INTERNATIONAL BUSINESS

 
MANAGEMENT
EVOLUTION OF INTERNATIONAL BUSINESS

First phase of globalization  in  1870

Ended with World  war I  driven by Industrial Revolution
‘A vast game of beggar-­‐my-­‐neighbour’
Felt need for  International Cooperation

IMF IBRD
CHARACTERISTICS/FEATURES OF  INTERNATIONAL  
BUSINESS

Regional Integration
Declining Trade Barriers
Declining Investment Barriers
Growth in FDI
Strides in Technology
Growth of MNCs
Stages Influence
• Domestic Social and Cultural  
• International Technological   Goals
• Multinational Economic • Market Share
• Global Political • High Profit
• Transnational • Risk Avoidance
• Resource Acquisition
• Expand Business Capacities

Advantages
Domestic International
• Low Price
Business Business
• Variety of Goods
• High  Living Standards
• Economic Growth
Approaches Influence • Competitive Advantages
• Ethnocentric Export
• Polycentric Direct  Investment  
• Regiocentric Licensing   Problems
• Geocentric Franchising   • Political risk
Turnkey Projects   • Foreign Debt
Joint  Venture • Exchange Instability
Mergers and Acquisition • High Cost

INTERNATIONAL BUSINESS MODEL

 INFLUENCES
Accurate Information
Timely Information
Size of the Business
Market Segmentation
Potentiality of Markets
Inter-Country comparative study
Host Country’s Monetary System
National Security Policies
Cultural Factors
Language
Nationalism and Business Policy e.g.: USA ‘s Be American, Buy
American Made
 STAGES OF INTERNATIONALIZATION
Domestic Company
Limits operation, Vision, Mission to National political boundaries
International Company
Focus  on  domestic  practices  but  extend  wings  to  foreign  countries  (Mere  
export-­‐import)
Multinational Company
Different  strategy  for different market
Global Company
Either  produce  in  one  country  and  market  globally  or  produce  globally  and  
market domestically
Transnational Company
Produces, markets, invests and operates across the world
 APPROACHES TO INTL.  BUSINESS
Ethnocentric
Polycentric
Domestic companies   Companies establish
view  foreign  markets  as   foreign  subsidiaries  and  

an extension to   empowers its  

domestic markets executives

Regiocentric  
Geocentric  
Subsidiaries  consider  
Companies  view  the  
regional  environment  
entire world as a single
for  policy/strategy  
unit
formulation
 MODES OF ENTRY

Indirect  
Direct Exporting Joint Ventures
Exporting

Turn Key     Direct  

Mergers and Acquisition Projects Investment

Franchising   Licensing  
arrangements     arrangements    
with  foreign   with  foreign  
companies companies

Management Contract
Contracts Manufacturing
 GOALS OF  INTERNATIONAL BUSINESS
To achieve higher rates of profits
Expanding production capacity

Severe competition in home country

Limited home market

Political stability vs. instability

Availability of  technology and human resources

High cost of transportation

Nearness to raw material

Liberalization and Globalization

To increase market share

Higher rate of economic growth

Tariffs and import quotas

ADVANTAGES OF INTL BUSINESS
High living standards

Increased socio-­‐economic welfare

Wider market

Reduced effects of business cycles

Reduced risks

Large-­‐scale economies

Potential Untapped markets

ADVANTAGES OF  INTL  BUSINESS
Opportunity for challenge to domestic business

Division of labour and specialization

Economic growth of the  world

Optimum and proper utilization of world resources

Cultural transformation
PROBLEMS OF INTL BUSINESS
Political factors

Huge foreign indebtedness

Exchange instability

Entry requirements

Tariffs, quotas  and  trade  barriers

Corruption

Bureaucratic  practices of Govt

Technological pirating

Quality Maintenance
What  Is  Globalization?
• Globalization  -­‐ the  shift  toward  a  more  integrated  and  interdependent  
world  economy
• The  world  is  moving  away  from  self-­‐contained  national  economies  
toward  an  interdependent,  integrated  global  economic  system
 What  Is  The  
Globalization  of  Markets?
• Historically  distinct  and  separate  national  markets  are  merging  
• It  no  longer  makes  sense  to  talk  about  the  “German  market”  or  the  
“American  market”
• Instead,  there  is  the  “global  market”
• falling  trade  barriers  make  it  easier  to  sell  globally
• consumers’  tastes  and  preferences  are  converging  on  some  global  norm
• firms  promote  the  trend  by  offering  the  same  basic  products  worldwide
 Why  Do  We  Need  
Global  Institutions?
• Examples  include
• the General  Agreement  on  Tariffs  and  Trade  (GATT)
• the World  Trade  Organization  (WTO)
• the International  Monetary  Fund  (IMF)
• the World  Bank
• the United  Nations  (UN)
• the G20
 What  Is  Driving  Globalization?

• Declining  barriers  to  the  free  flow  of  goods,  services,  and  capital  
• average  tariffs  are  now  at  just  4%
• more  favorable  environment  for  FDI
• global  stock  of  FDI  was  $20.4  trillion  in  2011
• facilitates  global  production
• Technological  change  
• microprocessors  and  telecommunications
• Internet:  information  backbone  of  the  global  economy
• transportation  technology  
 What  Does  Globalization  
Mean   For  Firms?
• Lower  barriers  to  trade  and  investment  mean  firms  can
• view  the  world,  rather  than  a  single  country,  as  their  market
• base  production  in  the  optimal  location  for  that  activity
• But,  firms  may  also  find  their  home  markets  under  attack  by  foreign  
firms
 What  Does  Globalization  
Mean   For  Firms?
• Technological  change  means
• lower  transportation  costs  
• help  create  global  markets  and  allow  firms  to  disperse  production  to  economical,  
geographically  separate  locations    
• low  cost  information  processing  and  communication
• firms  can  create  and  manage  globally  dispersed  production
• low  cost  global  communications  networks  
• help  create  an  electronic  global  marketplace
• global  communication  networks  and  global  media
• create  a  worldwide  culture  and  a  global  consumer  product  market  
 The  Changing  Demographics  
Of  The  Global  Economy
• Four  trends  are  important:  
1. The  changing  world  output  and  world  trade  picture
2. The  changing  foreign  direct  investment  picture
3. The  changing  nature  of  the  multinational  enterprise
4. The  changing  world  order
 How  Has  Foreign  Direct  
Investment  Changed  Over  Time?

• In  the  1960s,  U.S.  firms  accounted  for  about  two-­‐thirds  of  worldwide  
FDI  flows  
• Today,  the  United  States  accounts  for  less  than  one-­‐fifth  of  worldwide  FDI  
flows
• Other  developed  countries  have  followed  a  similar  pattern
• In  contrast,  the  share  of  FDI  accounted  for  by  developing  countries  
has  risen  
• Developing  countries,  especially  China,  have  also  become  popular  
destinations  for  FDI
 What  Is  A  
Multinational  Enterprise?
• Multinational  enterprise  (MNE) -­‐ any  business  that  has  productive  
activities  in  two  or  more  countries
• Since  the  1960s
• the  number  of  non-­‐U.S.  multinationals  has  risen
• the  number  of  mini-­‐multinationals  has  risen
The  Changing  World  Order
ØMany  former  Communist  nations  in  Europe  and  Asia  are  now  
committed  to  democratic  politics  and  free  market  economies
Ø creates  new  opportunities  for  international  businesses
Ø but,  there  are  signs  of  growing  unrest  and  totalitarian  tendencies  in  some  
countries    
ØChina  and  Latin  America  are  also  moving  toward  greater  free  market  
reforms
Ø between  1983  and  2010,  FDI  in  China  increased  from  less  than  $2  billion  to  
$100  billion  annually
Ø but,  China  also  has  many  new  strong  companies  that  could  threaten  Western  
firms
 Is  An  Interdependent    Global  
Economy   A  Good   Thing?
• Supporters  believe  that  increased  trade  and  cross-­‐border  investment  
mean  
• lower  prices  for  goods  and  services
• greater  economic  growth
• higher  consumer  income,  and  more  jobs
• Critics  worry  that  globalization  will  cause
• job  losses
• environmental  degradation
• the  cultural  imperialism  of  global  media  and  MNEs
• Anti-­‐globalization  protesters  now  regularly  show  up  at  most  major  
meetings  of  global  institutions  
 How  Does  Globalization  Affect  Jobs  
And   Income?
• Critics  argue  that  falling  barriers  to  trade  are  destroying  
manufacturing  jobs  in  advanced  countries
• Supporters  contend  that  the  benefits  of  this  trend  outweigh  the  costs
• countries  will  specialize  in  what  they  do  most  efficiently  and  trade  for  other  
goods—and  all  countries  will  benefit
How  Does  Globalization  Affect  Labor  Policies  And  The  
Environment?
• Critics  argue  that  firms  avoid  the  cost  of  adhering  to  labor  and  
environmental  regulations  by  moving  production  to  countries  where  
such  regulations  do  not  exist,  or  are  not  enforced
• Supporters  claim  that  tougher  environmental  and  labor  standards  are  
associated  with  economic  progress
• as  countries  get  richer  from  free  trade,  they  implement  tougher  
environmental  and  labor  regulations
 GLOBALIZATION OF BUSINESS

Globalization is the shift towards a more integrated and

interdependent world economy
Globalization implies integration of the economy of the country with
the rest of the world economy and opening up of the economy for
foreign direct investment by liberalizing the rules and regulation and
by creating favorable socio-economic and political climate for global
business
 FEATURES OF GLOBALIZATION
⚫ Operating and planning to expand business throughout the world

⚫ Erasing the difference between domestic and foreign markets

⚫ Buying and selling goods and services from any country to any country in the world

⚫ Establishing manufacturing and distribution facilities in any part of the world based
on the feasibility and viability rather than national consideration

⚫ product planning and development are based on market consideration of the

entire world

⚫ Sourcing the factors of production and inputs like raw materials, machinery,
finance, human resources , technology and managerial skills from entire world
⚫ Global orientation in strategies, organizational structure, organizational culture and
managerial expertise

⚫ Setting the mind and attitude to view the entire globe as a single market
 PROCESS OF GLOBALIZATION

⚫ Domestic company export to foreign countries through the dealers or

distributors of the home country
⚫ The domestic company exports to foreign countries directly on its
own
⚫ The domestic company becomes an international company by
establishing production and marketing operations in various key
foreign countires
⚫ The company replicates a foreign company in the foregin country by
having all the facilities including r&d, full fledged human resource
⚫ The company becomes a true foreign company by serving the needs
of foreign customer just like the home country company serves
 Components of globalization

Globalization Globalization of Globalization of

Globalization of
of markets investment technology
production
 What  Is  The  
Globalization  of  Markets?
• Firms  of  all  sizes  benefit  and  contribute  to  the  globalization  of  
markets
• 97%  of  all  U.S.  exporters  have  less  than  500  employees
• 98%  of  all  small  and  mid-­‐sized  German  companies  participate  in  international  
markets
 GLOBALIZATION OF MARKETS

Globalization of markets refers to the process of integrating and

merging of the distinct world markets into a single market

This process involves the identification of some common norms,

values, taste, preference and convenience and slowly enables the
cultural shift towards the use of a common products or services

A number of consumer products have global acceptance. Eg coca-

cola, pepsi, sony and kfc
 FEATURES  OF  GLOBALIZATION  OF MARKETS

⚫ The size of the company should be large to create a global market

⚫ The difference require the companies to formulate different
strategies for each market
Eg coca cola, levis jeans employ separate strategies for each
country
⚫ Most of the foreign markets are the marketers for non-consumer
goods like industrial products, machinery, computers, software,
financial products
⚫ The global business firms compete with each other frequently in
different national markets including their home markets
REASONS  FOR  GLOBALIZATION  OF MARKETS

Large scale industries enable mass production

Companies in order to reduce the risk

Companies globalize markets in order to increase their profits and

achieve company goals

To cater the demand for their products in the foreign markets

The failure of the domestic companies in catering the needs of their

customer pulled the foreign countries to market their product
 What  Is  The  
Globalization  of  Production?
• Firms  source  goods  and  services  from  locations  around  the  globe  to  
capitalize  on  national  differences  in  the  cost  and  quality  of  factors  of  
production like  land,  labor,  energy,  and  capital
• Companies  can  
• lower  their  overall  cost  structure  
• improve  the  quality  or  functionality  of  their  product  offering
 GLOBALIZATION  OF  PRODUCTION

Factors influencing the location of manufacturing facilities vary from

one country to another
They may be more favorable in foreign countries rather than in the
home country
Eg cheap lab our in developing countries, availability of high quality and
cheap raw materials in other countries enable the companies to produce
the products of high quality and low cost in various foreign markets
REASONS  FOR  GLOBALIZATION  OF PRODUCTION

Availability of high quality raw materials and components in other

countries

Availability of skilled human resources at low cost

Availability of inputs at low cost in foreign countries

Liberal lab our laws in the foreign countries

To reduce the cost of transportation and easy logistics management

To design and produce the product as per the varying tastes of

customers in foreign countries
 GLOBALIZATION OF INVESTMENT

Globalization of investment refers to investment of capital by a

global company in any part of the world

Before 1930 many countries created barriers relating to export and

imports. After GATT the reduction in trade was implemented

After WTO the eliminated the investment barriers

India has allowed 51% foreign direct investment in Indian

companies with restriction in some sectors
REASONS  FOR  GLOBALIZATION  OF INVESTMENT

⚫ Many countries provided more congenial environment for attracting

direct investment

⚫ Significant amount of FDI is directed to the developing countries in

Asia and Eastern Europe
⚫ Small and medium companies have started investing in foreign
countries

⚫ Limitation of exporting and licensing force the domestic companies to

enter foreign countries
¡ Sourcing funds globally: The Indian government has allowed Indian
companies to procured investment from foreign companies
Eg reliance, Dr. reddy lab and sat yam computers
GLOBALIZATION  OF  TECHNOLOGY

⚫ Technological changes is improved after 1950

⚫ The revolution in telecommunication, IT and transportation have

made many company go into globalization
¡ Methods of globalization technology
Companies with latest technology acquire distinctive competencies and gain the
advantages of producing high quality products at low cost

Companies may have technological collaboration with foreign companies through

which technology spreads from country to country

The foreign companies allow the companies of various other countries adopt their
technologies on royalty payment basis
ADVANTAGES AND DISADVANTAGES OF  GLOBALIZATION

⚫ Free flow of capital ⚫ Globalization kills domestic

⚫ Free flow of technology business
⚫ Increase industrialization ⚫ Exploits human resources
⚫ Balanced development of world ⚫ Leads to unemployment and
economics underemployment
⚫ Increase in production and ⚫ Decline in demand for domestic
consumption products
⚫ Commodities at lower prices with ⚫ Decline in income
high quality ⚫ Widening gap between rich and
⚫ Increase in jobs and income poor
⚫ Higher standards of living ⚫ Transfer of natural resources
⚫ Balanced human development
⚫ Increase in welfare and prosperity
 MODE OF GLOBALIZATION

Acquisition of foreign companies

Joint ventures
Long term loans
Issuing equity shares, debentures and bonds
Global deposits receipts
 DRIVERS OF GLOBALIZATION

Establishment of the world trade organization:

Government of the member countries of general agreement on trade and

tariff(GATT) concluded the Uruguay round negotiation on the 15th
December 1994. according to uruguay meeting they came with a political
support “ strengthen the world economy and lead to more trade,
investment, employment and income growth throughout the world” WTO
was established on 1st Jan 1995. This is to facilitate the implementation,
administration and operation and further the objectives of this agreement
and on the multinational trade agreement
Declining trade barriers:

International trade occurs when the goods flow across the countries.
Government used to impose trade barriers like quotas and tariffs in order
to protect domestic business from the competition of international
business. Advanced countries after world war 2 agreed to reduce tariffs
in order to encourage free flow of goods. Thus reduction of tariffs and
other trade barriers contributed for the growth of global trade

Declining investment barriers:

Global business firm invest in order to establish manufacturing and other
facilities in foreign country. Foreign government impose barriers on
foreign investment in order to protect domestic industry.
Various countries have been removing these barriers on foreign direct
investment
Growth in foreign direct investment:
There are number of reasons for the growth of FDI. Which is also a
drivers of globalization

Strides in technology:
Technological changes has dramatically diverged global company to
globalization
Microprocessors and telecommunications
The internet and world wide web
On-line globalization
Transportation technology

Growth of multinational companies

Growth of multinational and transactional company are spreading their
operation in manufacturing, finance and other functional areas. Which
are been the drivers of globalization
What  Is  A  Political  Economy?
• Political  economy of  a  nation  -­‐ how  the  political,  economic,  and  legal  
systems  of  a  country  are  interdependent
• they  interact  and  influence  each  other
• they  affect  the  level  of  economic  well-­‐being  in  the  nation  
What  Is  A  Political  System?
• Political  system -­‐ the  system  of  government  in  a  nation
• Assessed  according  to
• the  degree  to  which  the  country  emphasizes  collectivism  as  opposed  to  
individualism  
• the  degree  to  which  the  country  is  democratic  or  totalitarian  
What  Is  Individualism?
• Individualism  refers  to  philosophy  that  an  individual  
should  have  freedom  in  his  own  economic  and  
political  pursuits
• can  be  traced  to  Greek  philosopher,  Aristotle  (384-­‐322  BC)
• individual  diversity  and  private  ownership  are  desirable  
• individual  economic  and  political  freedoms  are  the  ground  
rules  on  which  a  society  should  be  based    
• implies  democratic  political  systems  and  free  market  
economies    
What  Is  Democracy?
• Democracy -­‐ a  political  system  in  which  government  is  
by  the  people,  exercised  either  directly  or  through  
elected  representatives
• usually  associated  with  individualism  
• pure  democracy  is  based  on  the  belief  that  citizens  should  
be  directly  involved  in  decision  making
• most  modern  democratic  states  practice  representative  
democracy where  citizens  periodically  elect  individuals  to  
represent  them  
What  Is  Totalitarianism?
• Totalitarianism -­‐ form  of  government  in  which  one  
person  or  political  party  exercises  absolute  control  
over  all  spheres  of  human  life  and  prohibits  
opposing  political  parties
What  Is  Totalitarianism?
• Four  major  forms  of  totalitarianism  exist  today
1. Communist  totalitarianism – found  in  states  where  the  
communist  party  monopolizes  power
2. Theocratic  totalitarianism -­‐ found  in  states  where  political  
power  is  monopolized  by  a  party,  group,  or  individual  that  
governs  according  to  religious  principles
3. Tribal  totalitarianism -­‐ found  in  states  where  a  political  
party  that  represents  the  interests  of  a  particular  tribe  
monopolizes  power
4. Right-­‐wing  totalitarianism -­‐ permits  some  individual  
economic  freedom,  but  restricts  individual  political  
freedom
What  Is  The  Link  Between  Political  
Ideology  and  Economic  Systems?
• Political  ideology  and  economic  systems  are  
connected
• countries  that  stress  individual  goals  are  likely  to  have  
market  based  economies  
• in  countries  where  state-­‐ownership  is  common,  
collective  goals  are  dominant
 What  Is  An  Economic  System?

• There  are  three  types  of  economic  systems

1. Market  economies -­‐ all  productive  activities  are  privately  owned  
and  production  is  determined  by  the  interaction  of  supply  and  
demand  
• government  encourages  free  and  fair  competition  between  private  
producers
What  Is  An  Economic  System?
2. Command  economies -­‐ government  plans  the  
goods  and  services  that  a  country  produces,  the  
quantity  that  is  produced,  and  the  prices  as  which  
they  are  sold
• all  businesses  are  state-­‐owned,  and  governments  
allocate  resources  for  “the  good  of  society”
• because  there  is  little  incentive  to  control  costs  and  be  
efficient,  command  economies  tend  to  stagnate  
What  Is  An  Economic  System?
3. Mixed  economies -­‐ certain  sectors  of  the  economy  
are  left  to  private  ownership  and  free  market  
mechanisms  while  other  sectors  have  significant  
state  ownership  and  government  planning
• governments  tend  to  own  firms  that  are  considered  
important  to  national  security
What  Is  A  Legal  System?
• Legal  system -­‐ the  rules  that  regulate  behavior  
along  with  the  processes  by  which  the  laws  are  
enforced  and  through  which  redress  for  grievances  
is  obtained
• the  system  in  a    country  is  influenced  by  the  prevailing  
political  system
• Legal  systems  are  important  for  business  because  
they
• define  how  business  transactions  are  executed
• identify  the  rights  and  obligations  of  parties  involved  in  
business  transactions
What  Are  The  
Different  Legal  Systems?
• There  are  three  types  of  legal  systems
1. Common  law -­‐ based  on  tradition,  precedent,  
and  custom
2. Civil  law -­‐ based  on  detailed  set  of  laws  
organized  into  codes
3. Theocratic  law -­‐ law  is  based  on  religious  
teachings
 How  Are  Contracts  Enforced  In  
Different  Legal  Systems?
• Contract -­‐ document  that  specifies  the  conditions  under  which  an  
exchange  is  to  occur  and  details  the  rights  and  obligations  of  the  
parties  involved
• Contract  law is  the  body  of  law  that  governs  contract  enforcement
• under  a  common  law  system,  contracts  tend  to  be  very  detailed  with  all  
contingencies  spelled  out
• under  a  civil  law  system,  contracts  tend  to  be  much  shorter  and  less  specific  
because  many  issues  are  already  covered  in  the  civil  code
Which  Country’s  Laws  Should  Apply    
In  A  Contract  Dispute?
• The  United  Nations  Convention  on  Contracts  for  the  
International  Sale  of  Goods  (CIGS)
• establishes  a  uniform  set  of  rules  governing  certain  aspects  
of  the  making  and  performance  of  everyday  commercial  
contracts  between  buyers  and  sellers  who  have  their  places  
of  business  in  different  nations
• Ratified  by  the  U.S.  and  about  70  countries  
• but,  many  larger  trading  nations  including  Japan  and  the  
U.K.  have  not  agreed  to  the  provisions  of  CIGS  and  opt  for  
arbitration  instead    
How  Can  Intellectual  
Property  Be  Protected?
• Intellectual  property -­‐ property  that  is  the  product  of  
intellectual  activity
• Can  be  protected  using
1. Patents – exclusive  rights  for  a  defined  period  to  the  
manufacture,  use,  or  sale  of  that  invention
2. Copyrights – the  exclusive  legal  rights  of  authors,  
composers,  playwrights,  artists,  and  publishers  to  
publish  and  disperse  their  work  as  they  see  fit
3. Trademarks – design  and  names  by  which  merchants  or  
manufacturers  designate  and  differentiate  their  products
How  Can  Intellectual  
Property  Be  Protected?
• Protection  of  intellectual  property  rights  differs  from  
country  to  country  
• World  Intellectual  Property  Organization  
• Paris  Convention  for  the  Protection  of  Industrial  Property
• To  avoid  piracy,  firms  can  
• stay  away  from  countries  where  intellectual  property  laws  
are  lax
• file  lawsuits
• lobby  governments  for  international  property  rights  
agreements  and  enforcement
Why  Is  Product  Safety  And  
Product  Liability  Important?
• Question:
• Does  the  high  cost  of  liability  insurance  in  the  U.S.  make  
American  companies  less  competitive?
• Question:
• Is  it  ethical  to  follow  host  country  standards  when  product  
safety  laws  are  stricter  in  a  firm’s  home  country  than  in  a  
foreign  country?
• Question:
• Is  it  ethical  to  follow  host  country  standards  when  liability  
laws  are  more  lax  in  the  host  country?
How  Can  Managers  Determine  A  
Market’s  Overall  Attractiveness?
• The  overall  attractiveness  of  a  country  as  a  potential  
market  and/or  investment  site  for  an  international  
business  depends  on  balancing  the  benefits,  costs,  
and  risks  associated  with  doing  business  in  that  
country
• Other  things  being  equal,  more  attractive  countries  have  
democratic  political  institutions,  market  based  economies,  
and  strong  legal  systems  that  protect  property  rights  and  
limit  corruption
What  Determines  A  Country’s  Level  
Of  Economic  Development?
• Gross  national  income  (GNI) per  person  measures  the  total  annual  
income  received  by  residents  of  a  nation
• Japan,  Sweden,  Switzerland,  and  the  U.S.  have  high  GNI
• China  and  India  have  low  GNI
• GNI  can  be  misleading  because  it  does  not  consider  differences  in  
the  cost  of  living
• need  to  adjust  GNI  figures  using  purchasing  power  parity  (PPP)  
 How  Does  Political  Economy  
Influence  Economic  Progress?
• Innovation  and  entrepreneurship  are  the  engines  of  long-­‐run  
economic  growth
• innovation includes  new  products,  new  processes,  new  organizations,  new  
management  practices,  and  new  strategies
• entrepreneurs commercialize  innovative  new  products  and  processes  
• Innovation  and  entrepreneurship  help  increase  economic  activity  by  
creating  new  markets  and  products  that  did  not  previously  exist  
• innovation  in  production  and  business  processes  result  in  more  productive  
labor  and  capital  further  boosting  economic  growth  rates  
 How  Does  Political  Economy  
Influence  Economic  Progress?
• Innovation  and  entrepreneurship  require  a  market  economy
• there  is  little  incentive  to  develop  new  innovations  in  planned  economies  
because  the  state  owns  all  means  production  and  therefore,  the  gains
• There  is  a  strong  relationship  between  economic  freedom  and  
economic  growth
• the  six  countries  with  the  highest  ratings  of  economic  freedom  from  1975  to  
1995  were  also  among  the  highest  for  economic  growth
• Hong  Kong,  Switzerland,  Singapore,  the  United  States,  Canada,  and  Germany  
 How  Does  Political  Economy  
Influence  Economic  Progress?
• Democratic  regimes  are  probably  more  conducive  to  long-­‐term  
economic  growth  than  dictatorships,  even  the  benevolent  kind
• property  rights  are  only  secure  in  well-­‐functioning,  mature  democracies  
• Subsequent  economic  growth  leads  to  the  establishment  of  
democratic  regimes
• South  Korea
• Taiwan  
 How  Does  Geography  Influence  
Economic  Development?
• Countries  with  favorable  geography  are  more  likely  to  engage  in  
trade,  and  so,  be  more  open  to  market-­‐based  economic  systems,  and  
the  economic  growth  they  promote
• Jeffrey  Sachs  studied  economic  growth  rates  between  1965  and  1990  
and  found  that  
• landlocked  countries  grew  more  slowly  than  coastal  economies
• being  totally  landlocked  reduced  a  country’s  growth  rate  by  0.7%  per  year  
• tropical  countries  grew  more  slowly  than  countries  in  temperate  zones      
 How  Does  Education  Influence  
Economic  Development?
• Countries  that  invest  in  education  have  higher  growth  rates  because  
the  workforce  is  more  productive
• countries  in  Southeast  Asia  have  offset  their  geographical  disadvantages  by  
investing  in  education
• Indonesia,  Malaysia,  and  Singapore
 How  Is  The  Political  
Economy  Changing?
• Since  the  late  1980s,  two  trends  have  emerged
1. Democratic  revolution  (late  1980s  and  early  1990s)
• democratically  elected  governments  replaced  totalitarian  regimes
• more  committed  to  free  market  capitalism
2. A  move  away  from  centrally  planned  and  mixed  economies
• more  countries  have  shifted  toward  the  market-­‐based  model
 How  Is  The  Political  
Economy  Changing?
• Trend  1:  Democracy  has  spread  over  the  last  two  decades
• many  totalitarian  regimes  failed  to  deliver  economic  progress  to  the  vast  
bulk  of  their  populations
• new  information  and  communication  technologies  have  broken  down  the  
ability  of  the  state  to  control  access  to  uncensored  information
• economic  advances  of  the  last  25  years  have  led  to  increasingly  prosperous  
middle  and  working  classes  who  have  pushed  for  democratic  reforms  
 How  Is  The  Political  
Economy  Changing?
• Author  Francis  Fukuyama  argues  that  the  new  world  order  will  be  
characterized  by  democratic  regimes  and  free  market  capitalism
• But,  political  scientist  Samuel  Huntington  argues  that  while  many  
societies  are  modernizing  they  are  not  becoming  more  Western  
• predicts  a  world  split  into  different  civilizations
• these  civilizations  will  be  in  conflict  with  each  other  
 How  Is  The  Political  
Economy  Changing?
• Trend  2:  The  spread  of  market-­‐based  systems  
• more  countries  have  moved  away  from  centrally  planned  and  mixed  
economies  toward  the  market-­‐based  model
• Command  and  mixed  economies  failed  to  deliver  the  sustained  
economic  growth  achieved  in  market-­‐based  countries
 What  Is  The  Nature  Of  
Economic  Transformation?
• The  shift  toward  a  market-­‐based  system  involves
• deregulation – removing  legal  restrictions  to  the  free  play  of  markets,  the  
establishment  of  private  enterprises,  and  the  manner  in  which  private  
enterprises  operate  
• privatization -­‐ transfers  the  ownership  of  state  property  into  the  hands  of  
private  investors
• the  creation  of  a  legal  system to  safeguard  property  rights
 What  Does   The  Changing  
Economy  Mean  For  Managers?
• Markets  that  were  formerly  off-­‐limits  to  Western  business  are  now  
open
• firms  need  to  explore  opportunities  in  these  markets
• Despite  being  underdeveloped  and  poor,  some  markets  have  huge  
potential  
• China  -­‐1.3  billion  people  
• India  – 1.2  billion  people
• Latin  America  – 600  million  potential  consumers
 What  Does   The  Changing  
Economy  Mean  For  Managers?
• However,  the  potential  risks  are  large
• will  democracy  thrive  especially  in  difficult  economic  times?
• will  totalitarian  regimes  return?
• will  a  multi-­‐polar  world  of  different  civilizations  emerge?
• will  China’s  financial  system  be  stable?  
 What  Are  The  Implications  Of  Political  
Economy  Differences  For  Managers?

• Countries  with  democratic  regimes,  market  based  economic  

policies,  and  strong  property  rights  protection  are  more  likely  to  
have  higher  sustained  rates  of  economic  growth
• these  markets  are  more  attractive  to  international  businesses  
• the  benefits,  costs,  and  risks  of  doing  business  in  a  country  are  a  function  of  
the  country’s  political,  economic,  and  legal  systems  
 What  Are  The  Implications  Of  Political  
Economy  Differences  For  Managers?

• The  benefits  of  doing  business  in  a  country  are  a  function  of  
• the  market’s  size
• the  purchasing  power  of  its  consumers
• their  likely  future  wealth  
• By  identifying  and  investing  early  in  potential  future  economic  stars,  
firms  may  be  able  to  gain  first  mover  advantages (advantages  that  
accrue  to  early  entrants  into  a  market)  and  establish  loyalty  and  
experience  in  a  country
• China
 What  Are  The  Implications  Of  Political  
Economy  Differences  For  Managers?

• The  costs  of  doing  business  in  a  country  are  a  function  of  its
• political  system
• is  it  necessary  to  pay  bribes  to  get  market  access?
• economic  level
• are  the  necessary  supporting  business  and  infrastructure  in  place?
• legal  system
• it  can  be  more  costly  to  do  business  in  countries  with  dramatically  different  product,  
workplace,  and  pollution  standards,  or  where  there  is  poor  legal  protection  for  property  
rights  
 What  Are  The  Implications  Of  Political  
Economy  Differences  For  Managers?

• The  risks  of  doing  business  in  a  country  are  a  function  of  
• Political  risk -­‐ the  likelihood  that  political  forces  will  cause  drastic  changes  in  
a  country's  business  environment  that  adversely  affects  the  profit  and  other  
goals  of  a  business  enterprise  
• Economic  risk -­‐ the  likelihood  that  economic  mismanagement  will  cause  
drastic  changes  in  a  country's  business  environment  that  adversely  affects  
the  profit  and  other  goals  of  a  business  enterprise  
• Legal  risk -­‐ the  likelihood  that  a  trading  partner  will  opportunistically break  a  
contract  or  expropriate  property  rights
 How  Can  Managers  Determine  A  
Market’s  Overall  Attractiveness?

• The  overall  attractiveness  of  a  country  as  a  potential  market  and/or  

investment  site  for  an  international  business  depends  on  balancing  
the  benefits,  costs,  and  risks  associated  with  doing  business  in  that  
country
• Other  things  being  equal,  the  benefit-­‐cost-­‐risk  trade-­‐off  is  likely  to  be  
most  favorable  in  politically  stable  developed  and  developing  nations  
that  have  free  market  systems  and  no  dramatic  upsurge  in  either  
inflation  rates  or  private  sector  debt  
How  Can  Managers  Determine  A  
Market’s  Overall  Attractiveness?
Country   Attractiveness
 How  Do  Cultural  Differences  Affect  
International  Business?
• Understanding  and  adapting  to  the  local  cultural  is  important  
international  companies
• cross-­‐cultural  literacy -­‐ an  understanding  of  how  cultural  differences  across  
and  within  nations  can  affect  the  way  in  which  business  is  practiced  
• cross-­‐cultural  literacy  is  important  for  business  success
• A  relationship  may  exist  between  culture  and  the  costs  of  doing  
business  in  a  country  or  region
• MNEs  can  be  agents  of  cultural  change
• McDonald’s
What  Is  Culture?
• Culture -­‐ a  system  of  values  and  norms  that  are  shared  among  a  
group  of  people  and  that  when  taken  together  constitute  a  design  for  
living
where
• values are  abstract  ideas  about  what  a  group  believes  to  be  good,  right,  and  
desirable
• norms are  the  social  rules  and  guidelines  that  prescribe  appropriate  behavior  
in  particular  situations
• Society -­‐ a  group  of  people  who  share  a  common  set  of  values  and  
norms  
What  Are  Values  And  Norms?
• Values  provide  the  context  within  which  a  society’s  norms  are  
established  and  justified  and  form  the  bedrock  of  a  culture
• Norms  include  
• folkways -­‐ the  routine  conventions  of  everyday  life
• mores  -­‐ norms  that  are  seen  as  central  to  the  functioning  of  a  society  and  to  
its  social  life
 How  Are  Culture,  Society,  
And  The  Nation-­‐‑State  Related?
• The  relationship  between  a  society  and  a  nation  state  is  not  strictly  
one-­‐to-­‐one  
• Nation-­‐states  are  political  creations  
• can  contain  one  or  more  cultures
• A  culture  can  embrace  several  nations
What  Determines  Culture?
• The  values  and  norms  of  a  culture  evolve  over  time
• Determinants  include  
• religion
• political  and  economic  philosophies
• education
• language
• social  structure
What  Determines  Culture?
Determinants  of  Culture
What  Is  A  Social  Structure?
• Social  structure -­‐ a  society’s  basic  social  organization
• Consider
• the  degree  to  which  the  basic  unit  of  social  organization  is  the  individual,  as  
opposed  to  the  group
• the  degree  to  which  a  society  is  stratified  into  classes  or  castes
 How  Are  Individuals  
And  Groups  Different?
• A  group is  an  association  of  two  or  more  people  who  have  a  shared  
sense  of  identity  and  who  interact  with  each  other  in  structured  ways  
on  the  basis  of  a  common  set  of  expectations  about  each  other’s  
behavior
• individuals  are  involved  in  families,  work  groups,  social  groups,  recreational  
groups,  etc.
• Societies  place  different  values  on  groups  
 How  Are  Individuals  
And  Groups  Different?
• In  many  Asian  societies,  the  group  is  the  primary  unit  of  social  
organization    
• discourages  job  switching  between  firms
• encourages  lifetime  employment  systems
• leads  to  cooperation  in  solving  business  problems
• But,  might  also  suppress  individual  creativity  and  initiative
 How  Do  Religious  And
Ethical  Systems  Differ?
• Religion -­‐ a  system  of  shared  beliefs  and  rituals  that  are  concerned  
with  the  realm  of  the  sacred
• Four  religions  dominate  society
1. Christianity
2. Islam
3. Hinduism
4. Buddhism
5. Confucianism  is  also  important  in  influencing  behavior  and  culture  in  many  
parts  of  Asia
 How  Do  Religious  And
Ethical  Systems  Differ?
• Ethical  systems -­‐ a  set  of  moral  principles,  or  values,  that  are  used  
to  guide  and  shape  behavior
• Religion  and  ethics  are  often  closely  intertwined
• Example:  Christian  or  Islamic  ethics  
What  Is  Christianity?
• Christianity  
• the  world’s  largest  religion
• found  throughout  Europe,  the  Americas,  and  other  countries  settled  by  
Europeans  
• the Protestant  work  ethic (Max  Weber,  1804)  
• hard  work,  wealth  creation,  and  frugality  is  the  driving  force  of  capitalism    
What  Is  Islam?
• Islam
• the  world’s  second  largest  religion  dating  to  AD  610
• there  is  only  one  true  omnipotent  God  
• an  all-­‐embracing  way  of  life  that  governs  one's  being  
• associated  in  the  Western  media  with  militants,  terrorists,  and  violent  
upheavals
• but,  in  fact  teaches  peace,  justice,  and  tolerance
• fundamentalists  have  gained  political  power  and  blame  the  West  for  many  
social  problems
• people  do  not  own  property,  but  only  act  as  stewards  for  God
• supportive  of  business,  but  the  way  business  is  practiced  is  prescribed
What  Is  Hinduism?
• Hinduism
• practiced  primarily  on  the  Indian  subcontinent
• focuses  on  the  importance  of  achieving  spiritual  growth  and  development,  
which  may  require  material  and  physical  self-­‐denial
• Hindus  are  valued  by  their  spiritual  rather  than  material  achievements
• promotion  and  adding  new  responsibilities  may  not  be  important,  or  may  be  
infeasible  due  to  the  employee's  caste
What  Is  Buddhism?
• Buddhism
• has  about  350  millions  followers
• stresses  spiritual  growth  and  the  afterlife,  rather  than  achievement  while  in  
this  world    
• does  not  emphasize  wealth  creation
• entrepreneurial  behavior  is  not  stressed
• does  not  support  the  caste  system,  individuals  do  have  some  mobility  and  can  
work  with  individuals  from  different  classes
What  Is  Confucianism?
• Confucianism
• ideology  practiced  mainly  in  China
• teaches  the  importance  of  attaining  personal  salvation  through  right  action
• high  morals,  ethical  conduct,  and  loyalty  to  others  are  stressed
• three  key  teachings  of  Confucianism  -­‐ loyalty,  reciprocal  obligations,  and  
honesty  -­‐ may  all  lead  to  a  lowering  of  the  cost  of  doing  business  in  Confucian  
societies
 What  Is  The  Role  
Of  Language  In  Culture?
• Language    -­‐ the  spoken and  unspoken (nonverbal  communication  
such  as  facial  expressions,  personal  space,  and  hand  gestures  )  means  
of  communication  
• countries  with  more  than  one  language  often  have  more  than  one  culture
• Canada,  Belgium,  Spain
 What  Is  The  Role  
Of  Language  In  Culture?
• Language  is  one  of  the  defining  characteristics  of  culture
• Chinese  is  the  mother  tongue  of  the  largest  number  of  people
• English  is  the  most  widely  spoken  language  in  the  world
• English  is  also  becoming  the  language  of  international  business
• but,  knowledge  of  the  local  language  is  still  beneficial,  and  in  some  cases,  
critical  for  business  success
• failing  to  understand  the  nonverbal  cues  of  another  culture  can  lead  to  
communication  failure
 What  Is  The  Role  
Of  Education  In  Culture?
• Formal  education  is  the  medium  through  which  individuals  learn  
many  of  the  language,  conceptual,  and  mathematical  skills  that  are  
indispensable  in  a  modern  society    
• important  in  determining  a  nation’s  competitive  advantage
• Japan’s  postwar  success  can  be  linked  to  its  excellent  education  system
• general  education  levels  can  be  a  good  index  for  the  kinds  of  products  that  
might  sell  in  a  country
• Example:  impact  of  literacy  rates
 How  Does  Culture  
Impact  The  Workplace?
• Management  processes  and  practices  must  be  adapted  to  
culturally  determined  work-­‐related  values
• Geert  Hofstede  studied  culture  using  data  collected  from  1967  to  
1973  for  100,000  employees  of  IBM
• Hofstede  identified  four  dimensions  that  summarized  different  cultures
Hofstede’s  Cultural Dimensions
 Power Distance
Culture defined

Hofstede’s dimensions

Power distance -­‐ The extent to which the less powerful 1)  Power Distance

members of institutions and organizations within a 2)  Uncertainty Avoidance

country expect and accept that power is distributed 3) Individualism

unequally 4) Masculinity

5)  Long-­‐term orientation

Implications

Criticism
 Power Distance
Low  power  distance High  power distance
Culture defined

Inequalities  among  people should Inequalities  among  people are

be minimized both  expected  and desired Hofstede’s dimensions

Interdependence  between  less  and     Less  powerful  people  should  be    

1)  Power Distance
more  powerful people depended  on  the  more powerful
Hierarchy  in  organizations  means     Hierarchy  in  organizations  reflects     2)  Uncertainty Avoidance
an  inequality  of roles the  existential inequality
3) Individualism
Decentralization  is popular     Centralization  is popular    
Narrow  salary range Wide  salary range 4) Masculinity

Subordinated  expect  to  be     Subordinated  expect  to  be  told     5)  Long-­‐term orientation
consulted what  to do
The  ideal  boss  is  a  resourceful     The  ideal  boss  is  a  benevolent    
Implications
democrat autocrat  or  good father
Privileges  and  status are     Privileges  and  status  are both     Criticism
disapproved expected  and popular
 Uncertainty Avoidance
Culture defined

Hofstede’s dimensions

1)  Power Distance
Uncertainty  avoidance  – The  extent  to  which  members  of  a    
2)  Uncertainty Avoidance
society  feel  threaten  by  uncertain  or  unknown    
3) Individualism
situations.
4) Masculinity

5) Long-­‐term orientation

Implications

Criticism
 Uncertainty Avoidance
Weak  uncertainty avoidance Strong  uncertainty avoidance
Culture defined

Uncertainty:  normal  feature  of life Uncertainty  :  continuous threat

and  each  day  is  accepted  as  it comes that  must  be fought Hofstede’s dimensions

Low  stress  – subjective  feeling  of     High  stress  – subjective  feeling  of    
1)  Power Distance
well-­‐being anxiety
Aggression  and  emotions  must  not     Aggression  and  emotions  may  be     2)  Uncertainty Avoidance
be shown shown  at  proper times
3) Individualism
Comfortable  in  ambiguous  situations     Fear  of  ambiguous  situations  and    
and  with  unfamiliar risk of  unfamiliar risk 4) Masculinity
There  should  not  be  more  rules  than     Emotional  need  for  rules,  even  if    
necessary they  never work 5)  Long-­‐term orientation

Precision  and  punctuality  have  to be Precision  and  punctuality come

learned naturally Implications

Tolerance  to  innovation     Resistance  to  innovation    

Criticism
Motivation  by achievement Motivation  by security
 Individualism
Culture defined

Hofstede’s dimensions

1)  Power Distance
Individualism  – The  tendency  of  people  to  look  after    
2)  Uncertainty Avoidance
themselves  and  their  immediate  family  and  neglect  the    
3) Individualism
needs  of society
4) Masculinity

5) Long-­‐term orientation

Implications

Criticism
 Individualism
Low individualism High individualism
Culture defined

Individuals learn to think in terms Individuals  learn  to  think  in terms
of “we” of  “I” Hofstede’s dimensions

High-­‐context communication Low-­‐context communication

1)  Power Distance
Diplomas provide entry to higher Diplomas  increase  economic    
status groups worth  and/or  self-­‐ respect 2)  Uncertainty Avoidance

Relationship employer-­‐ employee Relationship  employer-­‐employee     3) Individualism

is perceived in moral terms, like a is  a  contract  based  on  mutual    
family advantage 4) Masculinity
Hiring  and  promotion  decisions     Hiring  and  promotion  are    
take  employees’  ingroup  into     supposed  to  be  based  on  skills     5)  Long-­‐term orientation

account and  rules only

Management  is  management of Management  is  management of Implications
groups individuals
Criticism
Relationship  prevails  over task Task  prevails  over relationship
 Masculinity
Culture defined

Hofstede’s dimensions

1)  Power Distance
Masculinity  – The  tendency  within  a  society  to emphasize    
2)  Uncertainty Avoidance
traditional  gender roles
3) Individualism

4) Masculinity

5) Long-­‐term orientation

Implications

Criticism
 Masculinity
Low  masculinity High masculinity
Culture defined

Dominant  values:  caring  for others Dominant  values:  material success

and preservation and progress Hofstede’s dimensions

People  and  warm  relationships  are     Money  and  things  are important
1)  Power Distance
important
Sympathy  for  the weak Sympathy  for  the strong 2)  Uncertainty Avoidance

In  family,  both  fathers  and  mothers     In  family,  fathers  deal  with  facts     3) Individualism
deal  with  facts  and feelings and  mothers  with  feelings
Stress  on  equality,  solidarity  ,  and     Stress  on  equity,  competition     4) Masculinity
quality  of  work life among  colleagues  and    
5)  Long-­‐term orientation
performance
Managers  use  intuition  and strive Managers  are  expected  to be
for consensus decisive  and assertive Implications

Resolution  of  conflicts  by     Resolution  of  conflicts  by  fighting     Criticism
compromise  and negotiation them out
 Long-­‐ term orientation
Culture defined

Hofstede’s dimensions

1)  Power  D istance

2)  Uncertainty Avoidance
Long-­‐ term  orientation  – A  basic  orientation  towards  time that
values patience 3) Individualism

4) Masculinity

5) Long-­‐term orientation

Implications

Criticism
 Long-­‐ term orientation
Culture defined
Short-­‐ term orientation Long-­‐term orientation
Hofstede’s dimensions
Respect  for traditions Adaptation  of  traditions  to  a    
modern context 1)  Power Distance

Little  money  available  for     Funds  available  for investment

2)  Uncertainty Avoidance
investment
Quick  results expected Perseverance  towards slow 3) Individualism
results
4) Masculinity
Respect  for  social  and  status     Respect  for  social  and  status    
obligations  regardless  of cost obligations  within limits 5)  Long-­‐term orientation
Concern  with  possessing  the Truth Concern  with  respecting the
demands  of Virtue
Implications

Criticism
Implications
 Leadership
Styles
Cultural Context Low  PD  & low     High  PD  & low     Low  PD  & high     High  PD  & high    
UA UA UA UA Culture defined

Leader Type “The     “The Master” “The “The Boss” Hofstede’s dimensions
Democrat” Professional”
1) Power Distance
Recommended     Supportive Directive Directive Directive
Leadership
2) Uncertainty Avoidance
Styles Participative Supportive Supportive

Achievement Participative 3) Individualism

Example Great Britain China Germany France 4) Masculinity

Power Distance 5) Long-­‐term orientation

Implications

Criticism
Uncertainty Avoidance
 Leadership
Styles
Cultural Context Low  PD  & low High  PD  & low     Low  PD  & high     High  PD  & high    
UA UA UA UA Culture defined

Leader Type “The     “The Master” “The “The Boss” Hofstede’s dimensions
Democrat” Professional”
1) Power Distance
Recommended Supportive     Directive Directive Directive
Leadership
2) Uncertainty Avoidance
Styles Participative Supportive Supportive

Achievement Participative 3) Individualism

Example Great Britain China Germany France 4) Masculinity

Power Distance 5) Long-­‐term orientation

Implications

Criticism
Uncertainty Avoidance
 Leadership
Styles
Cultural Context Low  PD  & low     High  PD  & low     Low  PD  & high     High  PD  & high    
UA UA UA UA Culture defined

Leader Type “The     “The Master” “The “The Boss” Hofstede’s dimensions
Democrat” Professional”
1) Power Distance
Recommended     Supportive Directive Directive Directive
Leadership
2) Uncertainty Avoidance
Styles Participative Supportive Supportive

Achievement Participative 3) Individualism

Example Great Britain China Germany France 4) Masculinity

Power Distance 5) Long-­‐term orientation

Implications

Criticism
Uncertainty Avoidance
 Leadership
Styles
Cultural Context Low  PD  & low     High  PD  & low     Low  PD  & high     High  PD  & high    
UA UA UA UA Culture defined

Leader Type “The     “The Master” “The “The Boss” Hofstede’s dimensions
Democrat” Professional”
1) Power Distance
Recommended     Supportive Directive Directive Directive
Leadership
2) Uncertainty Avoidance
Styles Participative Supportive Supportive

Achievement Participative 3) Individualism

Example Great Britain China Germany France 4) Masculinity

Power Distance 5) Long-­‐term orientation

Implications

Criticism
Uncertainty Avoidance
 Organizational
Structures
Culture defined
1. Adhocracy
§ Flat  organizational pyramid Hofstede’s dimensions
§ People  can  tolerate  ambiguity  in  organizational roles
1)  Power Distance
§ Less  need  for  formalized  rules  and regulations
§ Distance  between  management  and  workers  tends  to  be     2)  Uncertainty Avoidance
small
3) Individualism
2. Professional Bureaucracy
4) Masculinity

3. Full Bureaucracy 5)  Long-­‐term orientation

Power Distance
4. Family Bureaucracy
Implications

Criticism
Uncertainty  Avoidance
 Organizational
Structures
Culture defined
1. Adhocracy

2. Professional Bureaucracy Hofstede’s dimensions

§ Standardization  of skills 1)  Power Distance

§ Centralized  decision making 2)  Uncertainty Avoidance

§ Order  and compartmentalization
3) Individualism
3. Full Bureaucracy
4) Masculinity

4. Family Bureaucracy 5)  Long-­‐term orientation

Power Distance
Implications

Criticism
Uncertainty  Avoidance
 Organizational
Structures
Culture defined
1. Adhocracy

2. Professional Bureaucracy Hofstede’s dimensions

1)  Power Distance
3. Full Bureaucracy
2)  Uncertainty Avoidance
§ The  most formalized
§ Organization  dominated  by  rules,  procedures and 3) Individualism
hierarchical relationships
4) Masculinity
§ Standardization  of  the  work process
§ Predictability  & control 5)  Long-­‐term orientation

Power Distance
4. Family Bureaucracy Implications

Criticism
Uncertainty Avoidance
 Organizational
Structures
Culture defined
1. Adhocracy

2. Professional Bureaucracy Hofstede’s dimensions

1)  Power Distance
3. Full Bureaucracy
2)  Uncertainty Avoidance

4. Family  Bureaucracy 3) Individualism

§ Parallels  an  extended  family:  dominant   father figure 4) Masculinity

§ Small
5)  Long-­‐term orientation

Power Distance
§ Less  specialization  of roles
§ Control:  personal supervision
Implications
§ Direct contact
§ Highly  centralized  decision making Criticism
Uncertainty Avoidance
Criticism
 Criticism

Culture defined

Single company
Hofstede’s dimensions

Time dependent Non-­‐exhaustive    

1) Power Distance

Business culture, Partial geographic 2) Uncertainty Avoidance

not  values culture coverage 3) Individualism

Western bias Attitudinal  rather  than     4) Masculinity

behavioral measures
5) Long-­‐term orientation
Ecological fallacy
Implications

Criticism
How  Does  Culture  
Impact  The  Workplace?
• Hofstede’s  dimensions  of  culture:

1. Power  distance -­‐ how  a  society  deals  with  the  

fact  that  people  are  unequal  in  physical  and  
intellectual  capabilities  
2. Uncertainty  avoidance -­‐ the  relationship  
between  the  individual  and  his  or  her  fellows  
3. Individualism  versus  collectivism -­‐ the  extent  to  
which  different  cultures  socialize  their  members  
into  accepting  ambiguous  situations  and  
tolerating  ambiguity
4. Masculinity  versus  femininity -­‐ the  relationship  
between  gender  and  work  roles
How  Does  Culture  
Impact  The  Workplace?
Work-­‐Related   Values  for  15  Selected  Countries
 How  Does  Culture  
Impact  The  Workplace?
• Hofstede  later  expanded  added  a  fifth  dimension  called  Confucian  
dynamism or  long-­‐term  orientation
• captures  attitudes  toward  time,  persistence,  ordering  by  status,  protection  of  
face,  respect  for  tradition,  and  reciprocation  of  gifts  and  favors
• Japan,  Hong  Kong,  and  Thailand  scored  high  on  this  dimension
• the  U.S.  and  Canada  scored  low  
Was  Hofstede  Right?
• Hofstede’s  work  has  been  criticized  for  several  reasons
• made  the  assumption  there  is  a  one-­‐to-­‐one  relationship  between  culture  and  
the  nation-­‐state
• study  may  have  been  culturally  bound
• used  IBM  as  sole  source  of  information
• culture  is  not  static  – it  evolves
• But,  it  is  a  starting  point  for  understanding  how  cultures  differ,  and  
the  implications  of  those  differences  for  managers  
Does  Culture  Change?
• Culture  evolves  over  time
• changes  in  value  systems  can  be  slow  and  painful  for  a  society
• Social  turmoil  -­‐ an  inevitable  outcome  of  cultural  change
• as  countries  become  economically  stronger,  cultural  change  is  particularly  
common
• economic  progress  encourages  a  shift  from  collectivism  to  individualism
• globalization  also  brings  cultural  change
 What  Do  Cultural  Differences  
Mean  For  Managers?
1. It  is  important  to  develop  cross-­‐cultural  literacy
• companies  that  are  ill  informed  about  the  practices  of  another  culture  
are  unlikely  to  succeed  in  that  culture
• To  avoid  being  ill-­‐informed
• consider  hiring  local  citizens  
• transfer  executives  to  foreign  locations  on  a  regular  basis
• Managers  must  also  guard  against  ethnocentrism
• a  belief  in  the  superiority  of  one's  own  culture  
 What  Do  Cultural  Differences  
Mean  For  Managers?
2. There  is  a  connection  between  culture  and  national  competitive  
advantage
• suggests  which  countries  are  likely  to  produce  the  most  viable  competitors
• has  implications  for  the  choice  of  countries  in  which  to  locate  production  
facilities  and  do  business
How  can  global  companies  succeed  in  
Emerging Markets in?
10 industries are represented in this
report
The industries are represented by the following symbols

• Manufacturing & Industrial

• Telecommunication, Technology  & Media

• Professional  &  Business  Services

• Financial Services

• Consumer & Retail

• Pharmaceuticals &  Healthcare

• Energy, Resources  &  Environment

• Automotive

• Chemicals

• Logistics & Transportation

Emerging Markets focus to 2017
Most companies think of Emerging Markets as  
BRIC,  BRIICS, or based on stage of economic
development
Market growth rate is also important and a quarter of companies classify by region

How Global Companies Define Emerging Markets

Stage of economic development 39%

Market growth rate 31%

BRIC (Brazil, Russia, India, China) 28%

55% BRIC or BRIICS
BRIICS (BRIC, Indonesia, S. Africa) 27%

By geography (eg. in region X) 23%

Penetration level of product/service 20%

Market not in US, W. Europe, Japan 16%

Penetration level by my company 10%

Penetration level by multinationals 8%

Proprietary listings eg. FTSE, S&P 3%

Emerging Markets in Asia and Latin
America are  generating the  most  interest
Russia, South Africa and Turkey are the other top targets for the next five years

Top 10 Emerging Markets (2012-­2017) by % all companies

Brazil,  China  and  India  seen  as  equally  
important  in  the next  five years
Russia is also still significant but the level of interest is well behind the top three

Top Four Emerging Markets (2012-­2017) • Brazil, Russia, India and China are still the top  
four most important Emerging Markets for  
2012-­2017.

India 66.4% • Russia is least favored amongst the BRIC  

countries, with the majority (~65%) focusing  
more on India, Brazil and China with equal  
Brazil 65.7% levels of  interest.

• According to the IMF, average GDP growth  

China 65.4% rates for 2012-­2017* will be 7.4% for India,  
3.7% for Brazil, 8.5% for China and 3.9% for  
Russia.
Russia 39.7%
• Brazil and Russia seem to be finding favor for  
reasons other than their growth rates, such as  
their potentially huge domestic markets, natural  
Question: Which are the  top 5 Emerging Markets for your industry   resources and dominance within their regions.
over the next 5 years? N=427.
European companies are  prioritizing Asia and
Latin  America despite their  proximity to  Russia
Latin American companies are less adventurous when it comes to looking outside their home region

Top Four Emerging Markets by Location of Headquarters (2012-­2017)

22%
13%
Asian headquarters
32%
33%
40%
15%
Latin American headquarters
24%
21%
28%
Brazil
19%
European headquarters Russia
25%
28% India
28% China
17%
US headquarters
29%
26%

Question: Which  are the top  5  Emerging Markets  for  your  industry over  the  next  5 years?  (To 2017)  N=395 (Total): N=95  (US),  
N=161(Europe), N=44 (Latin America), N=95 (Asia).
 China’s economy outweighs the other BRIC
countries  but  Brazil  and  Russia have highest  
GDP per capita
Different BRIC countries are attracting interest and investment for different reasons

Brazil India China Russia

Population
205.72 1,205.10 1,343.24 138.08
Persons (millions)

GDP
2,518 1,843 6,989 1,791
USD (Billions)

GDP (PPP) per Capita

11,600 3,700 8,400 16,700
Current international dollar

8.2%
6.9%
3.0%
GDP growth rate 2012 (e) 4.0%

Land
8,514,877 3,287,263 9,596,961 17,098,242
Km2
 China is the  easiest  to  do  business in and
Brazil is  becoming more competitive in the
global context
Levels of development and the opportunities vary across the different BRIC countries

Brazil India China Russia

Mobile subscribers
Q1, 2012
250 million 919 million 1.01 billion 227 million

126% 160%
Teledensity (wireless) 76% 74%
Q1, 2012

No. of millionaire  
households   303 286 1,312 375
2011, thousands

Ease of doing business  

Index (World Bank)   126 132 91 120
2011, ranking

Global   Competitiveness     53 51 26 63
Index (WEO)
2010/11  to 2011/12, ranking 58 56 27 66

14
China,  India and  Brazil  look good to  most industry  sectors;  
Russia has  less  widespread  appeal
Healthcare sector is least positive on China, Automotive on India, Energy & Resources on Brazil, and
Consumer & Retail on Russia

Top Four Emerging Markets by Industry (2012-­2017)

27% 28% 27% 25% 27% 26%

30% 29% 31% 29%

15% 13% 12% 17% 16%

19% 16% 21% Brazil  
21% 21%
Russia    
30% 29% 29% India  
27% 32% 23% 31%
28% 21%
24% China

27% 25% 26% 30% 30% 29% 29% 27% 29%

24%

Question: Which are the  top  5 Emerging Markets for  your industry over the  next 5 years? (To 2017) N=427.

15
Second tier Emerging Markets  span the globe,
led by  Indonesia  and  South Africa
No Middle Eastern countries named amongst top 10 Emerging Markets in the next 5 years after BRIC

Top 10 Emerging Markets after BRICs (2012-­2017) • Half of the 10 non-­BRIC Emerging Markets that  
international  companies plan to target in
Rank Country %
2012-­2017 are in Asia or Latin America.
5 Indonesia 27.4%
6 South Africa 22.2% • Indonesia is the next upcoming Emerging
Market, with over a quarter of companies
7 Vietnam 20.1%
naming it fifth after the BRICs.
8 Mexico 18.5%
9 Turkey 17.8% • South  Africa,  Vietnam,  Mexico  and  Turkey  
10
follow  with approximately one  fifth of  
Argentina 10.3% companies including one of them in their top  
11 Chile 9.6% five.
12 Thailand 9.6%
13 Malaysia
• Turkey is the only country in Europe to make it  
8.7%
into the top 10 Emerging Markets after BRIC.
14 South Korea 8.7%
Africa Asia Europe Latin America
Question: Which are the  top 5 Emerging Markets for your industry  
over the next 5 years (to 2017)? N=427

16
After Indonesia and South Africa, Turkey and
Mexico  interest US and  European companies
most
Latin American companies focus more on their own home region; Asian companies favor Vietnam

Top 10 Secondary Emerging Markets by Location of Headquarters (2012-­2017)

1%
4% 7% 4% 8%
6%
6% 6% Malaysia  
6% 3% 20% 3%
5% 7% South Korea    
10%
10% 4% 1%
2% Chile  
6%
17% 20% Thailand
14% 6%

Argentina
10% 7%
15% 22% Turkey
11%
10%
Mexico
29% 11%
17% Vietnam
15%
3%
South Africa    
26%
15% 18% 11% Indonesia
4%

US HQ European HQ Latin American HQ Asian HQ

Question:  Which  are  the  top  5  Emerging  Markets  for  your  industry  over  the  next  5  years  (to  2017)?  N=395;;   N=95  (US);;  N=161  (Europe);;  N=44  (Latin  
America);; N=95 (Asia).
Vietnam stands  out for  Consumer, Logistics
and  Resources sectors, Mexico for  
Healthcare
Chemical sector very focused on Indonesia and South Africa, Consumer & Retail on SE Asia

Top 10 Secondary Emerging Markets by industry (2012-­2017)

2% 4% 4% 4%
5% 6% 6% 7% 6% 5%
3% 10% 1% 6% 4%
4% 6% 5%
6% 8% 9% 3% 12% 8%
6% 5%
4% 2% 6% 8% 9%
5% 5% South Korea    
5% 9% 6% 8% 8%
8% 3% 6% 8% 14% Malaysia  
6% 3% 14% 6% 3%
14% 8% 4%
8% 6% 8% Thailand  
12% 11%
10% 16% 14% Chile  
10% 15% 17% 12% 8%
10% 12% 4% Argentina  
14% 13%
14%
7%
Turkey  
15% 18%
20% 6% 27% 21% Mexico  
14% 20%
18% 20% 3% Vietnam  
15% 18% 19% 8%
12% 6% South Africa    
14%
Indonesia
27%
21% 18% 20% 21% 21%
16% 12% 16% 16%

Question: Which are the  top  5 Emerging Markets for your industry over the  next 5 years (TO 2017)? N=427
Emerging Markets  aspirations  to  2017
Most companies are investing to establish a
presence  in future  major  markets  for  long term
gain
Less than one fifth look to Emerging Markets as a low cost supply base

Motivations for investing in Emerging Markets • The aim behind global companies’ 2012-­2017  
emerging markets strategy is to build markets  
70 70% Gain foothold for long term success in  
and gain global market share – it is now less  
large future  market
about capturing lower production costs (17%).
60
• Most companies want to gain a foothold for  
long term success. Half are looking for greater  
50 51% Gain global market share
global market  share.

40 • Four out of ten have followed their customers  

39% Our customers are there
to Emerging  Markets.
34% Lack of growth/profit in established markets
30 • A  third  are  being  pushed  into  Emerging  
25% Diversify risks
24% Tap into short/medium term growth/profit Markets by lack of growth or profit in more  
20 established markets.
17% Establish low cost supply base
• A  quarter  are  going  into  Emerging  Markets  to  
10 14% CEO/board directive / Competitors are there
diversify risks, and the same number to tap into  
Question:  What  are  the  main  reasons  for  i nvesting  i n  Emerging  Markets   short  to medium term profits  and growth.
for your company? N=428.
Half  of the  companies say  at  least  30%  of
global   revenues will come from Emerging
Markets by 2017
One fifth say Emerging Markets will account for 50% of revenues within five years

% Global Revenue from Emerging Markets (2012-­2017)

Zero revenue from  
Emerging  Markets  
1% (2012-­2017)

2012 53% 18% 14% 7% 3% 4% 7%

2014 29% 23% 22% 14% 3%5%   4% 1%

2017 15% 19% 15% 31% 7% 8% 5% 1%

0%-­10% 11%-­20% 21%-­30% 31%-­50% 51%-­60% 61%-­80% 81%-­100%

Question:  What  % of your  company's   global  r evenue do  you   expect  to come from  Emerging Markets?  N=277   (2012), N=268  (2014), N=263  (2017).
Key  Differences  Among  the  Three  Major  Country  Groups

Advanced Economies Developing Emerging

Dimension Economies Markets

Representative Countries Canada, Angola, Bolivia, Brazil,

France,  J apan, Nigeria, China, India,
United  Kingdom, Bangladesh Indonesia,
United  States Turkey
Approximate Number of Countries 35 120 40
Population (% of world) 14% 25% 61%
Approximate Average Per-­‐CapitaIncome $44,155 $3,618 $11,050
(U.S. dollars; PPP basis)

Approximate Share of World GDP(PPP 65% 4% 31%

basis)

Population  (millions) 979 1,706 4,155

Telephone Linesper1,000 People(fixed 803 442 694
and  mobile)

Personal Computers per 1,000 People 517 39 191

Internet Users per 1,000 People 751 165 422
MotorVehiclesper1,000 People 537 65 236
Risks and challenges of emerging markets
Emerging markets pose various risks, including

• Political instability,
• Inadequate legal and institutional frameworks,
• Lack of transparency,
• Inadequate intellectual property protection.
• Family conglomerates are large, diversified, family-owned
businesses that dominate many emerging markets and represent
formidable rivals and attractive choices for partnerships.
Success  strategies  for  emerging  markets

Firms  should  adapt  strategies  and  tactics  to  

• Suit  unique,  local  conditions.  

• Partnering  with  family  conglomerates.  
• Governments  are  often  major  buyers  but  require  specific  strategies.  

Successful  advanced-­‐economy  firms  conduct  research,  acquire  capabilities  

specific  to  target  markets,  and  leverage  advantages  available  in  emerging  
markets,  such  as  low-­‐cost  labor
How  MNC  Operates
Entry  Strategy  and  Strategic  
Alliances
What  Are  the  Basic  Decisions  Firms  Make  
When  Expanding  Globally?
• Firms  expanding  internationally  must  decide
1. Which  markets  to  enter
2. When  to  enter  them  and  on  what  scale
3. Which  entry  mode  to  use  
• exporting
• licensing  or  franchising  to  a  company  in  the  host  nation
• establishing  a  joint  venture  with  a  local  company
• establishing  a  new  wholly  owned  subsidiary
• acquiring  an  established  enterprise
What  Influences  
the  Choice  of  Entry  Mode?
• Several  factors  affect  the  choice  of  entry  mode  
including
• transport  costs
• trade  barriers
• political  risks
• economic  risks
• costs
• firm  strategy
• The  optimal  mode  varies  by  situation  – what  makes  
sense  for  one  company  might  not  make  sense  for  
another
Which  Foreign  Markets  
Should  Firms  Enter?
• The  choice  of  foreign  markets  will  depend  on  their  
long-­‐run  profit  potential    
• Favorable  markets  
• are  politically  stable  
• have  free  market  systems
• have  relatively  low  inflation  rates  
• have  low  private  sector  debt
When  Should  a  Firm  
Enter  a  Foreign  Market?
• Once  attractive  markets  are  identified,  the  firm  
must  consider  the  timing  of  entry
1. Entry  is  early  when  the  firm  enters  a  foreign  market  
before  other  foreign  firms
2. Entry  is  late  when  the  firm  enters  the  market  after  
firms  have  already  established  themselves  in  the  
market
 Why  Enter  a
Foreign  Market  Early?
• First-­‐mover  advantages include  
• the  ability  to  preempt  rivals  by  establishing  a  strong  brand  name
• the  ability  to  build  up  sales  volume  and  ride  down  the  experience  curve  
ahead  of  rivals  and  gain  a  cost  advantage  over  later  entrants
• the  ability  to  create  switching  costs  that  tie  customers  into  products  or  
services  making  it  difficult  for  later  entrants  to  win  business
Why  Enter  a
Foreign  Market  Late?
• First-­‐mover  disadvantages include
• pioneering  costs -­‐ arise  when  the  foreign  business  system  
is  so  different  from  that  in  the  home  market  that  the  firm  
must  devote  considerable  time,  effort,  and  expense  to  
learning  the  rules  of  the  game
• the  costs  of  business  failure  if  the  firm,  due  to  
its  ignorance  of  the  foreign  environment,  
makes  some  major  mistakes
• the  costs  of  promoting  and  establishing  a  
product  offering,  including  the  cost  of  
educating  customers
On  What  Scale   Should   a  Firm  Enter  Foreign  
Markets?
• After  choosing  which  market  to  enter  and  the  timing  
of  entry,  firms  need  to  decide  on  the  scale  of  market  
entry
• firms  that  enter  a  market  on  a  significant  scale  make  a  
strategic  commitment to  the  market  
• the  decision  has  a  long  term  impact  and  is  difficult  to  reverse
• small-­‐scale  entry  has  the  advantage  of  allowing  a  firm  to  
learn  about  a  foreign  market  while  simultaneously  
limiting  the  firm’s  exposure  to  that  market
 How  Can  Firms  
Enter  Foreign  Markets?
• These  are  six  different  ways  to  enter  a  foreign  market
1. Exporting – a  common  first  step  for  many  manufacturing  firms
• later,  firms  may  switch  to  another  mode
2. Turnkey  projects -­‐ the  contractor  handles  every  detail  of  the  project  
for  a  foreign  client,  including  the  training  of  operating  personnel
• at  completion  of  the  contract,  the  foreign  client  is  handed  the  "key"  to  a  
plant  that  is  ready  for  full  operation    
How  Can  Firms  
Enter  Foreign  Markets?
3. Licensing -­‐ a  licensor  grants  the  rights  to  intangible  
property  to  the  licensee  for  a  specified  time  period,  
and  in  return,  receives  a  royalty  fee  from  the  
licensee
• patents,  inventions,  formulas,  processes,  designs,  
copyrights,  trademarks
4. Franchising -­‐ a  specialized  form  of  licensing  in  
which  the  franchisor  not  only  sells  intangible  
property  to  the  franchisee  but  also  insists  that  the  
franchisee  agree  to  abide  by  strict  rules  as  to  how  
it  does  business  
• used  primarily  by  service  firms
 How  Can  Firms  
Enter  Foreign  Markets?
5. Joint  ventures  with  a  host  country  firm -­‐ a  firm  that  is  jointly  
owned  by  two  or  more  otherwise  independent  firms  
• most  joint  ventures  are  50–50  partnerships
6. Wholly  owned  subsidiary -­‐ the  firm  owns  100  percent  of  the  stock    
• set  up  a  new  operation
• acquire  an  established  firm
Why  Choose  Exporting?
• Exporting  is  attractive  because
• it  avoids  the  costs  of  establishing  local  manufacturing  
operations
• it  helps  the  firm  achieve  experience  curve  and  location  
economies
• Exporting  is  unattractive  because
• there  may  be  lower-­‐cost  manufacturing  locations
• high  transport  costs  and  tariffs  can  make  it  uneconomical
• agents  in  a  foreign  country  may  not  act  in  exporter’s  best  
interest
Why  Choose  a  
Turnkey  Arrangement?
• Turnkey  projects  are  attractive  because
• they  are  a  way  of  earning  economic  returns  from  the  
know-­‐how  required  to  assemble  and  run  a  technologically  
complex  process
• they  can  be  less  risky  than  conventional  FDI    
• Turnkey  projects  are  unattractive  because
• the  firm  has  no  long-­‐term  interest  in  the  foreign  country
• the  firm  may  create  a  competitor
• if  the  firm's  process  technology  is  a  source  of  competitive  
advantage,  then  selling  this  technology  through  a  turnkey  
project  is  also  selling  competitive  advantage  to  potential  
and/or  actual  competitors
Why  Choose  Licensing?
• Licensing  is  attractive  because
• the  firm  avoids  development  costs  and  risks  associated  
with  opening  a  foreign  market
• the  firm  avoids  barriers  to  investment
• the  firm  can  capitalize  on  market  opportunities  without  
developing  those  applications  itself
• Licensing  is  unattractive  because
• the  firm  doesn’t  have  the  tight  control  required  for  
realizing  experience  curve  and  location  economies
• the  firm’s  ability  to  coordinate  strategic  moves  across  
countries  is  limited
• proprietary  (or  intangible)  assets  could  be  lost
• to  reduce  this  risk,  use  cross-­‐licensing  agreements
Why  Choose  Franchising?
• Franchising  is  attractive  because
• it  avoids  the  costs  and  risks  of  opening  up  a  foreign  market
• firms  can  quickly  build  a  global  presence
• Franchising  is  unattractive  because
• it  inhibits  the  firm's  ability  to  take  profits  out  of  one  country  to  support  
competitive  attacks  in  another
• the  geographic  distance  of  the  firm  from  its  franchisees  can  make  it  difficult  
to  detect  poor  quality
Why  Choose  Joint  Ventures?
• Joint  ventures  are  attractive  because
• firms  benefit  from  a  local  partner's  knowledge  of  the  local  
market,  culture,  language,  political  systems,  and  business  
systems  
• the  costs  and  risks  of  opening  a  foreign  market  are  shared  
• they  satisfy  political  considerations  for  market  entry
Why  Choose  Joint  Ventures?
• Joint  ventures  are  unattractive  because
• the  firm  risks  giving  control  of  its  technology  to  its  partner  
• the  firm  may  not  have  the  tight  control  to  realize  experience  curve  or  
location  economies
• shared  ownership  can  lead  to  conflicts  and  battles  for  control  if  goals  and  
objectives  differ  or  change  over  time
Why  Choose  a  
Wholly  Owned  Subsidiary?
• Wholly  owned  subsidiaries  are  attractive  because
• they  reduce  the  risk  of  losing  control  over  core  
competencies
• they  give  a  firm  the  tight  control  in  different  countries  
necessary  for  global  strategic  coordination
• they  may  be  required  in  order  to  realize  location  and  
experience  curve  economies
• Wholly  owned  subsidiaries  are  unattractive  because
• the  firm  bears  the  full  cost  and  risk  of  setting  up  overseas  
operations  
Which  Entry  Mode  Is  Best?
Advantages  and  Disadvantages  of  Entry  Modes
How  Do   Pressures  for  Cost  Reductions  
Influence  Entry  Mode?
• When  pressure  for  cost  reductions  is  high,  firms  are  more  likely  to  
pursue  some  combination  of  exporting  and  wholly  owned  
subsidiaries
• allows  the  firm  to  achieve  location  and  scale  economies  and  retain  some  
control  over  product  manufacturing  and  distribution  
• firms  pursuing  global  standardization  or  transnational  strategies  prefer  
wholly  owned  subsidiaries
 Which  Is  Better  –
Greenfield  or  Acquisition?
• The  choice  depends  on  the  situation  confronting  the  firm
1. A greenfield  strategy -­‐ build  a  subsidiary  from  the  ground  up
• a  greenfield  venture  may  be  better  when  the  firm  needs  to  transfer  
organizationally  embedded  competencies,  skills,  routines,  and  culture
 Which  Is  Better  –
Greenfield  or  Acquisition?
2. An acquisition  strategy – acquire  an  existing  company
• acquisition  may  be  better  when  there  are  well-­‐established  competitors  or  
global  competitors  interested  in  expanding
• The  volume  of  cross-­‐border  acquisitions  has  been  rising  for  the  last  
two  decades
Why  Choose  Acquisition?
• Acquisitions  are  attractive  because
• they  are  quick  to  execute
• they  enable  firms  to  preempt  their  competitors
• they  may  be  less  risky  than  greenfield  ventures
• Acquisitions  can  fail  when
• the  acquiring  firm  overpays  for  the  acquired  firm
• the  cultures  of  the  acquiring  and  acquired  firm  clash
• anticipated  synergies  are  slow  and  difficult  to  achieve
• there  is  inadequate  pre-­‐acquisition  screening
• To  avoid  these  problems,  firms  should
• carefully  screen  the  firm  to  be  acquired
• move  rapidly  to  implement  an  integration  plan
Why  Choose  Greenfield?
• The  main  advantage  of  a  greenfield  venture  is  that  it  
gives  the  firm  a  greater  ability  to  build  the  kind  of  
subsidiary  company  that  it  wants
• But,  greenfield  ventures  take  longer  to  establish
• Greenfield  ventures  are  also  risky
What  Are  Strategic  Alliances?
• Strategic  alliances refer  to  cooperative  agreements  
between  potential  or  actual  competitors
• range  from  formal  joint  ventures  to  short-­‐term  
contractual  agreements
• the  number  of  strategic  alliances  has  exploded  in  recent  
decades
 Why  Choose  
Strategic  Alliances?
• Strategic  alliances  are  attractive  because  they
• facilitate  entry  into  a  foreign  market
• allow  firms  to  share  the  fixed  costs  and  risks  of  developing  new  products  or  
processes
• bring  together  complementary  skills  and  assets  that  neither  partner  could  
easily  develop  on  its  own
• help  a  firm  establish  technological  standards  for  the  industry  that  will  benefit  
the  firm  
• But,  the  firm  needs  to  be  careful  not  to  give  away  more  than  it  
receives
What  Makes  
Strategic   Alliances  Successful?
• The  success  of  an  alliance  is  a  function  of
1. Partner  selection
• A  good  partner
• helps  the  firm  achieve  its  strategic  goals  and  has  the  
capabilities  the  firm  lacks  and  that  it  values
• shares  the  firm’s  vision  for  the  purpose  of  the  alliance
• will  not  exploit  the  alliance  for  its  own  ends
What  Makes  
Strategic   Alliances  Successful?
2. Alliance  structure
• The  alliance  should
• make  it  difficult  to  transfer  technology  not  meant  to  be  
transferred
• have  contractual  safeguards   to  guard  against  the  risk  of  
opportunism  by  a  partner
• allow  for  skills  and  technology  swaps  with  equitable  
gains  
• minimize  the  risk  of  opportunism  by  an  alliance  partner  
What  Makes  
Strategic   Alliances  Successful?
3. The  manner  in  which  the  alliance  is  managed
• Requires  
• interpersonal  relationships  between  managers
• cultural  sensitivity  is  important
• learning  from  alliance  partners
• knowledge  must  then  be  diffused  through  the  
organization