What is different about operating abroad?

Culture and Politics

Operating Margins for 147 of the Fortune Global 500

0

4

8

12

1990 1995 2001

Domestic

Foreign

%

%

%

%

Source: Gestrin, OECD

What is different about operating abroad?

• Geographic distance• Different economic conditions and

currency• Different language, culture, and

institutions• Different governments

Geographic distance

• Increases transport costsPerishability

Services

• Increases management costs

Economic conditions and currency

• Level of economic development– Income inequality

• Currency– Foreign exchange risk if currency is not at

Purchasing Power Parity

Big Mac Index of Currencies

-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70

China

Singapore

Japan

South Korea

Euro area

UK

Switzerland

Source: Economist, based on July 2008 prices

% Undervalued Relative to US $ % Overvalued Relative to US $

Real trade-weighted dollar exchange rateppp=100

50

60

70

80

90

100

110

120

130

1975 77 79 81 83 85 87 89 91

Source: Goldman Sachs

Why persistent deviations from PPP?

• PPP assumes arbitrage equalizes exchange rates

• Barriers to arbitrage prevent convergence– Trade barriers, transport costs, tax differences – Untraded inputs

• Price of untraded inputs slow to convergeHence exchange rates can deviate from PPP for long periods

• Most efficient way to hedge against persistent PPP deviations is local production/procurement

Culture and Politics

HeadquartersSubsidiary manager

Subsidiary employees

Local Firms

Customers

Government Press

1

3

2

1

2

4

1. Communication of goals and directives/interpretation of behavior2. Communication/Negotiation3. Communication/negotiation4. Marketing mix adaptation

Home Country Host Country

Cost of foreignness: the dumb foreigner syndrome

• Management

• Politics

• Marketing and communication

• Business takes place within societal rules• These rules determine how the game is

played and who wins and loses• Rules can be explicit (laws) or implicit

(customs)• Rules both affect and are affected by

business• This is true both at home and abroad, but

foreigners are at a disadvantage because they do not know, cannot impact, and often cannot accept

The social group in which rules are enforced can vary – family– Tribe– Region/province– country– Multicountry grouping (EU)– world

The rules of the game determine..

• Employer-employee relationships (management costs)

• Firm-firm relationships

• Firm-government relationships

• Firm-customer relationships

We will now look at…• Cultural differences and their impact on

intra and inter-organizational relationships

• Cultural and institutional differences and their impact on relationships with non-business actors (political risk)

• Cultural and environmental differences and their impact on relationships with consumers (product and service adaptation)

Different Language and Culture

• Language– Spoken and silent

– Impact on international business

• Culture– Dimensions of culture

– Impact on international business

Language

• Spoken and written language

• Silent language

Communication across languages

• Perceptual gaps

• Encoding/Decoding gaps(translation errors)

EncoderSender

Culture Choice of words

Choice of symbols

Meaning

Seller’s field of experience

Seller in country A

Decoder Receiver

CultureChoice of wordsChoice of symbols Understanding

Buyer in country B

Message

Medium

Buyer’s field of experience

Silent language

• Silence

• Color

• Time

• Space

• Things

Meanings of color China Korea Japan USA

Blue High quality Powerful

High quality

Adventurous

Sincere

Trustworthy

Sincere **

Trustworthy **

High quality *

Dependable

Dependable **

High quality *

Sincere

Trustworthy

Expensive

Powerful

Black Powerful **

Expensive

High quality

Dependable

Trustworthy

Powerful *

Expensive

Powerful *

Expensive

Dependable

Powerful **

Expensive

Red Happy **

Love *

Adventurous *

Love **

Good-tasting

Adventurous

Love **

Good-tasting

Happy

Adventurous

Love **

Adventurous

Happy

Good-tasting

Inexpensive

Yellow Happy

Pure **

Progressive*

Happy **PureGood-tasting

Dependable

Happy **

Pure*

Good-tasting

Happy

Pure

Good-tasting

Green Pure

Trustworthy Dependable Sincere

Pure 纯洁 *Adventurous Sincere

Trustworthy

Pure Good-tastingAdventurous

Good-tasting

Adventurous

Grey Inexpensive * Inexpensive Expensive

High quality

Dependable

** 50% or more of respondents made this association.

* 30-49% of respondents made this association.

All others, 20-29% of respondents made this association.

Source: Jacobs/Keown/Worthley/Ghymn (1991), p. 24.

Language impacts…

• management – Information loss

– “Language bias”

• marketing

What is Culture?

• Learned

• Integrated

• Shared

Stereotypes

• Useful as a starting point

• National cultural traits are normally distributed

Stereotyping

Direct, Honest Rude

Indirect Tactful

Americans French

A Model of Culture

- explicit

Hofstede’s Cultural Dimensions

• Surveyed 116,000 employees from 70 countries

• Highlighted four dimensions of culture– Power distance– Uncertainty avoidance– Individualism– Masculinity/femininity

Power distancethe extent to which less powerful members of institutions and

organizations accept that power is distributed unequally

High power distance

Managers make decisions autocratically

Close supervision is appreciated by subordinates

Employees fear to disagree with their boss

Employees put high value on conformity

Low power distance

Managers consult with subordinates

Close supervision is resented by subordinates

Employees disagree with their boss

Managers can seek help from employees

IndividualismTendency of people to look after themselves and their immediate family

only

High Individualism

Everybody is expected to take care of himself/herself

Everyone is responsible for his/her fate

Emotional independence of the individual from the organization

Emphasis on individual initiative and achievement

Low Individualism

Extended families and clans protect individuals in exchange

for loyalty

Belief in group decisions

Emotional dependence or the individual on the organization

Emphasis to belonging to organizations

Masculinity/Feminity

A masculine society is one where the dominant values in society are success, money, and things

Masculinity

Great importance put on earnings, recognition,

advancement, and challenge

Feminity

Importance put on relationships and cooperation

Uncertainty Avoidance

Extent to which people feel threatened by ambiguous situations

High Uncertainty Avoidance

Concern with security in life

Uncertainty is a threat that must be fought

Belief in experts and their knowledge

Strong need for consensus

Low Uncertainty Avoidance

Willingness to take risks

Uncertainty more accepted

Belief in generalist and common sense

More acceptance of dissent

Values of Hofstede’s Dimensions

Power Distance

Individualism Masculinity Uncertainty Avoidance

Brazil 69 38 49 76

China 58 17 45 69

Germany 35 67 66 65

Japan 54 46 95 92

Mexico 81 30 69 82

Netherlands 38 80 14 53

Norway 31 69 8 50

U.K. 35 89 66 35

U.S. 40 91 62 46

ARA

ARG

AUL

AUT

BEL

BRA

CAN

CHL

COL

COS

DEN

EAF

EQA

SAL

FIN

FRA

GER

GBR

GRE

GUA

HOK

IND

IDO

IRA

IRE

ISR

ITA

JAM

JPN

KOR

MAL

MEX

NET

NZL

NOR

PAK

PAN

PER

PHI

POR

SIN

SAF

SPA

SWE

SWI

TAI

THA

TUR

USA

URU

VEN

WAF

47

101316192225283134374043464952555861646770737679828588919497

100103106109112115

0 18 36 54 72 90 108

Masculinity Index (MAS)

Unc

ert

ain

ty A

void

anc

e I

nd

ex

(UA

I)

Strong uncertainty avoidance Feminine

Strong uncertainty avoidance Masculine

Weak uncertainty avoidance Feminine

Weak uncertainty avoidance Masculine

Masculinity-Femininity and Uncertainty Avoidance (for 50 countries and 3 regions)

WAF

VEN

URU

USA

TUR

THA

TAI

SWI

SWE

SPA

SAF

SIN

POR

PHI

PER

PAN

PAK

NOR

NZL

NET

MEX

MAL

KOR

JPN

JAM

ITA

ISR

IRE

IRA

IDO

IND

HOK

GUA

GRE

GBR

GER

FRA

FIN

SAL

EQA

EAF

DEN

COS

COLCHL

CAN

BRA

BEL

AUT

AUL

ARG

ARA

4

12

20

28

36

44

52

60

68

76

84

92

100

108

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110

Power Distance Index (PDI)

Unc

erta

inty

Avo

idan

ce In

dex

(UA

I)

Small power distance Strong uncertainty avoidance Feminine (well-oiled machine)

Power Distance and Uncertainty Avoidance (for over 50 countries and 3 regions)

Large power distance Strong uncertainty avoidance

(pyramid of people)

Small power distance Strong uncertainty avoidance(vintage market)

Large power distanceWeek uncertainty avoidance

(family)

WAF

VEN

URU

USA

TUR

THA

TAI

SWISWE

SPA

SAF

SIN

POR

PHI

PERPAN

PAK

NOR

NZL

NET

MEX

MAL

KOR

JPN

JAM

ITA

ISR

IRE

IRA

IDO

IND

HOK

GUA

GRE

GBR

GER

FRA

FIN

SAL

EQA

EAF

DEN

COSCOL

CHL

CAN

BRA

BEL

AUT

AUL

ARG

ARA

468

10121416182022242628303234363840424446485052545658606264666870727476788082848688909294

5 22 39 56 73 90 107

Power Distance Index (PDI)

Ind

ivid

ua

lism

Ind

ex

(ID

V)

Small power distance High individualism

Large power distance High individualism

Small power distanceLow individualism

Large power distanceLow individualism

Power Distance and Individualism-Collectivism (for 50 countries and 3 regions)

Japanese

Arab

Greek

Spanish

Italian

English

French

American

Scandinavian

German

German-Swiss

High-context culture

Low-context cultures

Impacts of culture

• Cultural traits

• Differences between cultural traits: cultural distance

Many people lack cultural self-awareness

• “We are the world”– Middle Kingdom– The World (World Series)

• Everybody is like us (or should be)!

• Just be sincere and it will show through

Cultures have the advantages of their disadvantages and the

disadvantages of their advantages

Cultural frictions are a major, but underestimated, management

problem in international business

They greatly impair the implementation of global strategies– global marketing coordination– technology transfer– Joint ventures and mergers and acquisitions

• Unclear that cultures are converging

• Management practices are not universal – Accounting

– Motivation techniques

– Decision making

Impact of cultural differences on management

• Authority and delegation

• Communication

• Job scope

Managers in Latin American affiliates of MNEs (as percent of total managers)

US MNEs European MNEs

Japanese MNEs

Parent-Country Nationals

44 78 83

Host-Country Nationals

47 16 17

Third-Country Nationals

9 5

HRM

• Recruitment

• Socialization

• Performance appraisal

• Compensation and rewards

Executive pay*1996, $000s

0

200

400

600

800

Variable compensationFixed compensation

Source: Towers Perrin *Total remuneration for chief executive officer

Firm-to-firm relationships

• Legalistic or social

• Personal or impersonal

Adaptation problem is harder with values than with customs

• Customs are explicit and easier to imitate

• Values are implicit and must be inferred

• Ignorance of local values create the most problems– Federal Express in Germany– Mitsubishi and Toyota in US

Coping with cultural differences

• Try to make sense of it

• Sleep over it

• Question friends and colleagues

• It’s not all about you!

• Keep your sense of humor

0,51

1,52

2,53

3,54

4,55

5,56

6,57

3-4

6-9

13-2

446

-48

Time in Months

Degree of Adjustment

Honeymoon

Adjustment

Mastery

Culture Shock

The U-curve of cross-cultural adjustment

SOURCE:

Black, J.S. & M. Mendenhall. 1991.”The U-Curve adjustment hypothesis revisited: A review and theoretical framework.” Journal of International Business Studies, Vol. 22 second quarter, pp. 225-247.

Culture and Politics

HeadquartersSubsidiary manager

Subsidiary employees

Local Firms

Customers

Government Press

1

3

2

1

2

4

1. Communication of goals and directives/interpretation of behavior2. Communication/Negotiation3. Communication/negotiation4. Marketing mix adaptation

Home Country Host Country

Governments…

• Buy and subsidize or penalize

• Regulate (competition, employment, pollution)

• Set standards (technical, health)

• Set tariff and non-tariff barriers

Porter’s strategic framework

• Firms compete on technology, product differentiation, costs, not politics

• The rules of the game are exogenous and given

Political strategies

• Tariffs and quotas: US response to Japanese competition

• Subsidies: ADM and gasohol; subsidies for foreign investment

• Government procurement: MDD in China; M-K and LA metro

• National Security: DP World, Lenovo and IBM PC, CNOOC and Unocal

• Environmental regulations: Venezuelan gasoline

Political strategies

• Know the rules of the game

• Impact the rules of the game

• obtain access

• exert influence• knowledge

• offer support (money, votes, etc.)

• Political rules of the game differ across countries in form and/or in content

• centralized vs. federal

• regulatory vs. incitative (pollution control)

• are often implicit and difficult to fathom

• things that “are not done”

Foreigners

• do not know

• cannot do

• have no impact

Foreigners do not know

• Do not speak language

• do not know local ways• have fewer contacts

Opacity Index, 2004

0

10

20

30

40

50

60

Fin

land

Unite

d K

ingdom

Denm

ark

Sw

eden

Hong K

ong

US

A

Aust

ralia

Canada

Sin

gapore

Neth

erla

nds

Germ

any

Japan

Taiw

an

Kore

a

Fra

nce

Bra

zil

Pola

nd

Italy

Mexi

co

Russ

ia

India

Nig

eria

Chin

a

Phili

ppin

es

Venezu

ela

Lebanon

Indonesi

a

Country Category OPA

COR LEG ENF ACC REG

Finland 3 11 23 17 9 13

United Kingdom 20 3 25 33 13 19

Denmark 6 15 21 33 19 19

Hong Kong 26 12 14 33 15 20

USA 28 19 27 20 10 21

Australia 19 16 26 33 10 21

Canada 26 17 37 20 16 23

Singapore 15 19 25 50 10 24

Germany 28 14 33 17 32 25

Japan 38 24 31 22 22 28

Taiwan 47 33 20 40 28 34

Korea 61 35 22 30 37 37

Brazil 47 48 32 40 35 40

Poland 63 35 47 40 19 41

Italy 52 32 45 63 24 43

Mexico 65 60 35 33 25 44

Russia 78 44 39 40 31 46

India 74 44 49 30 46 48

Nigeria 80 65 48 0 50 49

China 74 39 39 56 43 50

Philippines 75 56 52 33 36 50

Indonesia 82 54 90 22 49 59

Table: The Opacity Index

Foreigners cannot do

Constrained by home-country rules and public opinion– Corruption– Embargoes– Working conditions

Foreigners have no impact

• Foreigners are outsiders

• Foreigners have fewer contacts

• are outside the network of reciprocity

• Foreigners carry their home flag (+ or -)

• US firms in Arab countries

Firms are exposed to political risk

• In all countries and by all regimes

• For all types of entry modes

• Through many forms of risk

GO

General

Instability

Risk

Transfer

Risk

Ownership/

Control

OperationsRisk

(Expropriation)Risk

STOP STOP STOP STOP

- Revolution?- Subversion?- Turmoil?- External aggression?

- Nationalization?- Intervention?- Requisition?- Coerced sale?- Coerced contract renegotiation?- Contract revocation?

- Import restrictions?- Local content requirements?- Taxation?- Price control?- Foreign staff limits?- Labor codes /strikes?- Export requirements?- Discrimination

- Restrictions on repatriation of dividends, royalties, interest, fees, or capital?- Exchange rates?

nononono

yes yes yes yesChaotic? Too high? Unacceptable

effects onlocal-currency ROI?

Unacceptableeffects onDollar ROI?

Two important points:

• Political risk is almost always micro

• Political risk is not exogenous

Political risk is micro

• Limited value of political risk indices (Euromoney, Institutional investor) – Generally export receipts = solvency risk

What to do?

• Consider the political dimension

• Monitor and stay informed

• Become an insider

• Protect investments

• Consider the political dimension –P&G and Ariel

–Cargill and Indian salt mine

• Monitor and stay informed– Both internal and external sources

Become an insider

• Take joint venture partners

• Hire local managers

• Enlist local stakeholders– directors

– banks

• PR campaigns– Toyota in US, IBM in France

Protect investments

• Structure the investment

• sequencing

• bring in allies

• project finance

• set up dependence

• Insure