MGX9660: International Business Theory & Practice

Lecture 2 International Business Environment

Dr Alex Newman

Globalisation Two important facets of Globalisation

Globalisation of markets Globalisation of production

Globalisation of Markets

Levis Citigroup/HSBC Coca-Cola IKEA Sony PlayStation MacDonald's

Australia? China? India? EU? Eastern Europe?

Levis
Levi Strauss & Co. is a well-established global business. It operates in 110 countries. Approximately half of its net revenues come from outside the United States. Levis has created a global distribution of products due, in large measure, to its track record of responsible business practices. Those practices, combined with the respect it shows to local communities, has helped build a brand that people love and trust.

IKEA
300 Stores in 35 Countries

IKEA offers a wide range of well designed, functional home furnishing products. Rather than selling expensive home furnishings that only a few can buy, IKEA makes it possible to serve the many by providing low-priced products that contribute to helping more people live a better life at home. IKEA products are designed, manufactured, transported, sold and assembled. All of these factors contribute to transforming the IKEA Concept into a reality.

Globalisation of production
Refers to sourcing goods and services from locations around the globe to take advantage
Locational differences Differences in cost & quality of factors of production
> > > > > > Labor Land Capital Technology Skills/knowledge IT infrastructure

Boeing 777
1. Eight Japanese companies make parts for the fuselage, doors, and wings. 2. A supplier in Singapore makes door for the nose landing gear. 3. Three suppliers in Italy manufactures wing flaps and so on. 4. Foreign companies build around 30% of the Boeing 777 by value.

Chinas Transition
Transition of China to a higher value added economy away from cheap labor and manufactured goods Chinese manufacturing is beginning to move to Bangladesh, India, Indonesia, Vietnam and in some African countries

Accenture Outlook, no 2, 2009

Why do Companies Engage in International Business? Expand sales Acquire resources Diversify sources of sales and supplies Minimize competitive risks

Institution-based view
The institutional framework governing a particular context is made up of formal and informal institutions governing individual and firm behaviour. Transaction costs Costs associated with economic transactions or, the costs of doing business

Dimensions of Institutions
Formal institutions are normally the government, and informal institutions concern behaviours are morally right and wrong, and what is important and not within a society.

Core Propositions

Political systems
A political system refers to the rules of the game on how a country is governed politically.
Political risk is the risk associated with political changes that may negatively impact domestic and foreign firms.
Types of Political System Democracy System in which citizens elect representatives to govern the country on their behalf Totalitarianism (dictatorship) System in which one person or party exercises absolute political control over the population

Economic Systems

Economic Systems The rules of the game on how a country is governed economically. Market economy Characterised by the invisible hand of market forces; government takes a hands-off, or laissez faire, approach Command economy Government taking the commanding height in the economy; all factors of production are government- or state owned and controlled, and all supply, demand, and pricing are planned by the government Mixed economy Elements of both market economy and command economies

Varieties of Capitalism

Legal Systems
Legal Systems Rules of the game on how a countrys laws are enacted and enforced
Civil law A legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments. Common law A legal tradition that is shaped by precedents and traditions from previous judicial decisions. Case law Rules of law that have been created by precedents of cases in court.

Legal Traditions

Intellectual Property Rights

Patents legal rights awarded by government authorities to inventors of new technological ideas, who are given exclusive (monopoly) rights to derive income from such inventions through activities such as manufacturing,licensing or selling. Copyrights the exclusive legal rights of authors and publishers to publish and disseminate their work (such as this book, a photo or a piece of software). Trademarks exclusive legal rights of firms to use specific names, brands and designs to differentiate their products from others.
Property traditionally refers to tangible pieces of property (such as land).
Intellectual property specifically refers to intangible property

The Russian Puzzle

If you were a board member at one of the Western multinational retailers (such as Carrefour, IKEA, Metro or Wal-Mart), would you vote yes or no for a new project to set up your firms first major store in Russia?

If you were to advise the Russian government on property rights reforms, what would be your advice? If you were managing the funds of a Russia oligarch, where would you invest?

The Informal Institutions

Language

Religion

Values & attitudes

Culture
Social structure

Communication

Opening Case: Cartoons that Explode

Why did Muslims gather outside the Danish Consulate in New York City to protest about depictions of the prophet Mohammed printed by a newspapers in Denmark?

Culture
Definitions:

A way of life of a group of people, the configuration of all the more or

less stereotyped patterns of learned behaviour, which are handed down from one generation to the next through means of language and imitation. Barnouw 1985 Culture is a collective phenomenon that is shared with people who live or lived within the same social environment, which is where it was learned. It is the collective programming of the mind which distinguishes the members of one group or category of people from another. Hofestede 1997 3 ways to systematically understand cultural differences: context cluster dimensions

Context is the underlying background upon which interaction takes place.

In low-context cultures (such as in North American and Western

Cultural Context

European countries), communication is usually taken at face value without much reliance on unspoken context. In other words, yes means yes.

In contrast, in high context cultures (such as Arab and Asian countries), communication relies a lot on the underlying unspoken context, which is as important as the words used.
For example, yes does not necessarily mean yes, I agree, it might may yes, I hear you.

Cultural Clusters

Cultural Dimensions
Hofstede/Swartz/GLOBE study Hofstede
Power distance Collectivism/individualism Uncertainty avoidance Masculinity/femininity Long term/short term orientation

Language

Chinese is the worlds largest in terms of the number of native speakers. English is a distant second, followed by Hindi and Spanish.

Religion

Religion is a major manifestation of culture, and it is the source of some of the differences in norms and values that we discussed before. Knowledge about religions is crucial even for nonreligious managers Religious beliefs and activities affect business through: religious festivals, daily and weekly routines activities and objects with symbolic values positive or negative. Religious differences, more than any other differences, tend to raise emotions and thus are challenging to handle for businesses. Showing respect for other religions and associated values will help you avoiding conflict and creating a basis for doing business.

Ethics
Ethics refers to the principles, standards and norms of conduct governing individual and firm behaviour. Ethics are not only an important part of informal institutions but is also deeply reflected in formal laws and regulations. Managing ethics overseas is challenging because what is ethical in one country may be unethical elsewhere.
ethical relativism follows the clich, When in Rome, do as the Romans do. ethical imperialism refers to the absolute belief that There is only one set of Ethics and we have it. Donaldsons (1996) Middle of the road approach (Table 3.3)

Rules when Venturing Overseas

Corruption Index
In 2011 only eight companies failed to score any points for reporting on anti-corruption programmes. In 2008, 21 companies out of 42 scored zero in this category. In the 2011 report 24 out of 44 companies reviewed their data. In 2008 only a handful of the companies surveyed agreed to review and comment on the data. Increase in company involvement- reflect a growing awareness by companies that they have responsibility to help stop corruption Transparency International, 2011

Five Concerns
1. Rules of the game is unfair designed to benefit advanced industrialised countries 2. Globalisation advances material values over other values 3. Reduced developing countries ability to make decisions in key areas 4. There are many losers in both developed and developing countries 5. Economic system imposed on many countries is inappropriate and grossly damaging
Joseph Stiglitz, 2006, p. 9

Globalisation & Markets

The role of market mechanism under globalisation Market mechanisms should not deny the opportunities of transactions through arbitrary controls. This could be a source of economic unfreedom in itself when the market serves the interests of the few Arbitrary restriction of the market mechanisms can lead to reductions of freedoms because of consequential effects of the absence of markets that expands income and wealth and economic opportunities
Amartay Sen, Development as Freedom, pp 25-27