Chapter One

Multinational Management In a Changing World

Haier of China Moves Overseas

While many American companies were moving to China for cheap labor odd turnabout is taking place in South Carolina Haier group, one of Chinas best-known companies is making refrigerators in South Carolina with US workers Why?

To establish a presence in the US

Haier pronounced higher

Significant headway since introduced 2002 sales volume of 100,000 or 2% Now can be found at Wal Mart, Costco and Target Cheaper than US brands but reliable Factory in Camden

Provided 200 much needed jobs Pays $10/hour with health benefits Only Chinese who remained in Camden is CFO

Objectives

What is globalization?

Brief history Definition and types Trade agreements, growth in trade and investment, technological changes, changing demographics, and implications

What are the drivers behind globalization?

Conclusions and objectives of course

Globalization

More and more businesses are seeing the world as a source of business opportunities They are also facing more and more competition from foreign companies Globalization is the worldwide trend of businesses expanding beyond their domestic boundaries Shift towards a more integrated and interdependent world market

Globalization: recent phenomenon?

No!

Middle Eastern Intercontinental Trade Kings highway in ancient Egypt 2000 years ago Silk road extended over 4000 miles out of the Nile Basin to Bagdad and Kashmir linking China, India, Persia and Rome

Commercial caravans crossed land routes and paid custom duties

Sent out 3750 vessels from China to cultivate trade Introduced uniform container measurements

China in 1421

Globalization Recent History

Spearheaded by US companies post World War 1 US had strong industrial, financial and technological resources

Ex: GM purchased Vauxhall in England, Opel Motors in Germany and opened plants in Brazil in 1920! Citibank opened first US bank in China in 1920 Coca-Cola, P&G all established significant presence IBM by 1939 had gone international and with foreign sales being 1/8 of revenues

European Wave

Post World War II

Royal Dutch Shell purchased and consolidated European subsidiaries Nestle became world leader in powdered drinks etc Dutch electronics Phillips Bayer and Siemens

1974 sudden slowdown in US and European markets

Asian Wave

1970s Japanese firms entered the US markets 1980s South Korean economic transformation Further development in Taiwan, Hong Kong, Singapore and now China Toyota is now worlds second largest automobile manufacturer!

Current Wave

Rise of emerging markets of Brazil, Russia, China and India Massive opportunities in these countries Bottom of the pyramid approach

Multinational/ Global Management

Because of globalization, it is now necessary to understand what is multinational management Formulation of strategies and design of management systems that successfully take advantage of international opportunities and respond to international threats A multinational company is any company that engages in business functions beyond its domestic borders

McDonalds The Global Component of a Big Mac in Ukraine

Sesame Seeds Mexico Pickles Germany Special Sauce Germany Bun Russia Onions US Beef patties Hungary Cheese Poland Lettuce - Ukraine

Forces Driving Globalization

Declining trade and investment barriers

During the 20s and 30s, countries imposed strict tariffs to protect domestic companies After World War 2, advanced industrial nations committed themselves to remove barriers to free trade birth of GATT In 1993, Uruguay negotiations lead to the birth of World Trade Organization Increase in number of bilateral treaties to facilitate trade

Regional Trade Agreements

European Union includes European countries to allow free movement of goods and services

2003 included 15 nations mostly Western European May 2004 entry of 10 additional countries Cyprus, Czech, Estonia, Hungary, Poland, Slovakia, etc One currency the euro

North American Free Trade Agreement U.S., Canada, Mexico freer exchange

Regional Trade Agreement

Association of South East Asian Nations (ASEAN)

Objectives of association is to accelerate growth Includes Indonesia, Malaysia, Philippines, Singapore, Thailand etc.

Mercosur includes South Americas largest trading partners Argentina, Brazil, Paraguay and Uruguay

Pending CAFTA Central American Free Trade Agreement with US

Trade Agreements

In 1995 World Bank identified 62 multilateral associations and 287 cooperative agreements Ranging from major European, North American and Asian initiatives to trade pacts in Latin America, Africa and the Middle East

Growth in World Trade and Investment

Phenomenal growth has taken place in trade and investment between countries The growth of world trade has grown much faster than the world output
2000 1500 1000 World GDP 500 0 1970 1980 1990 1997 GDP TRADE

Implications of Declining Trade Barriers

Firms are dispersing more and more parts of their overall production process to different locations in order to become more cost effective Economies of the world are becoming more intertwined

Foreign direct investment increased from $42b in 1984 to $430b in 1997

Role of Technological Change

Microprocessors and telecommunications

Development of microprocessor has allowed companies to get access to powerful low cost computers Vast amounts of information can be processed In 1990, fewer than 1 million users, in 1997 147 million users, and in 2000 330 million users

Internet and WWW

Internet
WORLD INTERNET USAGE AND POPULATION STATISTICS June 30, 2012 World Regions Population ( 2012 Est.) Internet Users Dec. 31, 2000 Internet Users Latest Data Penetration (% Population) Growth 2000-2012 Users % of Table

Africa

1,073,380,925

4,514,400

167,335,676

15.6 %

3,606.7 %

7.0 %

Asia

3,922,066,987

114,304,000

1,076,681,059

27.5 %

841.9 %

44.8 %

Europe

820,918,446

105,096,093

518,512,109

63.2 %

393.4 %

21.5 %

Middle East

223,608,203

3,284,800

90,000,455

40.2 %

2,639.9 %

3.7 %

North America

348,280,154

108,096,800

273,785,413

78.6 %

153.3 %

11.4 %

Latin America / Caribbean

593,688,638

18,068,919

254,915,745

42.9 %

1,310.8 %

10.6 %

Oceania / Australia WORLD TOTAL

35,903,569 7,017,846,922

7,620,480 360,985,492

24,287,919 2,405,518,376

67.6 % 34.3 %

218.7 % 566.4 %

1.0 % 100.0 %

Web Around the World

US lags behind in SMS text messaging

Users in Ecuador and Philippines send 200 messages a month, Danes/Irish 100, US fewer than 50

Metacafe.com Israeli version of YouTube Cyworld.nate.com largest social network in Asia (South Korea) Zohowriter.com India web based word processing Habbototel.com Finland virtual hotel for kids Beta.plazes.com adds another layer to Google Earth/Maps locates you and other users

Transportation Technology

Development of commercial jet aircraft and superfreighters and containerization Commercial jet aircrafts has shrunk the globe

1500-1840: Best average speed of horse-drawn carriages and sailing ships 10mph 1850-1930: Steam locomotives: 65 mph; Steam ships: 36 mph 1950s: Propeller aircrafts 300-400 mph 1960s- present: Jet passenger aircraft and commercial aircraft 500mph speed of sound

Implications of Technological Change

With progress in containerization, transportations costs have declined Real costs of processing information and communicating has declined

Ex: Texas instruments has 50 plants in 19 countries A satellite-based communications system allows TI to coordinate business functions on a global scale System consists of more than 300 remote jobentry terminals, 8,000 inquiry terminals, and 140 mainframe computers

Global Economy of the 21st Century

The last quarter has seen rapid changes

Barriers have been coming down Volume of cross-border trade and investment has gone up

National economies are becoming more closely intertwined, integrated into a single, interdependent, global economic system Need to for US companies to understand how to do business in other countries

Reasons to go International

95 percent of the world's consumers live outside of the United States

If a U.S. business is only selling domestically, it is reaching just a small share of potential customers.

Exporting enables companies to diversify their portfolios and to weather changes in the domestic economy.

The New Global Players?

Global business is seeing the arrival in force of the emerging market multinational In 2006, foreign direct investment from developing countries was 14% of worlds total ($174b)

Only 5% in 1990

US multinationals need to heed the arrival of such forces Strategies of emerging multinationals

Strategy 1: Taking brands from local to global

Emerging markets give a company vast and cheap manufacturing base It can test product locally and then add design and world class R&D Ex: Hisense TV in China 10% of market in China

Now sells 10m tvs and 3m Airconditioning units in 0ver 40 countries #1 seller of flat screens in France

Strategy 2: Turn local engineering into global excellence

Emerging markets provide cheap manufacturing base Rich-world exporters rely on more difficult-tomanage value chain Ex: Embraer of Brazil

# 1 supplier of regional jets Largely privatized company with support from Brazilian government Leader in sleeker and faster small jets

Strategy 3: Global leadership in narrow product category

Emerging markets have cheap labor Companies from emerging markets can take advantage of cheap labor to lower costs Ex: Johnson Electric Hong Kong

Has cornered half of the worlds market for tiny motors used in cars or cameras BMW M5 has over 100 tiny motors to move mirrors, adjust seats etc Johnson Electric manufactures to specification

Strategy 4: Take advantage of local resources; boost with first class marketing

Low costs in emerging markets allows emerging markets multinationals to be more competitive Ex: Sadia and Perdigao They have built sales organizations around the world to make the most of abundant local resources to produce pork, poultry and grains

Strategy 5: Better business model

Do something better than the developed world multinationals Ex: Cemex, Mexicos leading cement producer

Although cement is expensive to ship, know-how and investment is not Cemex has devised a rigorous system of company acquisitions 4/5 of revenue from outside Mexico Operations in Colombia, Panama, Venezuela etc.

Why are emerging markets multinationals better?

Cheaper costs

Manufacturing, labor etc

Often family owned or controlled faster decisions Can often get cheap finance from state banks Barriers

Tariffs, market ignorance, lack of management talent etc

Course

Globalization will inevitable change the nature of global trade This course will provide some material in order to appreciate the complexities of international business Hopefully, also provide the skills to become better multinational managers

Course Organization
Chapters in:
Cullen, J.B. & Parboteeah, K.P. 2014. Multinational Management, A Strategic Approach. CENGAGE Publishing, 6th edition.

Chapters

Chapter 1: Multinational Management in a Changing World Chapter 2: National Culture Chapter 3: Social Institutions Chapter 4: Global Ethics Chapter 5 and Chapter 6: Strategic Management issues Chapter 7: Small Businesses and Entrepreneurship

Chapters

Chapter 8: Organization Design for Multinationals Chapter 9: International Strategic Alliances Chapter 10: Multinational E-Commerce Chapter 11 and 12: Global HRM issues Chapter 13: International Negotiation and Communication Chapter 14: International Motivation Chapter 15: International Leadership

Chapters - Cullen, J.B. and Parboteeah, K.P. 2010. International Business. Routledge.

Chapter 1- Competing in the Global Marketplace Chapter 2 Strategy and the Multinational Chapter 3 - Global and Economic Regional Integration Chapter 4 Global Trade and FDI

Chapters

Chapter 5 Foreign Exchange Markets Chapter 6 Global Capital Markets Chapter 7 Culture and International Business Chapter 8 Social Institutions Chapter 9 Entry Strategies for MNCs Chapter 10 International Marketing and Supply Chain

Chapters

Chapter 11 Financial Management for MNCs Chapter 12 International Accounting Chapter 13 Org Structures for MNCs Chapter 14 International HRM Chapter 15 E-Commerce and MNCs Chapter 16 Global Ethics

Chapter 3
Social Institutions and Multinational Management

Objectives

What are social institutions? Why understand social institutions? Economic/political systems Education Religiosity

Limitations of National Culture

Outdated most studies have been done in the 1980s Static does not take into consideration changes people go through Does not explain experiences in transition economies Does not provide for complete understanding of the business climate in a country

Social Institutions

Social institutions are complex of positions, roles, norms, and values, lodged in particular types of social structures and organizing relatively stable patterns of human resources with respect to fundamental problems Selected examples: Political systems, social inequality, religion, education system, and labor unions

Economic/Political Systems

Capitalist free market Socialist state ownership of basic means of production Elements of communist societies

Lack of institutional structure to support free market exchange Incredibly inefficient production demand guaranteed by the state

Features of Communist Societies

Non-facilitative governments Governments are critical

They reduce unpredictability by establishing stable structures for human interaction Simple exchanges (agricultural societies) can be sustained through informal arrangements and traditions Complex exchanges need enforcement from the government Communist societies weakens reach of government

Ex: Lithuania

Newly passed privatization legislation Anyone could buy a government owned building for a nominal fee One entrepreneur recalled his actual experiences Went to the building privatization offices to apply for a building Was asked to choose a building and apply for it was not given list of available buildings After he chose a building, was told that that building was already taken Went through numerous similar rounds Realized that bribe was necessary to get a building

Ex: Selection in Eastern European

Selection of workers was a passive process Workers got jobs through referrals from communist-controlled labor department Managers were promoted by Party recommendations or nepotism Personnel directors were not chosen because of their education or skills because of membership

Ex: Argentina

Pre World War II among the worlds wealthiest countries High standard of living- among worlds 10 wealthiest societies Post World War II Argentina was isolated because of its neutrality during the war Refuge for fleeing Nazis and European common criminals Argentina responded to these problems by creating a statist government

Argentina

State-centered power system that controlled the major industries Unions became all powerful Citizens were guaranteed free education, health care, food and even seaside chalets! The result was that Argentinas industrial base was not able to support this idealistic society Result was extremely wealth for those in power and poverty for the rest

Argentina - Today

By 1999, Argentina was exporting 28% of output Privatization of industrial, banking and services Privatization has brought in new technology and infrastructure However, there still remains significant unemployment (17.5%) and poverty

Educational System

Can be assessed using literacy rates, enrollment in secondary education, or enrollment in higher education Education is the key to social mobility and competitive advantage Ex: Analysis of the Japanese economic success shows that after the war, Japans only resources were a pool of educated people

Education: Implications

How much can you count on training your workers? How workers view work? Research by Parboteeah & Cullen strongly suggests that education had an opposite effect on how much people are attached to work - Postindustrialization movement What types of education is emphasized? Liberal or vocational

Ex: Education and Social Class in UK

Historically, England was made of three classes upper class (wealth), middle class (professional occupations) and lower class (manual) Upper class and upper-middle class (important managerial positions and lawyers, accountants etc.) children go to select group of private school Pick many speech accents and social norms of higher strata of society

Education in England

Private schools also have close ties with the most prestigious universities Oxford, Cambridge Having been to a prestigious university offered an excellent chance for people to be hired by prestigious firms, often run by members of the upper and upper-middle class Perpetuation of the class system Similar in France, Japan, South Korea etc.

Education: Implications

The US is already seeing white-collar jobs move to India and China Same trend in Europe Why? Explosion of college graduates in low-wage nations

Philippines population 75m, graduate 380,000 college grads oversupply of accountants trained in US standards India has 520,000 IT engineers with starting salaries of $5000! China graduates twice as many mechanical engineers as the US 70,000

Religions

Any shared set of beliefs, activities, and institutions premised upon faith in supernatural forces Remains an ever important aspect of life and work in most societies

Ex: Resurgence of evangelical Christianity in US Rise of Islamic fundamentalism in middle East Explosive growth of Protestantism in Latin America Religious ferment in Eastern Europe and Russia

Economic Consequences of Religions

Demonstrated positive correlation between religion and economic outcomes Religion may be negatively related to deviance time allocation Religion seems to affect both mental and physical health positively

Religiosity

How religious people are in the country Implications:

More religious countries may have more positive views of work Protestant work ethic Ex: Islam is critical of others who earn profit through exploitation prohibits payment or receipt of interest Buddhism emphasis on spiritual achievements and harmony less emphasis on materialistic achievements

Conclusion

Hofstedes national culture framework and social institutions framework can be used concurrently to explain cross-national differences in individuals behaviors Provides ways to understand how work needs to be structured, what to expect, and basically, how to be better managers

Chapter 4
Ethics and Social Responsibility

Objectives

What is ethics and social responsibility? Why are multinationals being criticized? Some key ethical issues How does national culture and social institutions affect ethics? Bribery and Foreign Corrupt Practices Act What can be done about it?

When in Rome, do as the Romans? Universal values

Tobaccos Industry Ethics

Few developing countries require health warning on cigarette packages compared to 95% of developed nations

Should tobacco company put warnings? Should they advertise in LDC?

Cigarette consumption and production is increasing at an alarming rate in LDC

Targeted at young people and women

Cigarettes in LDC contain more tar and harmful chemicals Should tobacco be cultivated?

Tobaccos Industry Position

Tobacco cultivation in LDC grants higher returns than alternative crops More than 100 million people depend on tobacco for survival People in LDC have been cultivating and smoking tobacco for centuries Dilemma:

What weight should be given to human freedom (freedom of farmers and smokers) versus weight of human welfare?

Introduction

Multinational managers face complex ethical issues all the time With an understanding of key ethical problems in multinational management, managers can make more informed ethical judgments

Ethics & Multinational Ethics

Ethics - the rules and values that determine what goals and actions people follow when dealing with other human beings Business ethics: all business decisions with ethical consequences The unique ethical problems faced by managers conducting business operations across national boundaries

The Multinational Corporation

Most ethical issues arise from multinationals (MNC) firms that have direct investments in two or more countries MNCs wealth and power have given rise to concerns about

1) the impact on local economies 2) capacity of local governments to regulate

Country GDP vs. MNC GDP (2003)

Country/ Company USA China India Australia Sweden Austria Wal-Mart Stores Malaysia ExxonMobil GDP/ Revenue ($b) 10,820 5,560 2,660 466 228 220 220 200 192 Country Company Portugal GM Algeria BP (UK) Ford Motor Czech Rep. Denmark Chile Romania GDP/ Revenue ($b) 182 177 177 174 162 156 156 153 153

Criticisms vs. Multinationals (MNCs)

Exploitation of natural and human resources

Should MNCs be allowed to extract resources for a low price and sell for much higher prices?

Exploitation of labor markets criticisms are double-sided

Local companies complain that most productive and skilled workers go to work for MNCs Sweatshops

More Criticisms

Unfair competition

Because of their size, MNCs can get access to capital in large volume little left for local firms Use of technology creates hosts of problems

Bribery

Making a payment to a foreign official for the purpose of influencing any act or decisions of such foreign official in his in his official capacity or of inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official A bribe is made with the intention to corrupt Classic case of Lockheed Corporation paid Japanese officials $25million to win an aircraft contract

Transparency Index
Rank Country
1 2 3 4 Iceland Finland New Zealand Denmark

Score
9.7 9.6 9.6 9.5

Rank Country
55 65 78 88 Bulgaria Peru China India

Score
4.0 3.5 3.2 2.9

5
6 11 17 21

Singapore
Sweden U.K. U.S.A. Japan

9.4
9.2 8.6 7.6 7.3

97
130 144 144 155

Madagascar
Congo Pakistan Paraguay Haiti

2.8
2.3 2.1 2.1 1.8

40

South Korea

5.0

158

Chad

1.7

Whats wrong with bribery?

Systematic and widespread corruption inhibits the development of fair and efficient markets

Does not provide open market access to all competitors/individuals Is not an efficient allocation of resources higher prices Results in poverty and underdevelopment

Violation of duty or trust by an official

What can be done about bribery? Foreign Corrupt Practices Act

Forbids U.S. companies to make or offer payments or gifts to foreign government officials to get or retain business

Reason to know" provision

Grease payments facilitating payments to expedite routine governmental action Reasonable expenditures to entertain a foreign official in the course of doing business Any laws that permits or requires payments in the country even if it is bribe

Exceptions:

payments made under duress to avoid injury or violence are acceptable

Focus of FCPA Training

Various types of permissible/non permissible payments Recognizing rank, status of person requesting payment Select reputable foreign agent Brief foreign agent about FCPA Be familiar with local laws, customs, and practices Use company code of ethics Request legal counsel when in doubt Recognize and solve ethical dilemmas

What can be done? Apply Universal Codes

Countries and companies should abide by suggested guidelines for ethical behaviors There is pressure now across the world for ethical convergence

Best Practices for Enforcement of Code of Ethics

Lead by example international executives should also adhere to the code of ethics Make ethics part of the corporate culture Involve employees at all levels Set and monitor goals Effective integration in business processes Open forum to discuss ethical issues

Conclusions

Multinational managers face ethical challenges magnified by the international context Need to understand home ethical codes and impact on ethics of foreign culture/social institutions