International Business Operations and the Impact of Political Environment:
A Conceptual Frame Work Based on a Four-Industry Study
by
Rashid V. Saber
ISBN: 1-58112- 316-7
DISSERTATION.COM
Boca Raton, Florida USA • 2006
International Business Operations and the Impact of Political Environment: A Conceptual Frame Work Based on a Four-Industry Study
Copyright © 1998 Rashid V. Saber All rights reserved.
Dissertation.com
Boca Raton, Florida USA • 2006
ISBN: 1-58112- 316-7
International Business Operations And The Impact Of Political Environment: A Conceptual Frame
Work Based On A Four-industry Study.
By
Rashid V. Saber
To the ever living memory of
my mother
Valentine Saber
(Um-Rashid)
iii
ACKNOWLEDGEMENTS
Early in this project, when I took a preliminary steps towards my
dissertation, I did not foresee how many individuals would contribute to
its completion. In this section I would like to express my gratitude and
indebtedness to colleagues, business associates, friends, and family
members who have helped me successfully fulfill this endeavor.
First, I am grateful to Dr. Harold Van Alstyne, Dr. Patricia
Thomasson, and the members of my dissertation committee for their
thoughtful suggestions, objective comments, practical advice, and in-
sightful direction.
I would like to acknowledge a business associate, Leo Schroeder of
Aon Risk Services in Minneapolis, for his continual encouragement.
Thanks are also due to several colleagues from Roosevelt University in
Chicago, who made available their library sources, and offered sugges-
tions, technical expertise, and guidance during various phases of this
research project.
Any major research project involves an assortment of administra-
tive tasks, I am thankful to a group of friends who extended a helping
hand in computer programming, e-mail, copying, typing, editing, and
binding.
I am especially indebted to my brother, Dr. Aziz V. Saber of Geor-
gia Tech University, whose enthusiasm and creative ideas about method-
ology and statistical data analysis were invaluable to this research.
Aziz’s efforts and sacrifices were immense: He provided personal support
and wore the professional advisor hat. I could not have completed this
work without him.
iv
My final and most important thank-you note goes to my parents,
Victor and Valentine, who instilled me with a love of learning and en-
couraged me to always take on new challenges, and my brother Aziz,
sisters Faten, Lamia, and Waad, who expressed unwavering confidence
in my ability and constantly offered their support, encouragement, and
prayers. Without their love and support, none of this research would
have been possible.
v
TABLE OF CONTENTS
Page
Acknowlegements iii
Table of Contents v
List of Tables ix
List of Figures xiv
Chapter 1. Introduction ...................................................................... ………………………………….1
Background of the problem ...........................................................................2 Statement of the problem...............................................................................3 Purpose of the study.......................................................................................3 The Research Questions ................................................................................4 Scope of the Study .........................................................................................4 Importance of the Study.................................................................................5 Theoretical Background.................................................................................6 Definitions of Terms....................................................................................25 Limitations of the Study ..............................................................................32
2. Review of the Literature .........................................................................................34
The Field of International Business............................................................34 In ternational Business Operations .............................................................34 Forms of International Business Operations...............................................36 Dynamics of International Business Operations.........................................37 International Business and Global Environment ........................................47 International Business Operations and Globalization.................................51 International Business Operations and Marketing......................................59 Management's Role in International Business Operations............................................................................63 Multinational Enterprise's Operations ........................................................64 Political Risk...............................................................................................68 Political Risk and Risk Assessments ..........................................................69 Industries Profile.........................................................................................70 Pharmaceutical Industry .................................................................70 Automobile Industry.......................................................................72 Electric and Electronic Equipments Industry .................................76 Banking Industry ............................................................................79
vi
Quantitative Methods ............................................................................................. 83
Path Analysis ............................................................................................. 83 Matrix Analysis.......................................................................................... 85 Matrix Creation.......................................................................................... 86 Matrix Assessment..................................................................................... 86 Implications and Results ....................... ................................................... 88
3. Research Methods and Procedures......................................................................... 90
Research Approach.................................................................................... 90 Research Design ........................................................................................ 92 Research Design for Development of the Financial Performance Index................................................................ 93 Criteria For Data Selection in Financial Performance Index Development ......................................................... 95 Data Collection And Analysis Procedures In Financial Performance Index Development ......................................... 95 Research Design For Financial Performance Comparison Among Countries Across Selected Industries ............................................................................. 96 Data Collection and Data Analysis Procedures For Financial Performance Comparison Among Countries Across Four Selected Industries ......................................... 97
Country Risk Rating............................................................................................... 98
Methodology ............................................................................................... 98 Components of Risk Rating ........................................................................ 98 Risk Categories ........................................................................................... 98 Risk Assessments........................................................................................ 98 Risk Categories and Rating......................................................................... 99 Composite Country Risk Rating ................................................................. 99 Aggregate Country Risk Rating.................................................................. 99 Political Risk Measures............................................................................. 101
Research Design to Test for Relationship between Performance of Global Companies and the Political Conditions in the Host Countries ................................................................. 102
Procedures to Test the Hypothesis ....................................................................... 102
4. Research Findings ................................................................................................ 104
vii
Industries Data Analysis.......................................................................... 105 Automobile Industry 105
Banking Industry ......................................................................... 110 Pharmaceuticals Industry ............................................................ 115 Electric and Electronic Equipments Industry .............................. 120
Leading Countries Performance (1994-1997) ......................................................125 U.S.A. ............................................................................................125 Japan.............................................................................................131 Germany .......................................................................................137 France ...........................................................................................143
Global 1000 Companies, Country Composite ......................................................149 Year 1994 .....................................................................................149 Year 1995 .....................................................................................150 Year 1996 .....................................................................................152 Year 1997 .....................................................................................153
Development of the Financial Performance Index as a Measure of success in Business Operations .................................................155
An Illustration of the Versatility and Practicality of the Financial Performance Index in Measuring the Overall Financial Success of Business Operations ......................................................................................................164
Financial Performance Index................................................................................167 Automobile Industry.................................................................................167 Banking Industry ......................................................................................168 Pharmaceuticals Industry..........................................................................169 Electric and Electronic Equipments Industry ...........................................170
Relationships between a Global Company's Financial Performance Index and Political Risk Indicators of the Host Country .........................................................................171
Multiple Regression Analysis of the Financial Performance Index............................................................................................172 Banking Industry ......................................................................................172 Electric and Electronic Equipments Industry ...........................................179 Automobile Industry.................................................................................185 Pharmaceuticals Industry..........................................................................191 Four-Country Composite..........................................................................197
Chapter Summary ................................................................................................ 205
viii
5. Summary, Discussions, and Conclusions ' 206 A Summary of the Present Study .............................................................206 Discussions of Results and Findings........................................................207 The Financial Performance Index ............................................................208
The Financial Performance of the Global Companies Measured Among Their Parent Countries.........................................209
The Relationships Between the Financial Performance Index of a Global Company and Political Uncertainty Indicators in the Host Country.....................................................211
Implications and Applications for International Business Practice and Research ......................................................................212 Conclusions ..............................................................................................214
Bibliography.........................................................................................................215
Appendices ...........................................................................................................226 Appendix A: Country Risk Rating, Political Risk Measures..................................................................................226 Appendix B: Parent Country, Country Risk Ratings ...............................227 Appendix C: Parent Country, Multiple Regression Analysis Based on Twelve Independent Variables ............................228 Appendix D: Host Country, Country Risk Rating ...................................229 Appendix E: Host Country, Multiple Regression Analysis Based On Twelve Independent Variables............................230
ix
Table
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
LIST OF TABLES
Page
Automobile Industry, Global 1000 Companies
Year 1994............................................................................................................. 106
Year 1995 ............. ........................................................... .................................. 107
Year 1996............................................................................................................. 108
Year 1997 .............................................................................................................109
Banking Industry, Global 1000 Companies
Year 1994............................................................................................................. 111
Year 1995............................................................................................................. 112
Year 1996 ............................................................................................................ 113
Year 1997 .............................................................................................................114
Pharmaceuticals Industry, Global 1000 Companies
Year 1994............................................................................................................. 116
4.1 0 Year 1995............................................................................................................. 117
4 .11 Year 1996............................................................................................................. 118 4 .12 Year 1997............................................................................................................. 119
Electric and Electronic Equipments Industry, Global 1000
Companies
4.13 Year 1994............................................................................................................. 121
4.14 Year 1995............................................................................................................. 122
4 .15 Year 1996............................................................................................................. 123
4 .16 Year 1997............................................................................................................. 124
U.S.A, Global 1000 Companies, Four Years Profile (1994-1997)
4.17 Banking Industry.................................................................................................. 127
x
4.18 Pharmaceuticals Industry... .................................................................................. 128
4.19 Automobile Industry ............................................................................................ 129 4.20 Electric and Electronic Equipments Industry ...................................................... 130
Japan, Global 1000 Companies, Four Years Profile (1994-1997)
4.21 Banking Industry.. ............................................................................................... 133
4.22 Pharmaceuticals Industry..................................................................................... 134
4.23 Automobile Industry............................................................................................ 135 4.24 Electric and Electronic Equipments Industry ...................................................... 136
Germany, Global 1000 Companies, Four Years Profile (1994-1997)
4.25 Banking Industry.................................................................................................. 139
4.26 Pharmaceuticals Industry ........................................... ....... ......... ..................... 140
4.27 Automobile Industry............................................................................................ 141 4.28 Electric and Electronic Equipments Industry ..................................... ................ …….. 142
France, Global 1000 Companies, Four Years Profile (1994-1997)
4.29 Banking Industry.................................................................................................. 145
4.30 Pharmaceuticals Industry ............................................. ................................................................. 146
4.31 Automobile Industry .................................................. ....................................... 147 4.32 Electric and Electronic Equipments Industry ...................................................... 148
Global 1000 Companies, Countries Composite, All Industries
4.33 Year 1994 .................................................................................. ....................................149
4.34 Year 1995 ........................................................................................................................151
4.35 Year 1996............................................................................................................. 152
4.36 Year 1997 .......................................................... .......... ...................................... 154
xi
Financial Ratios, Four Countries and Across Four Industries
4.37 Year 1994............................................................................................................. 156
4.38 Year 1995............................................................................................................. 156
4.39 Year 1996............................................................................................................. 157
4.40 Year 1997 ............................................................................................................ 157
4.41 Composite Average, 1994-1997 .......................................................................... 158
4.42 Summary of Financial Ratios, Four Countries
and Across Four Industries, 1994-1997 ........................................................ 158
4.43 Financial Variables, Four Countries .................................................................... 159
4.44 Correlation Matrix of the Three Financial Variables .......................................... 159
4.45 Factor Analysis of the Three Financial Variables ............................................... 160
4.46 Financial Performance Index, by Country across Years (1994-1997) ............................................................................. 165
Financial Performance Index Four Countries and across Four
Industries
4.47 Year 1994............................................................................................................. 166
4.48 Year 1995............................................................................................................. 166
4.49 Year 1996............................................................................................................. 166
4. 50 Year 1997............................................................................................................. 166
xii
Financial Performance Index
4.51 Automobile Industry ............................................................................................ 167
4.52 Banking Industry.................................................................................................. 168
4.53 Pharmaceuticals Industry ..................................................................................... 169
4.54 Electric and Electronic Equipments Industry ....................................................... 170
4.55 Prediction Factors of FPI, for Banking Industry
in Thirteen Host Countries....................................................................... 176
4.56 Multiple Regression Analysis of
FPI in Banking Industry........................................................................... 177
4.57 Results of Multiple Regression
Analysis of FPI, Banking Industry .......................................................... 178 4.58 Prediction Factors for Thirteen Host Countries,
Banking Industry ..................................................................................... 179
4.59 Prediction Factors of FPI, Electric and Electronic Equipments
Industry in Thirteen Host Countries.............................................................. 182
4.60 Multiple Regression Analysis of FPI in Electric and Electronic
Equipments Industry................................................................................ 183
4.61 Results of the Multiple Regression Analysis of FPI in
Electric and Electronic Equipments Industry .......................................... 184 4.62 Prediction Factors for Thirteen Host Countries, Electric and
Electronic Equipments Industry .............................................................. 184
4.63 Prediction Factors of FPI, for Automobile Industry in Thirteen Host Countries....................................................................... 188
4.64 Multiple Regression Analysis of
FPI in Automobile Industry ..................................................................... 189
xiii
4.65 Results of the Multiple Regression
Analysis of FPI, Automobile Industry ..................................................... 190 4.66 Prediction Factors for the Thirteen Host Countries,
Automobile Industry ................................................................................ 190
4.67 Prediction Factors of FPI, Pharmaceuticals Industry in Thirteen Host Countries ........................................................................... 194
4.68 Multiple regression Analysis of
FPI, Pharmaceuticals Industry ................................................................. 195
4.69 Results of the Multiple Regression Analysis of FPI,
Pharmaceuticals Industry......................................................................... 196 4.70 Prediction Factors for Thirteen Host Countries,
Pharmaceuticals Industry......................................................................... 196
4.71 Prediction Factors of FPI, Country Composite in
Thirteen Host Countries ..................................................................... …. 202
4.72 Multiple Regression Analysis of
FPI for country Composite ......................................................................203
4.73 Results of the Multiple Regression Analysis of FPI
for Country Composite ............................................................................204 4.74 Prediction Factors for Thirteen Host Countries,
for Country Composite ............................................................................204
xiv
Figure
1.1
1.2
1.3
2.1
2.2
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
LIST OF FIGURES
Page
General Aspects of theories of International Business ............................................ 9
Summary of theoretical factors contributing to the decision to internationalize ..............................................................24
Summary of motivations to internationalize from theories of
International Business and Entrepreneurship............................................. 24
The field of International Business ................................................................35
Market Entry Strategies .........................................................................................61
The Research Design .............................................................................................92
The Modified Dupont Model of Financial Analysis..............................................93
A Form for collecting financial data of companies ranked in the Business Week's Global 1000between 1994-1997 ................................................................................... 94
Automobile Industry, Global 1000 Companies
Year 1994............................................................................................................. 106
Year 1995 .............................................................................................................107
Year 1996............................................................................................................. 108
Year 1997............................................................................................................. 109
Banking Industry, Global 1000 Companies
Year 1994.............................................................................................................111
Year 1995 .............................................................................................................112
Year 1996 .............................................................................................................113
Year 1997 .............................................................................................................114
xv
4.9
Pharmaceuticals Industry, Global 1000 Companies
Year 1994 ............................................................................................................. 116
4.1 0 Year 1995 117
4.11 Year 1996 ........................................................................................................................ 118 4.12 Year 1997 ............................................................................................................. 119
Electric and Electronic Equipments Industry, Global
1000 Companies
4. 13 Year 1994 ..............................................................................................................121
4.14 Year 1995 ............................................................................................................. 122
4.15 Year 1996 ........................................................................................................................ 123
4.16 Year 1997 ......................................................................................................................... 124
U.S.A., Global 1000 Companies, four years profile (1994-1997)
4.17 Banking Industry .................................................................................................. 127
4.18 Pharmaceuticals Industry ..................................................................................... 128
4.19 Automobile Industry............................................................................................. 129
4.20 Electric and Electronic Equipments Industry 130
Japan, Global 1000 Companies, four years profile (1994-1997)
4.21 Banking Industry.................................................................................................. 133
4.22 Pharmaceuticals Industry...................................................................................... 134
4.23 Automobile Industry..............................................................................................135
4.24 Electric and Electronic Equipments Industry........................................................136
Germany, Global 1000 Companies, four years profile (1994-1997)
4.25 Banking Industry .................................................................................................. 139
4.26 Pharmaceuticals Industry...................................................................................... 140
4.27 Automobile Industry............................................................................................. 141 4.28 Electric and Electronic Equipments Industry ....................................................... 142
xvi
4.33 U.S.A.................................................................................................................... 126
4.45 Electric and Electronic Equipments Industry ....................................................... 170
4.34 Japan ................................. ....................................................................................132
4.35 Germany .................................................................................................. .............138
France, Global 1000 Companies, four years profile (1994-1997)
4.29 Banking Industry. ............................................................................................... , 145
4.30 Pharmaceuticals Industry ..................................................................................... 146
4.31 Automobile Industry............................................................................................. 147
4.32 Electric and Electronic Equipments Industry 148
Country Composite, Global 1000 Companies, (1994-1997)
4.36 France. ................................................................ ........ ………………………… 144
Country Composite, Global 1000 all Industries
4.37 Year 1994 ....................................................................................................................... 150
4.38 Year 1995 ....................................................................................................................... 151
4.39 Year 1996 153
4.40 Year 1997 ................................................................ ……………………………154
4.41 Country Composite Financial
Performance Index (1994-1997).............................................................. 165
Financial Performance Index (1994-1997)
4.42 Automobile Industry............................................................................................. 167
4.43 Banking Industry .................................................................................................. 168
4.44 Pharmaceuticals Industry ' 169
1
CHAPTER 1
Introduction
Due to the large number of variables involved and the high level of
dynamics and uncertainty, international business is a complex system of
human enterprise. Practitioners in international business may perceive the
following factors as uncertain: (1) the general environment, (2) the
specific industry, and (3) organization-specific variables. General
environmental uncertainties include political and government policy
instability, and macroeconomic uncertainty. These complex and
interconnected factors mean that both the entrepreneur and
government official must navigate through a sea of information and a
variety of data before finding solutions to international business
operations issues.
International business researchers are interested in country risk
analysis because of uncertainties in the areas of politics, government
policy, and macroeconomics. Since unforeseen restrictions on business
activity can have a detrimental effect on the efficiency and profitability of
firms business, political risk analysis and forecast gives the firms a
chance to incorporate the requisite changes in its operations and
planning.
The conceptual framework in this research, will integrate a large
scale of financial data to construct a model, to test a hypothesis, and to
develop a measure of financial performance, in order to produce a set of
tools which can have a practical application in the field of international
business.
2
Background of the problem
Research concerning international operations and management
has been segmented into varied topics and disciplinary perspectives.
Between the 1960’s and the 1990’s, there were attempts to
develop theories to deal with the expansion and complexity of
international business (e.g., Buckley & Casson, l976; Dunning l981;
Linder, l961; Porter, 1990; Sharpe, 1964; Toyne, 1989; Vernon, 1966).
However, those theories dealt with particular segments or sectors of
international business operations, e .g., product-life cycle, technology
transfer, external market development, and foreign direct investment.
Vernon’s (1966) explanation of international expansion described
a simple demand driven, geographic diversification strategy. Vernon
assumed that markets were similar worldwide, and that a firm’s
operation strategy was easily replicated in multiple national markets.
Some countries, e.g., Japan and France, have formal international
policies and plans to pursue excellence in the global economy, while
many other countries are having difficulty in reacting to the uncertainty
and risks resulting from rapid change in the global economy.
In the past decade, the growing body of study on the global
economy, multinational enterprises, and international business covered
a variety of aspects and segments of international business, e.g.,
marketing in the global economy (O’Conner, 1988), import impact and
strategic response (Palia, 1990), human resource management in
international operation (Brown, 1990). This growing body of knowledge
in international business and related areas is sufficient to provide an
integrated view from which a comprehensive model can be developed for
both research and business practices.
3
Statement of the Problem.
Predicting financial performance of a business venture in foreign
environment is one of the major concerns in international business
operations.
This research attempts to develop a conceptual framework to
construct a model, develop a measure of financial performance in foreign
business environments, to test a hypotheses and to demonstrate the
versatility and applicability of the newly introduced measure.
The proposed model of international business operations suggest
that the level of financial performance of a global company in foreign
business environment is linearly related to the political conditions in the
host country. The second and peripheral hypothesis is that the
relationship between financial performance and the political conditions is
country specific. These hypotheses were tested in the present study.
Purpose of the Study
The central purpose of this study will be four fold, namely:
1. To develop a measure of business financial performance by
employing empirical data from global companies.
2. To identify and develop a measure for host country political risk
variables which influence performance in the international business
environment.
3. To test the main hypothesis that there is a linear relationship
4
between global companies’ financial performance in foreign business
environments and the political conditions in the host country.
4. To provide a foundation for decision making in international
business operations for global companies and to assist business
practitioners in their planning and policy making.
Research Questions
Following are the research questions guiding this study:
1. Employing the factor analysis method to extract a common factor
from three financial performance ratios, what measure can be developed
to assess a company’s business performance?
2. Is there a relationship between the company’s financial
performance in the global business arena and its performance in its
parent country, and how does this relationship compare across four
selected industries?
3. Utilizing the regression analysis method, what are the identifiable
political risk variables influencing the company’s financial performance
in foreign business environment?
Scope of the Study
This research study will focus on developing a model for
international business operations by employing data listed in
5
publications by the World Bank, Morgan Stanley Capital, Political Risk
Services, and independent research organizations. It is intended to
develop a financial performance formula based on data published on 630
Companies ranked in Business Week’s Global 1000, between 1994-
1997.
The scope of this study will be confined to variables pertaining to
the political uncertainties found in the parent and the host country.
The financial performance of four selected major industries
(automotive, pharmaceutical, banking, and electric and electronic
equipment) in four parent countries (France, Germany, Japan and the
United States) will be measured against twelve political uncertainties
(independent variables) in thirteen host countries.
Importance of the Study
This study intended to contribute to the integration of the growing
body of research findings in international business. The attempt was to
develop a new conceptual frame work to deal effectively with the
enormous amount of data and information in international business
operations.
With the introduction of new measure, the study was designed to
investigate the levels of performance of global companies conducting
international business, as compared among countries and across four
selected industries.
It was hoped that the methods and the findings in this study
would stimulate further attempts to refine and establish a grand model
and a unified theory. These may provide a foundation for decision
6
making in international business operations for multinational
enterprises, on the one hand, and for planning and policy-making for
governments, on the other.
Theoretical Background
Mercantilism
The economic philosophy put forward by a number of writers from
approximately the fifteenth century to the eighteenth century was
mercantilism. It premised that a country’s wealth was dependent on its
holdings, usually in the form of gold.
Trade was an integral part of this economic philosophy.
Mercantilism was the first theory that espoused trade (Daniels and
Radebaugh, 1986). Later on, neomercantilism was developed to explain
the phenomenon that some countries apparently tried to run favorable
balances of trade not to seek an influx of gold, but rather to achieve
social or political objectives.
Theory of Comparative Advantage
Ricardo (1817) developed the theory of comparative advantage,
which holds that there may still be gains from trade if a country
specializes in those products that it produces more efficiently than other
products, without regard to whether or not the country has an absolute
advantage.
The principle of comparative advantage states that it is beneficial for
a country to specialize in production of the good in which it has a
comparative advantage and to trade for the good in which it has a
7
comparative disadvantage.
Overview of Internationalization
Theories explaining why firms internationalize flow from two
streams of international business literature. The first stream is based on
organizational behavior theories suggesting that firms internationalize
when they have established a track record of operations and thereby
have gained sufficient experience (Aharoni, 1966; Johanson & Vahlne,
1977).
The second stream is based on industrial economics. These
theories suggest that firms seek international exchanges after they have
established a domestic market position. (Kindleberger, l969) or when
they have achieved a competitive advantage. (Buckley, 1983).
While these general theories do not distinguish between
businesses by size, they do explain why established large businesses
invest abroad. Similarly, theories of entrepreneurship explain
dimensions of venture creation but do not address reasons for
internationalization. Integration of these theories from the international
business and entrepreneurship perspectives is proposed to further
understand the internationalization of business.
Behavioral Theories of Internationalization
Behavioral theories assume that internationalization is an
outcome of a sequential process of incremental adjustments to the
changing conditions of the firm and its environment (Aharoni, 1966).
(See Figure 1.1) The internationalization process describing the
decision-making behavior of the organization is rooted in work by Cyert
