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Prentice Hall 2003 Chapter 1 1

Assessing the EnvironmentPolitical,

Economic, Legal, Technological

Chapter 1

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Prentice Hall 2003 Chapter 1 2

Chapter 1 Overview

Globalism

The Political and Economic Environment

The Legal Environment

The Technological Environment

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Prentice Hall 2003 Chapter 1 4

What is Globalism?

The term globalismrefers to global competition

characterized by networks that bind countries,

institutions, and people in an interdependentglobal economy.

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Prentice Hall 2003 Chapter 1 5

Regional Trading Blocs

The Triad

Western Europe

AsiaNorth America

Other Regions

Central and Eastern Europe

China

Less Developed Countries (LDCs)

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Prentice Hall 2003 Chapter 1 6

The European Union (EU)

12 of the 15 member states of the European Community

have adopted a common currency and monetary policy.

The Euro is now a legally tradable currency.

The EU is the largest and most integrated common

market in the world with 376 million consumers.

The creation of EU has not eliminated national pride.

Most people in W. Europe still think of themselves first as

British, French, Danish or Italian, and are wary of giving

up too much power to centralized institutions, or of

giving up their national culture.

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Prentice Hall 2003 Chapter 1 7

Global Managers and the E.U.

Global managers face two major tasks with

respect to the E.U.

How firms outside of Europe can deal with a marketgiving preference to insiders

How to deal effectively with multiple sets of national

cultures, traditions, and customs within Europe.

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Prentice Hall 2003 Chapter 1 8

North America

The North American Free Trade Agreement

(NAFTA) between the United States, Canada and

Mexico has created a single market of 360million consumers.

The one America trading bloc has the potential

for expansion in South America as trade

liberalization among the Latin Americancountries progresses.

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Prentice Hall 2003 Chapter 1 9

North America (contd.)

Maquiladorasare U.S. manufacturing facilities

that have operated just south of the Mexican-

American border since the 1960s under specialtax concessions.

Joint ventures between Mexican and American

companies are common. Examples include the

one between Wal-Mart and Cifra, which in 2001was Mexicos biggest chain.

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Prentice Hall 2003 Chapter 1 10

Asia

Japan and the Four TigersSingapore, HongKong, Taiwan, and South Koreaprovide mostof the capital and expertise for Asias developingcountries.

In the 1980s and early 1990s, much of Asiaseconomic power and competitive edge wasattributed to Japans keiretsuand S.Koreaschaebol.

Recent economic woes have slowed growth inthe region.

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Prentice Hall 2003 Chapter 1 11

Other Regions

The Central and Eastern European bloc, where

communism proved unworkable and crumbled, has

created a new market of 430 million people.

Impediments to business growth here are the lack of

capitalist structure and systems to reproduce Western

management practices easily.

China has enjoyed recent success as an export

powerhouse.

Its GDP growth rate, though slowing, was the fastest in

the world for several consecutive years.

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Prentice Hall 2003 Chapter 1 12

Other Regions (contd.)

The economic situation and the often

unacceptable level of government intervention

discourage foreign investment in less developedcountries (LDCs).

Assessing the risk-return tradeoffs and keeping

up with political developments in the LDCs are

two of the many demands on internationalmanagers.

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Prentice Hall 2003 Chapter 1 13

Workforce Diversity

The world labor force is undergoing

considerable change as a result of

the increasing movement across borders of

workers at all skill levels;

the rising average age of employees; and

the addition of great numbers of women to the

workforce (particularly in developing countries),

many with higher levels of education.

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Prentice Hall 2003 Chapter 1 14

An Open Systems Model: The Contingency

Role of the Global Manager(Exhibit 1-1)

FunctionsAnd PeopleOPERATING

ENVIRONMENT

Regulations Culture

Skills

Soc. Responsibility

Ethics

MEGA

ENVIRONMENT

HOST-COUNTRY

ENVIRONMENT

Subsidiary-Host

Interdependence

MNC-Host-Country

Interdependence

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Prentice Hall 2003 Chapter 1 15

What is Political Risk?

Political risks are any governmental action

or politically motivated event that could

adversely affect the long-run profitabilityor value of a firm.

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Prentice Hall 2003 Chapter 1 16

Terrorism Risk

Terrorism is the use, or threat of use, of anxiety-

inducing violence for ideological or political

purposes (Micklous). The increasing incidence of terrorism around the

world concerns MNCs.

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Prentice Hall 2003 Chapter 1 17

Typical Political Risk Events

Expropriation of corporate assets without prompt

and adequate compensation.

Forced sale of equity to host-country nationals,usually at or below depreciated book value.

Discriminatory treatment against foreign firms in

the application of regulations or laws.

Barriers to repatriation of funds (profits or

equity).

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Prentice Hall 2003 Chapter 1 18

Typical Political Risk Events (Contd.)

Loss of technology or other intellectual property

(such as patents, trademarks, or trade names).

Interference in managerial decision making. Dishonesty by government officials, including

canceling or altering contractual agreements,

extortion demands, and so forth.

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Prentice Hall 2003 Chapter 1 19

Managing Political Risk(Taoka and Beemans suggestions)

Equity sharing

Participative management

Localization of the operation

Development assistance

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Prentice Hall 2003 Chapter 1 20

Economic Risk

The economic risk incurred by a foreign

corporation usually falls into one of two main

categories: its subsidiary (or other investment)in a specific country may become unprofitable

if the government abruptly changes its domestic

monetary or fiscal policies or

if the government decides to modify its foreign-

investment policies.

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Prentice Hall 2003 Chapter 1 21

Some Means that Managers Might Use to

Maintain Dependency

Input control

Market control

Position control

Staged contribution strategies

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Prentice Hall 2003 Chapter 1 22

The Legal Environment

A host countrys legal system may be derived

from common law, civil law, or Muslim law, and

is a reflection of the countrys culture, religion,and traditions.

Under common law, past court decisions act as

precedents to the interpretation of the law and to

common custom.

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Prentice Hall 2003 Chapter 1 23

The Legal Environment (contd.)

Civil lawis based on a comprehensive set of

laws organized into a code. Interpretation of

these laws is based on reference to codes andstatutes.

Islamic lawcombines, in varying degrees, civil,

common, and indigenous law. It is followed in

approximately 27 countries.

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Prentice Hall 2003 Chapter 1 24

The Technological Environment

Technoglobalismis the phenomenon in which rapid

developments in information and communication

technologies (ICTs) are propelling globalization and vice-

versa.

An MNCs major concern is the appropriability of

technologythat is, the ability of the innovating firm to

profit from its own technology by protecting it from

competitors.

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Prentice Hall 2003 Chapter 1 25

Global E-Business

E-businessis the integration of systems,

processes, organizations, value chains and entire

markets using Internet-based and relatedtechnologies and concepts.

E-commercerefers directly to the marketing and

sales process

The Internet and e-business provide a number of

uses and advantages in global business.

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Prentice Hall 2003 Chapter 1 26

The Environment of the Global Manager

Political Environment

Form of government

Political stability Foreign policy

State companies

Role of military

Level of terrorism Restrictions on

imports/exports

Economic Environment

Economic system

Stage of development Economic stability

GNP

Intl financial standing

Monetary/fiscalpolicies

Foreign investment

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Prentice Hall 2003 Chapter 1 27

The Environment of the Global Manager

(contd.)

Regulatory Environment

Legal system

Prevailing intl laws Protectionist laws

Tax laws

Role of contracts

Protection forproprietary property

Technological Environment

Level of technology

Availability of local

technical skills Technical requirements of

country

Appropriability

Transfer of technology

Infrastructure

Environmental protection