRM Law (explicit framework) Industrial relations factors Relationships between worker, union, and employer (e.g. codetermination and participation in Germany or USA) Source: Dessler, G. (2000), Human Resource Management, 8th ed., Upper Saddle River (Prentice-Hall), pp. 614 ff.

  46. 7.2 International Staffing Policy 7. International HR Management International staffing policies • Ethnocentric-oriented • firms • Key management positions are filled by parent-country nationals • Reasons: • Lack of qualified local senior managers • Maintain unified corpo- rate culture and tighter control • Transfer of firm’s core competencies • Example: • Dutch national financial controllers at Royal Dutch Shell worldwide • Geocentric-orientedfirms • Best suited person, regard-less of nationality, is transferred to any appropriate open position • Reasons: • Most efficient use of HR resources of the firm • Building stronger and consistent culture • Building of team spirit and bonds between team members • Example: • General Electric Corp. • Polycentric-orientedfirms • Host-country nationals in foreign subsidiariesheadquarter with parent-country nationals. • Reasons: • Reduction of cultural mis- understandings locally in comparison to expatriates • Usually less expensive • Example: • Volkswagen AG Source: Dessler, G. (2000), pp. 623 f.

  47. 8.1 The Structure of Bargaining 8. Cross-Cultural Business Negotiations • Two players: Player A, Player B • Options in the negotiation process: “Agreement” or “Non-Agreement” • No PD! Player B Agreement Non-Agreement Agreement Player A Non-Agreement  Negotiation will be beneficial, if both players can win by reaching field I.

  48. 8.1 The Structure of Bargaining 8. Cross-Cultural Business Negotiations The Negotiation Process – What should be considered? Bargaining Power • Defined by next best option („outside option“): What is at stake? • Most likely different for each partner • Can be manipulated Reasons for Non-Agreement Motivation: Non-agreement payoff is best for me  Remedies: „Transfers“ within bargaining space (i.e. space defined by players‘ outside options) • Coordination: • Ambiguity and/or uncertainty of payoffs (one-sided or bilateral information deficits, „irrationality“) •  • Remedies: • Adequate communication • Better predictions • Prognostic tools

  49. 8.1 The Structure of Bargaining 8. Cross-Cultural Business Negotiations The Bargaining Process – What should be considered? Player B Agreement Non-Agreement Agreement Player A Non-Agreement • Should the players enter negotiations? • What are the players‘ outside options? (Bargaining Power) • Which transfer is required to reach an agreement? (What is the transfer space?)

  50.  20  18  18  14 Answer: • Yes, they should enter negotiations, because the agreement is socially desirable. 8.1 The Structure of Bargaining 8. Cross-Cultural Business Negotiations • Should the players enter negotiations? Player B Agreement Non-Agreement Agreement Player A Non-Agreement

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