Nature of International “Risk”
Three main categories of risk which effect international business managers – Unstable ethnic, religious and military conflicts
Including the types of threats within Political Risk
– Climatic extremes that threaten the health and safety of nonresident travelers
– Topographical extremes that endanger personal safety, communications and transportation.
Significant volume of information is available Requirements of “due dilligence”
– http://www.stern.nyu.edu/globalmacro/Geopolitics/PolRisk.htm– http://www.aon.com/risk-services/political-risk-map2/thank_you.html
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=383472 http://www.intracen.org http://www.itools.com/research-it/research-it.html http://www.access.gpo.gov/su_docs/ http://www.prsgroup.com/yearbook/yearbook.cfm http://www.grai.com/ http://www.ntu.edu.sg/library/stat/statdata.htm http://www.duke.edu/~charvey/Country_risk/pol/pol.htm
Conditions Favoring Corruption
Concentration of decision-making power: non-democratic regimes
Lack of government transparency in decision-making Large amounts of public capital involved in a project Self-interested closed cliques and "old-boy" networks Weak rule of law Poorly-paid government officials An apathetic and uninterested, or gullible and easily
led demos that does not scrutinize the political process sufficiently
From: http://www.answers.com/topic/political-corruption
Government Corruption
5 Most Corrupt Countries (1998 Data)
1. Cameroon
2. Paraguay
3. Honduras
4. Nigeria
5. Indonesia
2009 Corruption Ratings?
http://www.forbes.com/2009/03/18/most-corrupt-countries-bizcountries09-business-washington-corrupt-countries_slide.html
Corruption (2001 Data from Transparency International)
Most Corrupt1. Azerbaijan2. Bangladesh3. Bolivia4. Cameroon5. Indonesia6. Kenya7. Nigeria8. Pakistan9. Russia10. Tanzania11. Uganda12. Ukraine
Least Corrupt1. Australia2. Canada3. Denmark4. Finland5. Iceland6. Luxembourg7. Netherlands8. New Zealand9. Norway10. Singapore11. Sweden12. Switzerland
Rank Country
1. Myanmar
Somalia
2. Iraq
3. Haiti
4. Tonga
Uzbekistan
5. Afghanistan
Chad
Sudan
6. Congo, Democratic Republic
Equatorial Guinea
Guinea
Laos
2007
2009?http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table
Political Risk (From Perc Library)
http://www.asiarisk.com/library5.html
Importance of Degree of difficulty Country political risk of doing business 1. China 68.55 6.33 2. Hong Kong 62.32 3.61 3. Vietnam 56.54 5.75 4. Philippines 56.32 5.83 5. Taiwan 54.20 4.78 6. South Korea 50.24 5.62 7. Thailand 48.70 5.59 8. Indonesia 48.41 6.27 9. Malaysia 42.00 5.35 10. US 32.19 2.89 11. Japan 31.79 4.97 12. Singapore 27.07 3.50
1 Measured as a percentage of total country risk. (Balance of Economic and Political)2 Graded on a zero to 10 scale, with zero being the best grade possible, or an extremely hospitable business environment, and a 10 the worst grade possible, or a very difficult business environment
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 currencyBureaucratic legal systemsRequiring foreign investors to establish joint
ventures with local partners
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
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
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
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
Bargaining Power Over TimeB
arga
inin
g P
ower
Low
High
Initialinvestment
Time
Host nation’sbargaining power
Interventionoccurs
Subsidiary’sbargaining power
A
B
C
DE
Fig. 10.3
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
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
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
A Three-Dimensional Frameworkfor 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
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
Science-based industries High risk factor
Non-science-based industriesLower risk factor
Technological Sophistication
– Wholly owned businesses High risk factor
– Partially owned businesses Lower risk factor
Patterns of ownership
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
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
Organizational Consequence of
Internationalization Aircraft Cameras Electronics Computers
Telecommunications
Aerospace
Autos
Synthetic fibers
Cement
Steel
Clothing
Packaged goods
High
Low
Low High
Pressure for Local Responsiveness
Pre
ssu
re f
or
Glo
balizati
on
Initial Division StructureUsed for Initial Entry into International Markets
– Exporting Common first choice for manufacturers of
technologically advanced products Firm can charge premium price due to little
competition
– Subsidiary A common for handling finance-related businesses
or other operations that require an on-site presence from the start
Subsidiaries During the Early Stage of
InternationalizationHome OfficeDepartments
OverseasSubsidiaries
CEO
Production Marketing Finance Personnel
V.P. InternationalOperations
France Japan Egypt Australia Argentina
International Division Structure
Advantages– Takes burden off the CEO
– Receives top management attention
– Promotes overall unified approach
– Develops internationally experienced managers
Disadvantages– Separating domestic and international managers may
cause differing objectives
– Home office may not be able to allocate resources globally, thereby penalizing growth
Home OfficeDepartments
OperatingDivisions
CEO
Production Marketing Finance Personnel
DomesticDivision
DomesticDivision
DomesticDivision
DomesticDivision
InternationalDivision
Australia Japan Italy
OfficeOperations
Marketing Government Relations
International Division Structure
Global Product Division
Advantages– Helps to manage diversity– Able to cater to local needs– Marketing, production, and finance can be co-ordinated
on a product-by-product global basis
Disadvantages– Duplication of facilities and staff personnel – Managers may pursue attractive short-term sites
instead of long-term sites– Managers spend to much time trying to tap local instead
of international markets
Domestic divisions are given worldwide responsibility for product groups
Global Product Division Structure
CEO
Production Marketing Finance Personnel
SouthAmerica
Africa Europe Australia Far East
ProductDivision A
ProductDivision B
ProductDivision C
ProductDivision D
ProductDivision E
Production
Marketing Finance Personnel
Great BritainFranceGermanyItalyNetherlands
Global Area Division
Advantages– Reduces cost per unit– Caters to local markets– Makes rapid decisions to accommodate environmental
changes
Disadvantages– Difficulty reconciling a product emphasis with
geographic orientation– Ignores new research and development by division
groups
Based on geographic rather than product orientation
Global Area Division Structure
Home OfficeDepartments
OperatingDivisions
CEO
Production Marketing Finance Personnel
NorthAmerica
SouthAmerica Europe Asia Africa
Great BritainFranceGermanyItalyNetherlands
Global Functional Division
Advantages– Emphasizes functional expertise
– Tight centralized control
– Relatively lean managerial staff
Disadvantages– Difficulty co-coordinating manufacturing and
marketing
– Difficulty managing multiple product lines
– Only CEO can be held accountable for profits
Worldwide operations based primarily on function and secondarily on product
A Global Functional Structure
CEO
Production Marketing Finance
DomesticProduction
Product AProduct BProduct CProduct D
ForeignProduction
Product AProduct BProduct CProduct D
DomesticProduction
Product AProduct BProduct CProduct D
ForeignProduction
Product AProduct BProduct CProduct D
Mixed Organization Structures
Advantages– Allows organization to create the specific type of
design to meet its needs
Disadvantages– Complexity increases– Difficulty arises in co-ordinating personnel
Combines global product, area, and functional divisions to supplement its primary structure with a secondary
one, and perhaps a tertiary (third) one
A Multinational Matrix Structure
CEO
Production Marketing Finance Personnel
Manager,Industrial GoodsNorth America
Manager,Industrial GoodsEurope
North America Industrial Goods Europe
Meeting the Challenges of Globalization
Synergy - (2 + 2 = 5)– whole is greater than the sum of its parts
Organizational Synergy– Pooling knowledge across regions – Sharing resources to meet world-wide needs– Pooling purchases for greater negotiating power– Coordinating strategies to become more efficient– Vertically integrating to be more cost effective
– Creating new businesses
Strategies: Mutual adjustment Use of direct, technically skilled supervisors Use of integrative leadership Technical training provided in-house Use of standard milestones in work design Flexible design standards
Organizing for Product Integration
Information Technology
Key Questions: Which information systems are needed? Are investments are worthwhile? How does technology fit into
management’s strategic thinking ? How should users and specialists connect
within the company? How do you design systems to improve
organizational performance?
Organizational Characteristics3 most critical for international
operations Formalization
– The use of defined structures used in decision making, communicating, and controlling
Objective - written descriptions Subjective -informal controls
Specialization– The assigning of individuals to specific, well-defined
tasks Horizontal specialization Vertical specialization
Centralization– Management system in which important decisions are
made at the top
Structural Deficiency Symptoms
Decisions are delayed or lacking in quality
Organization does not respond innovatively to a changing environment
Too much conflict from departments being at cross purposes is evident
Relate “Structure” to “Culture”
How do cultural dimensions affect structural dimensions?
Are some structures inherently more effective in some cultures?
INTERNATIONAL DECISION MAKING
British are highly decentralized
French tend to be centralized
Germans are fairly centralized
Swedes are also centralized
Japanese decide by consensus
FACTORS AFFECTING DECISION MAKING
CENTRALIZATION Large company Homogeneous product
lines Large capital investment High degree of
technology
DECENTRALIZATION Small company Heterogeneous product
lines Small capital investment Moderate to low degree of technology
See Table 12-1, p 333
Centralization and DecentralizationCentralization and Decentralizationof Decision Making in Subsidiary of Decision Making in Subsidiary
OperationsOperations
Adapted from Table 11–1: Factors That Influence Centralization or Decentralization of Decision Making in Subsidiary Operations
Comparing Decision MakingCo-determination
– Legal system requiring workers and management to discuss major decisions
Ringisei– From Japan; decision making by consensus
Tatemae– Japanese; “doing the right thing” accoring to
norms.Honne
– Japanese: What one really wants to do
TQM DECISIONS
Manufacturing
Rewards and
Recognition
U.S. has greatly improved the quality of their cars
Japanese use continuous improvement of quality
U.S. workers value individual recognition and praise
Japanese prefer group rewards
QUALITYOLD MYTH
Quality is the responsibility of the people in the Quality Control Department
Training is costly It is human to make mistakes Quality improvements are made in small, continuous
steps Quality improvement takes time Haste makes waste Suppliers need to be price competitive
QUALITY NEW TRUTH
Quality is everyone’s job Training does not cost, it saves Total customer satisfaction is a standard that should
be vigorously pursued In improving quality, both small and large
improvements are necessary Quality does not take time, it saves time Thoughtful speed improves quality Suppliers need to be quality competitive
INTERNAL dominating attitude bordering
on aggressiveness towards the environment
focused on self, function, one’s own group, and one’s own organization
discomfort when the environment seems “out of control” or changeable
Win some, lose some
EXTERNAL flexible attitude, willing to
compromise and keep the peace
focused on others such as customers, partners, and colleagues
Comfort with waves, shifts, and cycles, which are regarded as “natural”
Win together, lose apart
Direct vs. Indirect Controls
Direct Controls Involves face-to-face or personal
meetings to monitor operationsEx.) Monthly management meetings
Ex.) Visits by top executives to overseas affiliates or subsidiaries
Indirect Controls Use reports and other written forms of communication to control operations
Ex.) Monthly operating reports that are sent to the home office
Ex.) Balance sheet, income statement, cash budgets
The Controlling Process
Methods by which MNCs control overseas operations
– Most combine direct and indirect controls
– Some prefer heavily quantifiable methods – others more qualitative approaches
– Some prefer decentralized approaches – others greater centralization
CONTROL IN U.S. MNCs
Control in U.S. MNCs focuses more on the quantifiable, objective aspects of a foreign subsidiary
Requires more precise plans and budgets
Requires large central staffs and centralized information processing capability
CONTROL IN EUROPEAN MNCs
Requires more decentralization of operating decisions
Requires more capable expatriate managers who are willing to spend long periods of time abroad
Requires a high level of company-wide understanding and agreement regarding appropriate behavior
The Controlling Process
MNC will focus on the things that it does best– Management wants to ensure there is a market for
the goods and services it offers – First the company needs to find out what the
customers want and be prepared to respond appropriately
– This requires an external control focus Internal and external perspectives of control –
one is often given more attention than the other.
Types of ControlInternal and
External Control
The Impact of Internal and External-The Impact of Internal and External-Oriented CulturesOriented Cultures
on the Control Processon the Control Process
Adapted from Table 11–3: The Impact of Internal and External-Oriented Cultures on the Control Process
The Controlling Process
The use of face-to-face or personal meetings for the purpose of monitoring operations
International Telephone and Telegraph (ITT) holds monthly management meetings at its New York headquarters– Meetings are run by the CEO of the company– Reports are submitted by each ITT unit manager
throughout the world– Problems are discussed, goals set, evaluations made, and
actions taken to help the unit to improve its effectiveness
Types of Control Direct Controls
The Controlling Process
Other examples – Top executives visit overseas affiliates or subsidiaries to
learn firsthand the problems and challenges facing the unit and to offer assistance
– By determining who to send overseas to run the unit, MNCs can directly control how the operation will be run
– Designing a structure that makes the unit highly responsive to home-office requests and communications ensures MNCs that all overseas operations are run in accord with central management’s desires
Types of Control Direct Controls
The Controlling Process
The use of face-to-face or personal meetings for the purpose of monitoring operations
International Telephone and Telegraph (ITT) holds monthly management meetings at its New York headquarters– Meetings are run by the CEO of the company– Reports are submitted by each ITT unit manager
throughout the world– Problems are discussed, goals set, evaluations made, and
actions taken to help the unit to improve its effectiveness
Types of Control Indirect Controls
The Controlling Process
The use of reports and other written forms of communication to control operations at subsidiaries
Financial statements – Statements prepared to meet the national accounting
standards and procedures prescribed by the host country– Statements prepared to comply with the accounting
principles and standards required by the home country– Statements prepared to meet the financial consolidation
requirements of the home country
Types of Control Indirect Controls
Types of Control
Input OutputProcesses
Feedforwardcontrol
Anticipatesproblems
Concurrentcontrol
Corrects problemsas they happen
Feedbackcontrol
Corrects problemsafter they occur
FINANCIAL PERFORMANCE
Based on profit and return on investment
Profit = Total Revenues - Total Exp
Using Financial Performance alone when controlling a subsidiary for effective performance can be misleading
QUALITY PERFORMANCE
Taguchi Method: Brainstorming and a few experiments seek to quickly find the problem.
Brainstorming session
Production problem
Employ Taguchi
Experimental production runs
Confirm results
PERSONAL PERFORMANCE
1. Success attracts the best people--and the best people sustain success
2. The top companies know precisely what they are looking for
3. These firms see career development as an investment, not a chore
4. Whenever possible, these companies promote from within
5. Performance is rewarded
The Negotiation Process
Planning
Interpersonal relationship building
Exchanging task-related information
Persuasion
Agreement
“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
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
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