Mgt 485Chapter 10

Managing Political Risk and Negotiations

Mgt 485-10-2

Response from HON Intntl.

We don't currently sell anything to Hobis, may have years ago or something. I would say that our values haven't changed since the company's inception in the 1940s and while our current CEO/Chairman will give up his CEO title this year, there won't be any vision/values changes. Perhaps an even more aggressive pursuit of profitable growth opportunities, but our core stakeholder focus will remain the same. [James]

Might it be reasonable to assume that this increases the economic imperative (emphasis of profitability over flexibility and responsiveness to individual countries and cultures)? [ES]

Seems reasonable at first glance, but I don't think so. It's not like say Pepsi, where one size fits all. There is no pan-European office furniture company, for example. Some may be strong in 2 or 3 countries, but you HAVE to be responsive to culture on an individual basis to be effective. [James]

Mgt 485-10-3

Follow-up with HON Intntl.Our (my) thinking was based on a Multi-National company’s approach at orienting their strategy according to one or more (in combination) of the four areas:

•Economic Imperative (Strategy based on Cost, differentiation, segmentation) •Political Imperative (Country responsive strategies - protect local market niches) •Quality Imperative (TQM - customer focus) •Administrative Co-ordination (Strategic decisions based on individual situations)

This relates to the strategic perspective adopted by firms (somewhat based on leadership philosophy, but also affected by the product / market mix)

•Ethnocentric (Allows the values and interests of the parent company to guide the strategic decisions) •Polycentric (Tailored to suit the cultures of the countries where the MNC operates) •Regiocentric (Leads a firm to try to blend its own interests with those of its subsidiaries on a regional basis) •Geocentric (Tries to integrate a global systems approach to decision making)

Based on the documentation we found on the web site, we categorized HON industries as being predominately Regiocentric (since we did not feel your products required major adaptations to satisfy cultures (compare to food products). We also felt that three of your vision statements strongly suggested a strategic approach towards the economic imperative, one directly speaking to the quality imperative, and two that could be interpreted as speaking to the political imperative (including protecting your workforce in your home country).

Your comment of an aggressive pursuit of economic opportunity, I now take to be more a matter of how you define your economic pursuit rather than placing it as a higher level of importance in the total balance of operations.

Mgt 485-10-4

Additional Internet Sites http://www.imf.org/ http://www.transparency.org http://www.duke.edu/~charvey/Country_risk/couindex.htm http://lcweb2.loc.gov/frd/cs/cshome.html http://www.economist.com/displayStory.cfm?Story_ID=38347

2 http://www.intracen.org http://www.gpoaccess.gov/index.html http://www.grai.com/ http://www.duke.edu/~charvey/Country_risk/pol/pol.htm

Mgt 485-10-5

Figure 10 - 1 Country Risk

0 20 40 60 80 100

IraqIndonesia

RussiaColombiaVenezuela

MexicoPhilippines

IndiaChina

PolandCzech Republic

South KoreaGreeceTaiwan

Hong KongSingapore

Mgt 485-10-6

Government Corruption

5 Most Corrupt Countries (1998 Data)1. Cameroon2. Paraguay3. Honduras4. Nigeria5. Indonesia

Mgt 485-10-7

Macro Analysis of Political Risk

Purpose: To review the major political decisions likely to affect all business conducted in a country– Examples

Tightening controls on flow of foreign currency

Bureaucratic legal systemsRequiring foreign investors to establish

joint ventures with local partners

Mgt 485-10-8

Micro Analysis of Political Risk

Purpose: government policies that influence selected sectors of the economy or specific foreign business– Examples

Industry regulationTaxes on specific types of business

activityRestrictive local taxes

Mgt 485-10-9

Political Risks Transfer Risks - policies that limit the

transfer of capital, payments, production, people, and technology in or out of a country– Tariffs on exports or imports

Operational Risks - policies that constrain the management and performance of local operations– Price controls and financing restrictions

Ownership control risks - polices that inhibit ownership or control of local operations– Foreign ownership limitations

Mgt 485-10-10

Managing Political Risk (cont.)

General Nature of Investment– Conglomerate investment

Type of high-risk investment in which goods or services produced are not similar to those produced at home

– Vertical investment Production of raw materials or intermediate goods that

are to be processed into final products– Horizontal investment

MNC investment in foreign operations to produce the same goods or services as those produced at home

Special Nature of Investment– Determined by economic activity, technological

sophistication, and pattern of ownership

Mgt 485-10-11

A Three-Dimensional Framework

for Assessing Political Risk

Transfer Ownershipcontrol

Operational

Low Low Low

High High High

High High High

Low Low Low

II

I

IV

III

V

Special

inve

stmen

ts

Conglomerate

Vertical

Horizontal

Gen

eral

inve

stm

ents

Fig. 10-2 p. 288

Mgt 485-10-12

Managing Political Risk (cont.)

Quantifying the Variables in Managing Political Risk– Identify important factors and compare the

results from different geographic locales– Factors typically reflect the political and

economic environment Formulating Appropriate Response

– Relative bargaining power MNC attempts to garner greater bargaining power

than the host country– Proprietary technology not available to the host

country is one source of relative bargaining power

Mgt 485-10-13

Relative Bargaining Power Over Time

Bar

gain

ing

Pow

er

Low

High

Initialinvestment

Time

Host nation’sbargaining power

Interventionoccurs

Subsidiary’sbargaining power

A

B

C

DE

Fig. 10.3

Mgt 485-10-14

Managing Political Risk (cont.)

Formulating Appropriate Risk (cont.)– Integrative techniques

Help the overseas operation become a part of the host country’s infrastructure

– Produce as much locally using local suppliers– Create joint ventures with local companies– Develop effective labor-management relations

– Protective and defensive techniques Discourage the host government from interfering in

operations Encourage nonintegration of the enterprise in the

local environment– Do little local manufacturing– Limit the responsibility of local people– Conduct all research and development outside of the

country

Mgt 485-10-15

Use of Integrative and Protective andDefensive Techniques by Firms in Select

Industries

Advancedmanagement skill

United logistic,labor transmission

Low or stable technology

(14,3)

(7,10)

(11,14)

(16,6)

Inte

grat

ive

tech

niq

ues

Low 1

High 20

Moderate 10

Low

Protective/defensive techniquesModerate High

1 10 20

Dynamic high technology

Mgt 485-10-16

The Nature of Investment

1. Conglomerate investment - The

production of goods or services dissimilar to those produced at home– High risk

2. Vertical investment - production of raw materials or intermediate goods that are to be processed into final products– Moderate risk

3. Horizontal investment - production of goods or services similar to those produced at home– Low risk

Mgt 485-10-17

Special Nature of Investment

Economic Activity consists of: – primary sector (agriculture, forestry, etc.)

Highest risk factor

– industrial sector (manufacturing operations)

Lowest risk factor

– service sector (transportation, finance, etc.)

Moderate risk factor

Mgt 485-10-18

Technological Sophistication consists of: – Science-based industries

High risk factor

– Non-science-based industriesLower risk factor

Mgt 485-10-19

Patterns of ownership consist of:– Wholly owned businesses

High risk factor

– Partially owned businessesLower risk factor

Mgt 485-10-20

Integrative Techniques

Designed to help overseas operations become part of the host country’s infrastructure– Examples

Developing good relations with host government

Producing products locallyCreating joint ventureParticipating in local research and

development

Mgt 485-10-21

Protective & Defensive Techniques

Designed to discourage the host government from interfering in operations– Examples

Doing little local manufacturingConducting little local research and

developmentLimiting responsibility of local

personnelDiversifying production in a number of

countries

Mgt 485-10-22

The Negotiation Process

Planning

Interpersonal relationship building

Exchanging task-related information

Persuasion

Agreement

Mgt 485-10-23

“Do’s” and “Don’ts” of Negotiation

Do not identify the counterpart’s home culture too quickly

Beware of western bias toward “doing” Try to counteract the tendency to

formulate simple, stable images Do not assume that all aspects of

culture are equally significant Do not overestimate your familiarity

with your counterpart’s culture

Mgt 485-10-24

Cultural Differences Affecting Negotiations– Must understand the other party’s

communication patterns, time orientation, and social behaviors

Society’s culture plays a major role in determining the effectiveness of a negotiating approach

– U.S. negotiators often differ from negotiators in many other countries

Negotiation Tactics– Location

For important matters, neutral site preferred– Time Limits

Important when one party is under a time constraint

Managing International Negotiations

Mgt 485-10-25

Managing International Negotiations

Negotiation Tactics (cont.)– Buyer-Seller Relations

Negotiators from different countries perceive outcomes of negotiations differently

– For example, desire to come out on top

Bargaining Behaviors– Use of Extreme Behaviors

Initial bargaining position

– Promises, Threats, and Other Behaviors Designed to influence the other party Behaviors often are greatly influenced by the

culture

– Nonverbal Behaviors