2007universityofsouthafrica allrightsreserved...

# 2007 University of South Africa

All rights reserved

Printed and published by theUniversity of South AfricaMuckleneuk, Pretoria

MNI301J/1/2008^2010

98211633

3B2

Ericabus Styl

CONTENTS

FOREWORD vCOURSEMAP ix

PART1THESCOPEANDDYNAMICSOFGLOBAL

BUSINESS

TOPIC1: ANOVERVIEWOFGLOBALBUSINESS 3

STUDYUNIT1.1: GLOBALISATIONOF BUSINESS 4STUDYUNIT1.2: MACROECONOMIC THEORIES OF INTER-

NATIONALBUSINESS 9STUDYUNIT1.3 INTERNATIONALISATION AND THE DE-

VELOPMENTOF MULTINATIONAL ENTER-PRISES 15

TOPIC 2: GLOBALISATION AND INTERNATIONALTRADE 19

STUDYUNIT 2.1: GLOBALISATION AND INTERNATIONALTRADE THEORIES 20

STUDYUNIT 2.2: TRADE REGULATION AND SOUTH AFRI-CA'SROADTOGLOBALISATION 24

TOPIC 3: ECONOMIC INTEGRATION, REGIONALTRADE BLOCS AND FREE TRADE AGREE-MENTS 30

STUDYUNIT 3.1: ECONOMIC INTEGRATION 31STUDYUNIT 3.2: REGIONALTRADE BLOCS 35

PART 2GLOBALBUSINESS ENVIRONMENTS

TOPIC 4: THE INTERNATIONALCULTURALENVIRONMENT 45

STUDYUNIT 4.1: THE CONCEPT, CHARACTERISTICS ANDELEMENTSOF CULTURE 46

STUDYUNIT 4.2: IMPLICATIONS OF CULTURAL DIFFER-ENCESFORBUSINESS 55

TOPIC 5: POLITICAL, LEGAL ANDTECHNOLOGICALENVIRONMENTS 63

STUDYUNIT 5.1: POLITICAL ENVIRONMENTS 64STUDYUNIT 5.2: LEGAL ENVIRONMENTS 69STUDYUNIT 5.3: TECHNOLOGICAL ENVIRONMENTS 72

MNI301J/1/2008±2010 III

TOPIC 6: THE INTERNATIONALECONOMICENVIRONMENT 77

STUDYUNIT 6.1: ECONOMIC SYSTEMS AND MACROECO-NOMIC ISSUES 78

STUDYUNIT 6.2: TRANSFORMATIONTOAMARKET ECON-OMY 87

PART 3GLOBALBUSINESSLEADERSHIPAND

STRATEGIES

TOPIC 7: INTERNATIONALMANAGEMENTANDLEA-DERSHIP:DEVELOPINGAGLOBALMINDSET 95

STUDYUNIT 7.1: INTERNATIONAL MANAGEMENT ANDLEADERSHIP 97

STUDYUNIT 7.2: DEVELOPINGAGLOBALMINDSET 103

TOPIC 8: GLOBALCOMPETITIVESTRATEGIES 112

STUDYUNIT 8.1: GLOBAL BUSINESS ENVIRONMENTANDCOMPETITIVE ADVANTAGE 114

STUDYUNIT 8.2: INTERNATIONAL STRATEGIES AND MAR-KET ENTRYSTRATEGIES 120

PART 4ECONOMICDEVELOPMENTANDGROWTH

IMPERATIVES

TOPIC 9: GLOBALCOLLABORATIONANDSTRATEGICALLIANCES 130

STUDYUNIT 9.1 GLOBALCOLLABORATION 131STUDYUNIT 9.2 STRATEGIC ALLIANCES 134

TOPIC 10: ECONOMIC AND SOCIAL DEVELOPMENTINITIATIVES FOR SOUTH AFRICA ANDAFRICA 139

STUDYUNIT10.1: PROFILE AND GROWTH POTENTIAL OFAFRICA 140

STUDYUNIT10.2: SOCIO-ECONOMICGROWTH INITIATIVES 143

BIBLIOGRAPHY 147

CONTENTS

IV

FOREWORD

The lecturers in Global Business Environments welcome you to this studymodule and trust that youwill find your learning experience over the nextmonths both stimulating and rewarding.

Wewill start the discussion of themodule with a brief explanation of theimportance of understanding the global business environment and whythis area of academic endeavour should be regarded as a separate field ofstudy within the broad parameters of management science.

need for internationalbusiness training

Owing to the growth of international business and the increasinginvolvement of business enterprises in the global market place, it is clearthat there is a need for specific education, to develop and train managerswho understand the global business environment. However, the questionarises whether existing areas of study in business management ö such asstrategy, organisational behaviour, marketing, finance, production,purchasing and human resources management ö should simply beadapted to provide an international context or whether training in globalbusinessmanagement should be offered as a separate field of study.

separate field of study

In this regardwe can say thatmost researchers andpractitioners who areinvolved in global business management now believe that internationalbusiness relations have expanded so rapidly over the past three decadesthat traditional fields of study do not provide adequate information on thecontemporary international business environment nor on critical globalmanagement issues.Thus it is argued that management concepts are notnecessarily universal and that global business management requires arecognition of the fact that business environments and business practicesdiffer fromcountry to country.Hence thegrowingneed forglobalbusinessenvironments and global business management to be the subject of aseparate field of study.

THEAIMOF THISMODULE

global business and itsframework

The aim of this module is to provide you with some insight into and anunderstanding of the methodology of global business management andstrategies, and the global environment framework within which it isconducted. The key objective is to provide training for the managers ofthose firms ö both large and small ö that are engaged in globalbusiness, or are planning to do so, and who have to tread a wary waythrough the increasing complexities caused by a rapidly changing externalenvironment and continuing globalisation.

The second objective of the course is to highlight the relevance of globalbusiness for South African enterprises and to indicate how theseenterprises can contribute to the national economy and help to makeSouth Africa more competitive in the global economy.

MNI301J/1 V

VI

The third objective of themodule is to discuss recent and expected futuredevelopments in the SouthernAfrican region and to demonstrate how theSouth African business community may benefit from the process ofincreased economic integration of the region.

MODULEOUTCOMES

Once you have studied thismodule, you should be able to

. understand the process of increasing globalisation within whichinternational business has to be conducted

. gain insight into global trade applications and the ebb and flowof foreigndirect investment within the parameters of regional economicintegration

. demonstrate the implications of economic integration and thedevelopment of regional trade blocs

. plan global business operations within the context of internationalcultural politico-legal and economic environments

. plan and implement international business strategies including thedevelopment of entry strategies and strategic alliances

. develop a global mindset based on international management andleadership principles

. demonstrate how global collaboration and strategic alliances couldinfluence business operations in Africa and Southern Africa

. show how South African business enterprises could benefit from theincreasing economic integration of Southern Africa as an emergingregionalmarket

. show how socio-economic development initiatives could enhanceeconomic development in Africa, Southern Africa and South Africa.

OVERVIEWOF THEMODULE

The module consists of four parts.The first part discusses the scope anddynamics of global business with specific reference to international trade,the global investment environment, economic integration and regionaltrade blocs. The second part provides an overview of global businessenvironments with specific reference to international cultural environ-ments, politico-legal environments, the international technological envir-onment, and the global economic environment. Part three focuses on theinternational management and leadership principles that influence thedevelopment of a global mindset. The importance of the development ofinternational competitive strategies and foreign market entry strategiesto attain sustainable competitive advantage concludes our discussions inpart three. Part four details global collaboration and strategic alliancesand covers Southern Africa as an emerging regional market, outliningAfrica's potential and the socio-economic development initiatives toenhance future economic growth.

FOREWORD

PRESCRIBEDBOOKANDSTUDYGUIDEprescribed book The following textbook is prescribed for this studymodule:

Hough, J, & Neuland, EW. 2007.Global business: environments and strategies.3rd ed.CapeTown: Oxford University Press.

This module in `Global Business Environments' is based on chapters1to 6,8,9,13 and14, unless otherwise indicated in your tutorial letters.

importance of studyguide

The study guide is an important tool for studying this module. In general,the assignedchapters in theprescribedbook support the syllabus and aimsof thismodule in Global Business Environments.The study guide is dividedinto the four main parts referred to above and there are various topicsunder each part. At the beginning of each topic, the topic is summarisedby means of a topic chart, which indicates which study units make up thetopic. At the end of each topic, you will find self-evaluation questions thathave been designed to test your knowledge of the topic.We do not giveanswers to these questions.

the study guide will leadyou

The study guide will lead you through the prescribed book. In the studyguidewe have omitted certain sections of the prescribed book and addedto or emphasised others. At the end of each study unit there is one ormore activities to help you understand the concepts discussed in therelevant study unit and the prescribed book. It is very important thatyou use the study guide and the prescribed book together!

METHODOFSTUDY

basis for success

As a Unisa student your success will be based on how well you are able tostudy independently.The primary purpose of the study guide is thereforeto bring to your attention what we consider to be the most importantaspects of the conduct of international business and the parameters ofthe global framework within which such business operations take place.We believe youwill succeed in your studies if you

. make an in-depth study of the study guide and the relevant sections ofthe prescribed book and other coursematerial

. make sure that you read, understand and follow the instructionscontained in tutorialmaterial

. do additional reading

. discuss the studymaterial with colleagues and experts

. contact us should you have difficulties with your studies

. do the assignments and activities to the best of your ability

. test your knowledge in practical situations

. work conscientiously from day one to improve your knowledge andinsight and also to prepare yourself for the examination

FOREWORD

MNI301J/1 VII

EXPLANATIONOFICONS

Icons are used in the study guide to highlight and bring to your attentionimportant issues.Themeaning of each of the different icons is as follows:

Activity

Assessment

Learning outcomes

Key concepts

Read icon

Study icon

TUTORIALLETTER101

first tutorial letter The first tutorial letter is very important as it contains general informationon academic and administrative matters, as well as the assignments andtheir due dates. In this tutorial letter we include a study plan as aguideline and timetable for you.

other tutorial letters Other tutorial letters serve as the main source of information on eventsand issues that arise during the year.You should read these tutorial lettersimmediately and not file them away to look at later. The purpose of thetutorial letters is to supply feedback on assignments, give information onexaminations and to discuss anything else of importance that may havecome up during the academic year.

Your lecturers in Global Business Environments hope that you will enjoy

FOREWORD

VIII

GLOBALBUSINESSENVIRONMENTS

PART1

The scope anddynamics of global

business

An overview ofglobal business

Globalisation andinternational trade

Economic integra-tion, regional tradeblocs and free tradeagreements

PART 2

Global businessenvironments

The internationalcultural environ-ment

Political, legal andtechnological envir-onments

The internationaleconomic environ-ment

PART 3

Global businessleadership andstrategies

International man-agement and leader-ship: developing aglobalmindset

Global competitivestrategies

PART 4

Economicdevelopment and

growth imperatives

Global collaborationand strategic alliances

Economic and socialdevelopment initia-tives for South Africaand Africa

! ! ! !

!

!!

!!

!

real life business

the study module and that it will encourage you to want to learn moreabout the bestmanagement practices in the global business environment.We believe the module will assist you when you apply what you havelearned to real life business situations.We also trust that the module willstimulate your interest in further studies in the field of businessmanagement and, specifically, global business management in acompetitive environment.

Best wishes and greetings

Lecturers in Global Business Environments

COURSEMAP

FOREWORD

MNI301J/1 IX

Topic1

An overview of globalbusiness

Topic 2


Topic 3

Economic integration,regional trade blocs andfree trade agreements

Part1THESCOPEANDDYNAMICSOFGLOBALBUSINESS

INTRODUCTIONTOPART1Part1of this course deals with the scope and dynamics of global business.

Under topic 1 we provide an overview of global business. In topic 2international trade, globalisation and trade regulation are discussed.Topic3 focuses on economic integration, the developmentof regional tradeblocsand the importance of free trade agreements.

MNI301J/1 1

An overview of globalbusiness

Study unit1.1

Globalisation ofbusiness

Study unit1.2

Macroeconomictheories of interna-tional business

Study unit1.3

Internationalisa-tion and thedevelopment ofmultinationalenterprises

topic1 ANOVERVIEWOFGLOBALBUSINESS

AIMThe aim of this topic is to provide you with an overview of global businessdevelopment.The objective is to create anunderstanding of theprocess ofthe globalisation of business and to identify the macroeconomic theoriesthat impact on the outcome of this process.Within this context the focusis on the process of internationalisation and the development ofmultinational enterprises.

LEARNINGOUTCOMES

After studying this topic you should be able to

. define the concepts of globalisation and the globalisation of business

. identify the specific macroeconomic theories that influence theglobalisation of business

. describe the process of internationalisation and how multinationalenterprises have developed within the context of the globalisation ofbusiness

MNI301J/1 3

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KEYCONCEPTS

The key concepts identified in this topic are

global businessglobalisation of businessmacroeconomic theoriesmultinational enterprisesthe process of internationalisation

study unit1.1 GLOBALISATIONOFBUSINESS

CONTENTS

Study unit learning outcomes

Key concepts

Overview

1.1.1 Technological change and global business

1.1.2 Definition of globalisation and global business

1.1.3 Types of international business

1.1.4 Trends in the internationalisation of business

Assessment

Summary

STUDYUNIT1.1 LEARNINGOUTCOMES

Once you have finished this study unit, youwill be able to

. define the concept of globalisation

. explainwhat global business is

. discuss the process of the globalisation of business

. identify the various types of international business

. interpret the trends in the internationalisation of business

Topic 1: AN OVERVIEW OF GLOBAL BUSINESS

4

KEYCONCEPTS

globalisationglobal businesstechnological changetypes of international businesstrends in the internationalisation of business

OVERVIEW

In studyunit1.1we focus on theprocess of the globalisation of business.Wedefine the concepts of globalisation and global business and demonstratethe impact that technological change has had on the development ofglobal business. We also identify the various types of internationalbusiness that exist and discuss evolving trends in the internationalisationof business.

1.1.1 TECHNOLOGICALCHANGE AND GLOBALBUSINESS

(Study section1in chapter1of the prescribed book.)

The global business environment is changing rapidly for a number ofreasons such as those listed in the opening paragraph of chapter1.

new factors ofglobalisation

In the emerging global market, successful businesses will be those thatcompete internationally to meet supply and demand requirements.Globalisation of business is, in itself, not a new concept, but new factorshave contributed to its recent prominence. These factors include thecrumbling of the ideological edifices that came into existence after theSecondWorldWar.This meant that the former Soviet bloc countries andChina gradually opened their markets to Western companies andreciprocal trade came into being between former estranged economies.This process was enhanced by rapid and massive changes incommunication and transportation technologies. Trade barriers are alsobecomingmore andmore obsolete as the countries of the world seek toachieve the expansion of international trade and investment throughdialogue in international bodies such as the World Trade Organisation(WTO).

profound global change

We can therefore say that the liberalisation of markets, the rise ofdeveloping countries, technological change and disappearing tradebarriers are bringing profound change to the global economic landscape.Companies have a simple but important choice: get on board or get leftbehind. We live in an increasingly global world. What this means in

Study unit 1.1 Globalisation of business

MNI301J/1 5

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practical terms is that if you are the chairman of Mittal Steel in SouthAfrica, you consider Kazakstan as well as Australia when deciding whereto locate a new $500m mini-mill. Similarly, if you are the chairman ofToyota, you enter emergingmarkets such as China or India with modifiedversions of existing cars, such as the Corolla or Lexus, rather thandesigning a new car from scratch.

What is important, however, is that the 2006 and 2007 WorldCompetitive Reports of the World Economic Forum show a decline inSouth Africa's international competitiveness, relative to other newly-industrialised nations.

technology andpoorcommunities

We should also be aware of the fact that information and communicationtechnologies (ICT) can connect individuals, small companies and artisans inthe poorest and most isolated areas of the world by bringing them tonational and global markets.Thus ICT could, for instance, help adjust theimbalance between the advantaged and the disadvantaged in the SouthAfrican market place and from a more level playing field enable all SouthAfricans to benefit from the globalisation process.

globalmindset In summary, the global economic landscape has undergonemassive changeover the past two decades and the pace of global economic change isquickening.The only certain factor in this new global landscape is change.Therefore, the managers of companies that seek to competeinternationally will have to understand what globalisation is, whichmegatrends will influence globalisation, and ultimately what fundamentalfactors will drive globalisation. As will become clear in our discussions inPart 3,Topic 7, managers will have to develop a global mind-set or be leftbehind.

Look at figure 1.1 in the prescribed book. Here we see that research onglobalisation shows strong support for positive expectations from thisphenomenon over the next few years.

1.1.2 DEFINITIONOFGLOBALBUSINESS

(Study section 2 in chapter1of the prescribed book.)

areas of globalisation

Globalisation can be defined in several different ways, depending on theangle from which we choose to look at it. We can speak of theglobalisation of the entireworld, or of a single country, a specific industry,a specific companyor even a particular line of business or functionwithin acompany.

definition ofglobalisation

However, in the international business context the term `globalisation''usually refers to commercial activities in which two or more countriesare involved.These commercial activities could be those between privatecompanies with a profit motive or between government organisationswhere no profitmotive is involved.


6

More specifically, globalisation refers to the shift towards a more integratedand inter-dependent world economy, including the globalisation ofproduction andmarkets.

range of commercial

activitiesInternational commercial activities are defined as themovement of goods,services, capital, people or technology and skills over internationalborders.The goods could be in the form of rawmaterials, or half-finishedor finished products. Services include accounting, advertising,communications, computer services, advisory services, education andtraining, legal opinions and banking activities while skills covermanagement and technical skills.

Have a look at figure 1.2 in the prescribed book to see the importantinteraction between the operations of international enterprises and theirexternal and competitive environments.

1.1.3 TYPESOF INTERNATIONALBUSINESS


types ormodes of

international

business

Weidentify a range of international businessmodes.Theyrange frombasicimports and exports to the sophisticated activities of multinationalenterprises which include

. merchandise imports and exports

. service imports and exports

. tourism and transportation

. foreign portfolio and direct investments

. use of assets

These differentmodes of international business activities are considered inmore detail in chapters 9 and 11 where we discuss the options for abusiness to enter the internationalmarket.

1.1.4 TRENDS INTHEINTERNATIONALISATIONOFBUSINESS


trends in internation-

alisation of businessYou will find an overview of the most important current trends in theinternationalisation of business in section 4 in chapter 1of the prescribedbook.Of particular importance are changing demographic patterns, theworld-wide growth of market economies following the fall ofcommunism, technological renewal, including the shift in emphasis frommanufacturing to services, the evolving global information and knowledgesocieties, and the development of regional trading blocs.

Refer to Box 1.1 on the joint collaboration between MIT and Nokia for


MNI301J/1 7

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advanced research into mobile computing and communicationstechnologies.

ACTIVITY 1.1.1

Read Box1.1on the MIT-Nokia collaboration.Do you think this new trendin technological industry-university researchwill accelerate or slow down infuture? Why or why not? What are the potential advantages to inter-national business? Give your answer in a brief written essay and gatherfacts from the newspapers and financial as well as technology journalsyou have studied, to substantiate your views.

ASSESSMENT

You may want to check your understanding of the contents of this studyunit by demonstrating that you can answer the following:

. Which businesses will be able to compete successfully in the emergingglobalmarket?

. What are the new key factors that have contributed to the recentprominence of globalisation and the globalisation of business?

. Do you believe that the managers of companies that seek to competeinternationally will have to understand what globalisation is and whichmegatrends will influence globalisation? If so, why?

. Why is it important formanagers to develop a globalmind-set?

. Write down a definition of the term `globalisation'' as we usuallyencounter it in the international business context.

. Make a list of the variousmodes of international business referred to inthe prescribed book and provide two different examples of SouthAfrican companies that you have identified that meet the criteria forone ormore of thesemodes.

SUMMARY

In this study unit we defined the concept of global business and showedhow technological advancement has impacted on the global economiclandscape. We looked at different types or modes of internationalbusiness and identified the key trends that have emerged in theinternationalisation of business. Finally, we said that it was imperative formanagers of firms that compete or want to compete internationally to


8

develop a global mindset, failing which they risk being left behind in thecompetitive global commercial race.

study unit1.2 MACROECONOMICTHEORIESOF

INTERNATIONALBUSINESS

CONTENTSStudy unit learning outcomes

Key concepts

Overview

1.2.1 Why we studymacroeconomic principles

1.2.2 Theory of comparative advantage ö comparative cost benefits

1.2.3 Technological renewal and production expertise

1.2.4 Theories on FDI

1.2.5 Multinational agreements and organisations

1.2.6 The trade cycle

1.2.7 The oligopolymodel

1.2.8 International transfer of resources

1.2.9 Balance of payments

1.2.10 Motives for internationalisation

Assessment

Summary


MNI301J/1 9

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Once you have studied this study unit, youwill be able to

. explainwhatkeymacroeconomic theories influence a national economy

. define the theory of comparative advantage

. demonstrate the relationship between technological renewal andproduction expertise

. discuss the different theories on FDI

. analyse the importance of multinational agreements and internationalorganisations for increased global trade

. provide information on and critically assess the trade cycle

. explain why you think it is important to know about the oligopolymodel

. explain the relationship between the international transfer of resourcesand the balance of payments

. explain theproactive andreactivereasons for the internationalisation ofbusiness

KEYCONCEPTS

macroeconomic macroeconomic theoriescomparative advantage technological renewalcomparative cost benefits production expertisemultinational organisations trade cycleoligopolymodel international transfer of resourcesbalance of payments multinational agreements

motives for internationalisation

OVERVIEWThis study unit covers the macroeconomic factors that influence globalbusiness expansion. It explains why we study the macroeconomictheories and frameworks of international business and introduces us tothe relevant theories and concepts, such as the theory of comparativeadvantage, the oligopoly model, and the trade cycle.We also explore therelationship between technological renewal and production expertise andconsider the importance of the international transfer of resources and acountry's balance of payments.


10

1.2.1 WHYWESTUDYMACROECONOMICPRINCIPLES

importance ofunderstanding macroe-conomic principles

Macroeconomic factors influence theperformance of a country's economyand, byextension, thatcountry's global competitiveposition. It is thereforeof importance for the managers of both domestic firms and those firmsthat engage in international trade to understand what macroeconomicprinciples are and how they determine growth or lack of growth in thenational economy.

We next consider some important macroeconomic determinants ofinternational business:

1.2.2 THEORYOFCOMPARATIVEADVANTAGE-COMPARATIVECOSTBENEFITS


different resources andcost structures

In this section of the prescribed book the discussion turns to the reasonwhy countries trade with each other rather than being self-reliant andproducing goods to meet their own needs.The answer lies in the unevendistribution of resources between countries and the fact that there aredifferent cost structures in different countries. This means that onecountry may have a comparative cost benefit over another when itcomes to the exploitation of a resource or the manufacturing of aproduct where it has a production cost advantage. The theory ofcomparative advantage is also discussed in chapter 3, section 3.3.

companies benefit fromcomparative advantage-comparative costbenefits

Similarly, companies use the principle of comparative advantage to benefitfrom the exploitation of natural resources or manufacturing anddistribution possibilities in countries where they have a comparativeadvantage over conditions that exist in their domestic markets.

1.2.3 TECHNOLOGICALRENEWALANDPRODUCTIONEXPERTISE

(Study section 5.2 in chapter1of the prescribed book.)

50 years of revolutionarytechnological change

Over the last 50 years there have been massive technological changesworldwide.These changes are particularly evident in the radical renewalor improvement of the technology that governs communications,transportation and information processing. For instance, in the fifties andsixties business communication was done mainly by telex.Then came thefax and today we have theWorld WideWeb and the Internet which notonly allows us to send e-mail to friends and family anywhere in theworld,but also allows instantaneous business transactions and financial transfersworldwide.

An excellent example of a firm capitalising on advanced technology andinnovative business and marketing initiatives is Capitec Bank, as

Study unit 1.2 Macroeconomic theories of international business

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illustrated in Box1.3. Ensure that you understand the role that technologycan play in the new information era.

1.2.4 THEORIESONFDI

(Study sections 5.3 and 6.2 in chapter1of the prescribed book.)

FDI explained In section 5.3 of the prescribed book you will learn about foreign directinvestment (FDI), and why and how it takes place between countries. Insummary it may be said that FDI is usually the outcome of a companymoving beyond the borders of its own home country to purchase andcontrol a business activity in another country, which is then referred toas the host country.

According to the general theory of capital flow, capital will move fromcountries where it is abundant to countries where it is scarce, or fromcountries where the rate of return on investment is low, to countrieswhere it is high.

increasing importanceof FDI

The past 30 years have seen a marked increase in worldwide FDI flows,from 25 billion US dollars in 1975 to a record 1,2 trillion US dollars by2000.Historically, most FDI has been directed at developed nations up tothe late 1990s, with the United States and the European Union being themain recipients.Towards the end of the 1990s, however, the FDI flows toless developed countries had already reached 35 to 40 per cent, whichincreased to 44 per cent by 2004.Most of these FDI flows were targetedat India, China and other countries in South East Asia, while the UnitedStates and the European Union remain the major recipients, and are stilltheworld's largest trade and investment partners.

wealth and jobs These flourishing economic ties createwealth and jobs in allmajor regionsof the world. An estimated 4,8 million US jobs, 3,5 million of which aredirectly provided for by EU-owned firms, are supported by Europeaninvestment in the US, with benefits in this regard also being experiencedbymany developing countries.

study section 6 of theprescribed book

Now study section 6 in chapter 1 of the prescribed book to gain anunderstanding of how and why growth in global business and foreigninvestment takes place.

1.2.5 MULTINATIONALAGREEMENTSANDORGANISATIONS


EU, NAFTA, GATTandWTO

Multinational agreements resulting in free trade areas such as the EuropeanUnion (EU) and theNorth American FreeTradeAgreement (NAFTA) andorganisations such as the General Agreement onTariffs and Trade (GATT)and its successor, the World Trade Organisation (WTO) have helped tobring about a global reduction in trade barriers. These organisations and


12

a global trend towards free market economies have also facilitated thedevelopment of regional trade blocs, as we will see in greater detail inchapter 3 of the prescribed book.

1.2.6 THETRADECYCLE(Study section 5.5 in chapter1of the prescribed book.)

trade cycle theory Make sure that you understand the explanation of the trade cycle theoryin section 5.5 in chapter 1 of the prescribed book.You should be able todemonstrate that shifts in world trade can be compared with the stagesin the life cycle of a product, and that the location of the production of aproduct may shift from one country to another as the product movesthrough its life cycle.

1.2.7 THEOLIGOPOLYMODEL(Study section 5.6 in chapter1of the prescribed book.)

oligopoly explainedThe oligopoly model explains another macroeconomic theory ofinternational business. It helps us understand the characteristics of largescale FDI when an industry or business sector is controlled by a smallnumber of companies. Finally the oligopoly model helps us analyse themotivation and behaviour of businesses and their role in themovement ofinternational capital.

1.2.8 INTERNATIONALTRANSFEROFRESOURCES


what resources includeWe also have to consider the influence on international business of thetransfer of resources over national borders. This is an importantmacroeconomic determinant of international business. These resourcescould include capital, labour and natural resources, but also technologyand management expertise.While the international transfer of resourcesis generally based on economic and business considerations, governmentscan also influence themovement of resources.

1.2.9 BALANCEOFPAYMENTS(Study section 5.8 in chapter1of the prescribed book.)

favourable orunfavourable balance ofpayments

The final theoreticalmacroeconomic frameworkwe consider in studyunit1.2 is a country's balance of payments.Thus we say that the trade balancebetween countries is reflected in a favourable or unfavourable balance ofpayments. It is obviously very important, particularly in developingcountries such as South Africa, to maintain a positive balance ofpayments so that economic growth can be sustained. (See chapter 6,section 6.4.)

Study unit 1.2 Macroeconomic theories of international business

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1.2.10 MOTIVESFORINTERNATIONALISATION(Study section 6.1in chapter1of the prescribed book)

motives forinternationalinvolvement

It is important to know why domestic firms would even consider goinginternational'. The reasons for internationalisation can be proactive orreactive, as discussed in this section. Ensure that you understand thesemotives.

ACTIVITY1.2.1

Consult local newspapers and journals as well as the Internet to obtaininformation on South Africa's current balance of payments. Section 6.4and Appendices 1, 2 and 3 in chapter 6 of the prescribed book containinformation on South Africa's balance of payments. Write a fewparagraphs to reflect your findings and indicate whether you believe FDIhas played a role or could play a role in securing a positive balance ofpayments in South Africa. In your assessment of South Africa's balance ofpayments in recent years, what trend(s) do you observe with regard totrade surpluses or deficits for the period under investigation?

ACTIVITY1.2.2

Read the case example in Box 1.1, `Capitec Bank: Innovative use oftechnology in banking'. Evaluate the importance of using technology toattain a competitive advantage. How and why did Capitec succeed in thisregard? Motivate your answer.

ASSESSMENT

You may want to check your understanding of the contents of this studyunit by demonstrating that you can answer the following:

. Explain the term,`macroeconomic theories''.

. Define the theory of comparative advantage.

. Explain in your own words the interaction between technologicalrenewal and production expertise.

. Explain why FDI is important especially in a developing country likeSouth Africa.

. What is the oligopoly model and does it have any relevance for SouthAfrica?


14

. Identify an example of the international transfer of resources that hasbenefitted South Africa.Consult themedia and the Internet.

SUMMARY

In this studyunitwe explained the importance ofmacroeconomic theoriesfor international business. To illustrate our point, we identified specificmacroeconomic principles such as those embodied in the theory ofcomparative advantage-comparative cost benefits, the trade cycle andthe oligopoly model.We also demonstrated the impact of technologicalrenewal on the production expertise of international business. Finally, wediscussed how FDI and the transfer of international resources couldinfluence economic growth in the host country and the effect they couldhave on the balance of payments of the particular host country.

study unit1.3 INTERNATIONALISATIONANDTHEDEVELOPMENT

OFMULTINATIONALENTERPRISES

CONTENTS


Key concepts

Overview

1.3.1 Definition of a multinational enterprise (MNE)

1.3.2 Strategies for internationalisation

1.3.3 Evolution of MNEs

Assessment

Summary

Topic summary



. definewhat a multinational enterprise is

MNI301J/1 15

Study unit 1.2 Macroeconomic theories of international business 1

. explain the different strategies for internationalisation that a businesscould consider

. identify the different phases of evolution of multinational enterprises

KEYCONCEPTS

multinational enterprise strategies for internationalisationevolution of MNEs international inquiriesexportmanager export departmentdirect overseas sales overseas brokersoverseas subsidiaries overseas assemblyoverseasmanufacturers licencesinvestment inmanufacturing integration of subsidiaries

OVERVIEWThis study unit addresses the development of multinational enterprises.First we identify what a multinational enterprise is. Then we discuss thevarious strategies for the internationalisation of business and inconclusion track the different phases in the evolution of multinationalenterprises.

1.3.1 DEFINITIONOFAMULTINATIONALENTERPRISE

MNE-businessoperations in two ormore countries

Amultinational enterprise (MNE) is defined as a firm thatowns or controlsproductive business activities in two ormore countries. In fact we can saythat aMNE comes into existence as a result of FDI. In other words, when adomestic firm moves outside the borders of its own home country tomake its first investment in another country and owns or controls abusiness activity in that host country, it becomes a multinationalenterprise.

1.3.2 STRATEGIESFORINTERNATIONALISATION

(Study section 7.1in chapter1of the prescribed book.)

study figure1.3 Make sure that you study figure 1.3 in chapter 1 to increase yourunderstanding of the various strategies that companies in differentindustries could implement at different levels of internationalisation. Low


16

to high international involvement proceeds from the centre to the outsideof the circle, indicating thevarious possible alternatives and opportunities.

1.3.3 EVOLUTIONOFMNEs


sevenphasesof evolution

in internationalisationSection 7.2 in chapter 1 of the prescribed book identifies seven phases ofevolution to demonstrate how a business enterprise could move frombeing a domestic firm to becoming an MNE.These phases are illustratedin figure 1.4 in chapter 1 of the prescribed book. However, it should benoted that not all companies move through all seven phases as they gofrom being a domestic business to an international business. The sevenphases can be summarised as follows:

. Phase 1 occurs when a company receives an inquiry about one of itsproducts from a foreign business entity or from a domestic exporter.

. In phase 2 an export manager is appointed to expand the search forforeignmarkets for the company's products.

. Phase 3 occurs when an export department or division is established atthe same level as the domestic sales department.

. In phase 4 a sales branch is established abroad to handle sales andpromotional work in a host country and this sales branch then evolvesinto a sales subsidiary incorporated in the host country.

. In phase 5 the company expands the sales activity of the subsidiary inthe host country to include an assembly operation so that adisassembled product rather than the whole product can be exportedfrom the home country.

. Phase 6 is the establishment of actual production in the host country.Ensure that you understand the three methods that are generallyavailable to MNEs to commence foreign production with reference tofigure1.5 in chapter1which explains the relationship between productdiversity' and market complexity' in this regard.

. Finally, in phase 7 the parent company integrates the various foreignsubsidiaries into onemultinational enterprise system.

ACTIVITY1.3.1

Select a company with international operations that is listed on theJohannesburg Securities Exchange ( JSE). From newspaper and financialjournal reports, as well as the company's website and annual report(s),establish the types of international operations and its phase ofinternationalisation, where possible.Write a brief report on your findings.

Study unit 1.3 Internationalisation and the development of multinational enterprises

MNI301J/1 17

1

ASSESSMENT

You may want to check your understanding of the contents of this studyunit by demonstrating that you can

. define a multinational enterprise.

. list, discuss and evaluate the different strategies that companies use forinternationalisation

. evaluate the different phases of evolution through which a domesticcompany could progress to become a multinational enterprise (MNE).

SUMMARYIn this study unit we reviewed the development of multinationalenterprises (MNEs). In particular we asked how one could define a MNE.In conclusionwe discussed thevarious strategies for internationalisation inbusiness and we identified the seven different phases that a domesticcompanymay go through to become a MNE.

TOPICSUMMARYIn study unit1.1we defined the concept of the globalisation of business.Wethen reviewed the impact of technological change on global business andidentified the various types of international business. Finally, we evaluatedthe current trends in the internationalisation of business.

In studyunit1.2we continued the discussion of theglobalisation of businessby referring to the various macroeconomic theories that impact on theglobalisation of business. In this respect our discussion included thetheory of comparative advantage-comparative cost benefits and the stateof a country's balance of payments.

In study unit 1.3 we looked at the development of multinationalenterprises. In particular we reviewed the various strategies forinternationalisation and evaluated the different phases through which adomestic firm could evolve to become a MNE.


18

Study unit2.1


theories

Study unit2.2

Trade regulationand South Africa's

road to globalisation


topic 2 GLOBALISATIONANDINTERNATIONALTRADE

AIM

The aim of this topic is to further expand our views on the globalisation ofthe world economy and within this context discuss international tradetheories, free trade and trade regulation in the context of the ongoingglobalisation of the world economy. The topic is concluded with a briefoverview of South Africa's road to globalisation.

LEARNINGOUTCOMES

After studying this topic, you should be able to

. evaluate globalisation as a frame of reference for international trade

. explainwhat international trade is

. identify and explain the various international trade theories

. explain the forces driving globalisation

. define and describe economic integration

. discuss, evaluate and explain tariff barriers in the context ofinternational trade

. discuss, evaluate and explain non-tariff barriers in the context ofinternational trade

MNI301J/1 19

2

. explain and critically evaluate the case for and against governmentintervention

. explain and evaluate the role of trade remedies

. discuss and evaluate South Africa's road to globalisation

KEYCONCEPTS


globalisation global businessinternational trade internationalisationinternational trade theories free tradetrade regulation world economyglobalisation institutions economic integrationnational competitive advantagemarket entry barriersgovernment intervention tariff barriersinfant industries non-tariff barrierstrade remedies trade patterns

study unit 2.1 GLOBALISATIONANDINTERNATIONALTRADE

THEORIES


Key concepts

Overview

2.1.1 Globalisation as a basis for international trade

2.1.2 Themodern globalisation institutions

2.1.3 International trade theories

2.1.4 Economic integration

Assessment

Summary

Topic 2: GLOBALISATION AND INTERNATIONAL TRADE

20

STUDYUNIT 2.1 LEARNINGOUTCOMES




. identify and explain the international trade theories



KEYCONCEPTS

globalisation globalisation institutionsinternational trade global businessinternational trade theories free tradeeconomic integration international trade barriersworld economy national competitive advantage

OVERVIEWIn study unit 2.1 we discuss international trade and the globalisation ofbusiness. We then discuss the important modern globalisationinstitutions, international trade theories, the forces driving globalisationand the place of economic integration in the international tradeenvironment.

2.1.1 GLOBALISATIONASABASIS FORINTERNATIONALTRADE

(Study sections1and 2 in chapter 2 of the prescribed book.)

the globalisationprocess

In section1in chapter 2 of the prescribed book the argument is proposedthat globalisation is the economic restructuring of the world economy. Byimplication, the question also posed is whether the global goal of betterliving standards for all will be achieved through the process ofglobalisation or whether globalisation will merely exacerbate gapsbetween rich global blocs and the poor regions.

Study unit 2.1: Globalisation and International trade theories

MNI301J/1 21

2

develop your ownopinions

You should, at this early stage of your studies in global businessenvironments and based on the discussions in topic 1 above, already startforming your own opinion on the process of globalisation that we areseeing all around us. See which arguments in favour or against you agreewith, but make sure you are always in a position to fully substantiate anddefend the arguments you select.The views of Stiglitz towards the end ofsection 1 in chapter 2 of the prescribed book are quite revealing in thisregard.

2.1.2 THEMODERNGLOBALISATIONINSTITUTIONS

(Study section 2 in chapter 2 of the prescribed book.)

main institutionsgoverning globalisation

The three main institutions governing globalisation worldwide are theWorld Trade Organisation (WTO), the International Monetary Fund(IMF) and the World Bank. Study this section to identify their role, aswell as that of other organisations in this regard.

2.1.3 INTERNATIONALTRADETHEORIES

(Study sections 3 and 4 in chapter 2 of the prescribed book.)

the different tradetheories

Porter's theoryofnational competitiveadvantage

Section 3 of the prescribed book explains the different theories we needto know about to understand international trade (see, too, figure 2.1).Thefirst attempt at explaining international trade became known asmercantilism'. It was centred on the nation state and aimed at increasingexports over imports.However, the first important theory that explainedinternational trade was published by Adam Smith in An Inquiry into theNature and Causes of theWealth of Nations in 1776. It is known as the` theory of absolute advantage''. Study this theory closely and thencompare it with Ricardo's important theory of comparative advantage.Next we need to consider the Hecksher-Ohlin theory of factorendowments and the so-called Leontief paradox. Now, acquaint yourselfwith Raymond Vernon's product life cycle theory and the NewTradeTheory. Finally, there is the very important theory on the competitiveadvantage of nations, known as `Porter's diamondmodel''. Porter's theoryis not a trade theory in the strict sense of the word, but rather a uniqueand valuable framework for the analysis of the competitiveness ofindustries and firms within industries, which helps to explain whyinternation trade takes place.

evolution of tradetheories

When we analyse these different trade theories we can see anevolutionary process. Each theory was built on the previous one until weget to Porter's diamond, which currently offers the best explanation ofwhy international trade takes place in the global economy. Section 4 inchapter 2 of the prescribed book briefly summarises four drivers ofglobalisation. Based on our discussion in this section, and other relevantsources, compile your own summary of the various trade theories.


22

2.1.4 ECONOMICINTEGRATION


increasing importance

of economic integrationIn recent years there has been an increasing trend amongst countries incertain geographic areas to align themselves economically withneighbouring countries to create trade blocs and free trade areas. StudyBox 2.4,`400 Trade Agreements by 2010' in this regard.

Economic integration typically evolves through the following phases:

. Free trade zone

. Free trade area

. Customs union

. Commonmarket

. Economic union

. Political union

regional economic

integration enhances

international trade

Ensure that you understand the basic characteristics of each of thesestages, which are explained in greater detail in chapter 3 of theprescribed book.

In the context of international trade, economic integration is importantbecause it increases trade between member countries as a result ofeliminating trade barriers.

ACTIVITY 2.1.1

In a brief report, compare the theory of comparative advantage of trade,theHecksher-Ohlin theory and Porter's diamond theory, andcommentonthe merits and usefulness of each of these theories for internationalmanagement.

ASSESSMENT




. identify and explain the international trade theories



Study unit 2.1: Globalisation and International trade theories

MNI301J/1 23

2

SUMMARYIn this study unit we defined the concept of international tradewithin thecontext of the globalisation of business.We then shifted our focus tointernational trade theories and briefly explained how economicintegration and the formation of trade blocs and free trade areas enhanceinternational trade.

study unit 2.2 TRADEREGULATIONANDSOUTHAFRICA'SROAD

TOGLOBALISATION


Key concepts

Overview

2.2.1 Market entry barriers

2.2.2 The case for government intervention

2.2.3 Trade remedies

2.2.4 South Africa's road to globalisation

Assessment

Summary

Topic summary



. discuss, evaluate and explain tariff barriers in the context ofinternational trade


. explain and critically evaluate the case for and against governmentintervention in international trade




24

KEYCONCEPTS

globalisation government interventionmarket entry barriers infant industriestariff barriers trade patternsnon-tariff barriers trade remedies

OVERVIEW

In study unit 2.1we discussed the theories of international trade and theirevolution to the present day. The message derived from the theory ofcomparative advantage of international trade and the more recent tradetheories is that potential world production and consumption is greaterwith unrestricted or free trade than it is with restricted trade.

In studyunit 2.2 we examinemarketentrybarrierswith specific referenceto tariff barriers and non-tariff barriers as measures of trade regulation.We also look at the case for government intervention in internationaltrade and the role of trade remedies, and conclude our discussion with abrief overview of South Africa's road to globalisation.

2.2.1 MARKETENTRYBARRIERS


free trade versusprotectionism

Modern economists generally support free trade because it is seen as thebest way of ensuring economic growth worldwide. However, there arealso opponents of free trade who favour protectionist policies based ontrade barriers as the best way of protecting the economic welfare ofindividual countries. Apart from the argument of protecting infant orgrowing industries, those who favour protectionist policies often basetheir arguments on non-economic factors which include political, social,moral and ethical issues.

trade protection andretaliation

Aworrying part of the process of global trade expansion has been theretaliatory measures invoked by different countries to protect vulnerablesectors of their national economies. Examples in this regard include:

. The ongoing quarrel between the US and the EU about steel andagricultural subsidies

. The ongoing battle between the two giant aircraft manufacturers,Boeing and Airbus, about alleged unfair government subsidies

. The discontent of some 20 developing countries with the US, the EUand Japan about agricultural subsidies that have largely derailed theWTO's Doha Round of international trade negotiations

Study unit 2.2: Trade regulation and South Africa's road to globalisation

MNI301J/1 25

2

With regard to market entry barriers, we now briefly look at the twotypes of measures that governments use to protect their economies orstem the flow of imports:

. tariff barriers

. non-tariff barriers (NTBs)

2.2.1.1 Tariff barriers

(Study section 6.1in chapter 2 of the prescribed book.)

nature of tariff barriers Tariff barriers are created when governments put financial levies on theimportation of goods ö either in the form of specific taxes or tariffs, oras ad valorem tariffs. Tariffs generally generate revenue for governments,anddiscourage the importation of specific goods for various reasons.Nowstudy the general implications of tariffs listed in this section.

In the sub-sections that follow the more general and often-used tariffbarriers are discussed.These include

. Customs duties

ö Ad valorem dutiesö Specific dutiesö Formula or rated duties

types of tariff barriers . Levels of duties

ö Applied ratesö Bound ratesö Nominal ratesö Effective rates

. Other forms of customs duties

ö Ad valorem customs duties (luxury tax)ö Specific customs duties (sin taxes)ö Surchargeö Environmental leviesö Fuel levies and Ordinary levies

Study these forms of tariffs and their characteristics thoroughly withreference to Boxes 2.5 and 2.6 in chapter 2 of the prescribed book.

2.2.1.2 Non-tariff barriers (NTBs)

(Study section 6.2 in chapter 2 of the prescribed book.)

nature of non-tariff

barriersNTBs are more refined than tariff barriers, but arguably also moreeffective in restricting international trade or the free flow of goods. Studythe nature of NTBs and their implications as described in this section,noting that the flow of goods which are tariff-free or duty-free may still


26

be restricted by imposing NTBs, and that NTBs are less easy to detectthan tariff barriers.

Now study the rest of this section on NTBs with reference to Box 2.7,under the following headings:

types of non-tariffbarriers

. Import and export control

. Import licences

. Quotas

. Prohibitive goods

. Restricted goods

. Standards (quality and health)

. Embargoes and sanctions

. Other NTBs

. Environmental trade barriers

. Infrastructural trade barriers

In closing, it should be clear that importers and exporters need to beaware of the existence of NTBs in those countries withwhich they trade,or run the risk of significant detrimental exposures and losses.

2.2.2 THECASEFORGOVERNMENTINTERVENTION


reasons for governmentintervention

Study the following arguments advanced for government intervention ininternational trade:

. Protecting industries and jobs

. Protecting infant industries' (also see Box 2.8 and section 8 in chapter 2)

. Protecting consumers

. Protecting foreign exchange reserves

. Trade remedies

. Retaliation

. National security

. Food security

As stated in the Overview above, themain argument against governmentintervention is that thepotential for worldproduction and consumption isgreater with free trade than restricted trade.

2.2.3 TRADEREMEDIES


defining trade remedies Governments canuse traderemedies in instances of unfair tradepractices,notably dumping and subsidies. Safeguards can also be used in cases ofdisruptive competition due to increased imports. Two categories ofsafeguards are:


MNI301J/1 27

2

types of trade remedies . Unfair trade remedies (anti-dumping and countervailing). Fair trade remedies (industrial safeguards; agricultural safegards; and

special safeguards (Chinese accession)).

Ensure that you understand these trade remedies, their implications forinternational trade, andwhen they can be used.

2.2.4 SOUTHAFRICA'SROADTOGLOBALISATION

(Study section10 in chapter 2 of the prescribed book.)

SA's future prospects ofinternationalinvolvement

This section discusses South Africa's road to globalisation and the factorsthat affect the country's trading patterns under the following headings:

. Abrief history of South Africa's globalisation

. Factors affecting South Africa's foreign trade patterns

factors affecting foreigntrade

ö Abundance of natural resourcesö Degree of sophisticationö Emergence of service-oriented economiesö Economic conditions in foreignmarketsö Size of foreignmarketsö Traditionalmarkets and newmarket opportunitiesö Political factors

. Opportunities and problems facing South African exporters

Familiariseyourself with the contentof this section as outlined above sinceit provides an invaluable frame of reference to assess South Africa's futureinternational involvement and serves as a basis for the remaining topics inthismodule.

ACTIVITY 2.2.1

Write a brief report on and evaluate South Africa's current status of traderegulation on industrial/manufactured products. Apart from newspapersand financial journals, access the websites of the Department of Tradeand Industry and of the International Trade Administration Commissionof South Africa (ITAC) (www.thedti.gov; www.itac.org.za).


28

ASSESSMENT


. discuss, evaluate and explain tariff barriers in the context of inter-national trade


. explain and critically evaluate the case for and against governmentintervention in international trade



SUMMARYIn this study unitwe discussed and explained trade regulationwith specificreference to tariff barriers andnon-tariff barriersö themain elements ofmarket entry barriers. We then looked at the case for governmentintervention in trade, and the nature and use of trade remedies. Anoverview of South Africa's road to globalisation concluded our discussion.

TOPICSUMMARYStudy unit 2.1 focused on international trade, international trade theories,modern globalisation institutions and concluded with an overview of theimportance of economic integration in international trade. Study unit 2.2dealt with the regulation of international trade with specific reference totariff and non-tariff barriers. The case for government intervention andthe role of trade remedies were discussed next. South Africa's road toglobalisation rounded off the discussions in this topic.


MNI301J/1 29

2

Study unit3.1

Economicintegration

Study unit3.2

Regional trade blocs

Economic integration,regional trade blocs andfree trade agreements

topic 3 ECONOMICINTEGRATION,REGIONALTRADEBLOCSANDFREETRADEAGREEMENTS

AIM

The aim of this topic is to provide you with an overview of regionaleconomic integration and the development of regional trade blocs withinthe context of globalisation.The discussion is therefore about the conceptof economic integration both in its global and in its regional sense withspecific reference to the characteristics of today's most importantregional trade blocs. Finally, we seek to establish what the costs andbenefits are for South Africa to be part of the SADC regional trade blocin Africa.

LEARNINGOUTCOMES


. define the concept of economic integration

. define and discuss the process of regional economic integration

. describe the characteristics of a regional trade bloc

. identify today'smost important regional trade blocs

. analyse and interpret the implications of economic integration andregionalisation for SADC and South Africa

30

KEYCONCEPTS


economic integration regionalisationregional economic integration regional trade blocsSADC forms of trade blocs

study unit 3.1 ECONOMICINTEGRATION


Key concepts

Overview

3.1.1 Definition of economic integration

3.1.2 Analytical basis formeasuring the effects of economic integration

3.1.3 Forms of trade blocs

3.1.4 Advantages and disadvantages of free trade areas

Assessment

Summary

STUDYUNIT 3.1LEARNINGOUTCOMES


. define the concept of economic integration

. explain the analytical basis for measuring the effects of economicintegration

. discuss the difference between trade creation and trade diversion

. identify the various forms of trade blocs

. evaluate the advantages and disadvantages of free trade areas

Study unit 3.1: Economic integration

MNI301J/1 31

3

KEYCONCEPTS

economic integration regional economic integrationtrade blocs regional trade blocstrade creation trade diversionfree trade area customs unioncommonmarket economic unionpolitical union principle of economic integration

OVERVIEW

In study unit 3.1 we define economic integration and other relevantconcepts and demonstrate that such economic integration often takesthe form of the development of regional trade blocs. In this context wediscuss the analytical basis for measuring the effects of economicintegration with specific reference to the effects of trade creation andtrade diversion, and explain the principle of economic integration.Wealso delineate the various forms that regional trading blocs can take andevaluate the most important advantages and disadvantages of free tradeareas.

3.1.1 DEFINITIONOFECONOMICINTEGRATION

(Study sections1, 2 and 3 in chapter 3 of the prescribed book.)

economic integration

degrees and forms of

economic integration

This section commences with the definition of a few key concepts, andthen defines economic integration as the grouping of countries byagreement or treaty, usually on a regional basis, to form a trade bloc thatsecures trade benefits for the participating member states through thetariff-free or tariff-reduced cross-border movement of goods, services,capital and labour in that particular trade bloc. The share in worldmerchandise and commercial services trade in the major geographicalregions of the world is illustrated in table 3.1 in chapter 3 of theprescribed book, which indicates that Europe dominated global exportsand imports in 2005. However, there are different degrees as well asforms of economic integration. Make sure, therefore, that youunderstand the statement by Czinkota, Ronkainen and Moffett (2002) insection 3 in chapter 3 of the textbook on the degrees or spectrum ofeconomic integration and refer to section 3.1.3 below where we discussthe forms of economic integration.

Topic 3: ECONOMIC INTEGRATION, REGIONAL TRADE BLOCS AND FREE TRADE AGREEMENTS

32

3.1.2 ANALYTICALBASISFORMEASURINGTHEEFFECTSOFECONOMICINTEGRATION


trade creation and tradediversion

The analytical basis formeasuring the effects of economic integrationwasdevelopedby the American scholar, JacobViner (1892^1970).We thereforehave to understand this economic theory to be able to discuss therole andcharacteristics of thevarious regional tradeblocs that came into existenceafter the Second World War. In particular, we need to understand thedifference between the concepts of trade creation and trade diversion.

principle of economicintegration

Ensure that you understand the principle of economic integration, whichstates that greater world production and tradewould be possible if fewertrade restrictions existed, asmanifested in trade blocs, notably free tradeareas and the other forms of trade blocs.

3.1.3 FORMSOF TRADEBLOCS(Study section 4 in chapter 3 of the prescribed book.)

degrees of economicintegration

In section 4 of the prescribed book the different forms of trade blocs arediscussed and the characteristics of each of these forms of trade blocs aredelineated.You will see that the degree of economic integration increasesas onemoves from a free trade area through to a customs union, then to acommonmarket and, ultimately, to an economic andconceivably a politicalunion.

3.1.4 ADVANTAGESANDDISADVANTAGESOFFREETRADEAREAS


economic impact of freetrade areas

It is true to say that most modern economists support free trade. Theyargue that it increases consumption possibilities, is beneficial to generaleconomic wellbeing, and leads to higher living standards. However, it isalso true to say that just as there are arguments in favour of free tradethere are arguments against its impact on the economies of, particularly,less developed countries.You should therefore carefully study section 7.4on the advantages and disadvantages of free trade and free trade areas inorder to form a frame of reference within which you may evaluate freetrade, economic integration and regional trade blocs.

ACTIVITY 3.1.1

Tabulate the characteristics of the various forms of trade blocs, namelyfree trade areas, customs unions, commonmarkets, economic unions andpolitical unions.This will enable you to evaluate and discuss the degree of

Study unit 3.1: Economic integration

MNI301J/1 33

3

economic integration of the differentregional tradeblocswewill discuss instudy unit 3.2.

ASSESSMENT


. define the term`economic integration''

. evaluate the relative value of trade creation and trade diversion foreconomic integration

. list the different forms of trade blocs and assess their characteristics

. explain, in your opinion, themost importantbenefit of a free trade area(Give reasons for your answer.)

. list a significant disadvantage of a free trade area (Give reasons for youranswer.)

SUMMARYIn this study unit we defined the concept of economic integration.We alsoreviewed the analytical basis for measuring the effects of economicintegration with specific reference to trade creation and trade diversion.We then considered the different forms of trade blocs and demonstratedthe incremental growth in the economic integration process as onemovesfrom a primary free trade area to the more complex and sophisticatedlevel of economic union and, ultimately, to a political union. Finally, weanalysed the advantages and disadvantages of free trade areas withspecific reference to less developed countries.


34

study unit 3.2 REGIONALTRADEBLOCS

CONTENTS


Key concepts

Overview

3.2.1 Economic integration and regional trade blocs

3.2.2 The EU

3.2.3 NAFTA

3.2.4 MERCOSUR

3.2.5 Andean Common Market, Central American Common Market,Latin American Integration Association, CARICOM and the ACPGroup

3.2.6 ASEAN

3.2.7 Asia-Pacific Economic Co-operation (APEC)

3.2.8 Cairns Group

3.2.9 Indian Ocean Rim Association

3.2.10 Africa

3.2.11 Free trade agreements

Assessment

Summary

Topic summary



. define a regional trade bloc

. identify themost important regional trade blocs that exist in theworldtoday

. evaluate the characteristics of regional trade blocs in general

. list the regional trade blocs that provide specific value to the SouthAfrican economy

. discuss specific examples of free trade agreements

. demonstrate the implications of important regional trade blocs forSouthern Africa, South Africa and South African business

Study unit 3.2: Regional trade blocs

MNI301J/1 35

3

KEYCONCEPTS

economic integration regional trade blocstrade characteristics structure and governancepolitical integration expansion to the EastEU ECBeuro euro and dollar zonesNAFTA MERCOSURCARICOM ASEANCairns Group ACPGroupIndian Ocean Rim Association ECOWASCOMESA SADCTDCA agreement bilateral agreementopen economy economic dependence

OVERVIEWIn this study unit we review the most important trading blocs, economicco-operation groups and free trade areas that exist in theworld today.Wealso identify the potential benefits and some of the drawbacks that freetrade areas have for the global community and for individual countries.We pay specific attention to those regional trade blocs, such as the EU,NAFTA and SADC, which havemajor trade benefits for South Africa.

3.2.1 ECONOMIC INTEGRATIONAND REGIONALTRADEBLOCS

global distribution ofregional trade blocs

Section 5 in chapter 3 of the prescribedbookdeals with specific examplesof regional trade blocs. These regional trade blocs have all been createdsince the Second World War and can be said to have a global distribution(ie they are distributed across the world's main geographical regions öEurope, the Americas, Asia and Africa).We will deal with examples oftrade blocs in each of these geographical regions.

study selectively

As you work your way through this chapter of the prescribed book youshould not allow yourself to become confused by the number of existingregional trade blocs or the detail in which they are sometimes discussed.You should study this chapter selectively.To assist you, wewill identify thespecific trade blocs of which you need to be aware and indicate into howmuch detail you need to go.The sections that you are required to read forbackground information only will be marked with the `Read'' icon whereconvenient. In general, the rule is that you should be able to say whichregional trade blocs are important for South Africa and why, what their


36

organisational and trade characteristics are, and how specifically theyimpact on South African trade or the South African business community.

As a general introduction table 3.4 and figure 3.1 in chapter 3 of theprescribed book clearly illustrate the increasing importance of regionaltrade blocs inworld trade in recent years.

3.2.2 THEEUimportance of the EU The European Union (EU) is the largest trade bloc in theworld and South

Africa's most important trading partner.You should study the followingsections of the prescribed book:

STUDY

study sections 5.1.1.1 to5.1.1.6 in section 5.1.1

. This section describes the global importance of the EU as a trade bloc.

. The section also describes the trade characteristics of the EU.

. Finally the section discusses the euro ö specifically its operationalfactors and the relative size of the euro and dollar zones.

READ

read the other sections,sections 5.1.1.7 to 5.1.1.9and 5.1.2

The rest of section 5.1.1 makes interesting reading and is useful asbackground information. Make a note of the European Central Bank(ECB) and be aware of the existence of the European FreeTrade Area(EFTA). Section 5.1.2 is also assigned for reading.

importance for SouthAfrica

When you have studied and read the relevant sections of the prescribedbook, make a few notes onwhat you regard as the importance of the EUfor South Africa.

3.2.3 NAFTAsecond largest regionaltrade bloc

The North American FreeTrade Agreement (NAFTA) is the secondlargest regional trade bloc in the world and constitutes South Africa'ssecond largest trade partner.


MNI301J/1 37

3

STUDY

study sections 5.2.1.1,5.2.1.2 and 5.2.1.5

Study section 5.2.1 in chapter 3 of the prescribed book on the increase oftrade that resulted from the creation of NAFTA. This section alsodelineates the NAFTA trade characteristics. Read sections 5.2.1.3 and5.2.1.4.


When you have studied and read the relevant sections of the prescribedbook, make a few notes onwhat you regard as the importance for SouthAfrica of its trade relationshipwith NAFTA.

3.2.4 MERCOSUR

Read the entire section 5.2.2 in chapter 3 of the prescribed book.Youshould be aware that the Southern Common Market (MERCOSUR) isgrowing in importance as a regional trade bloc in the Americas and thatlinks are being increasingly formed between MERCOSUR and the EU andbetween MERCOSUR and NAFTA.

3.2.5 ANDEANCOMMONMARKET,CENTRALAMERICANCOMMONMARKET,LATINAMERICANINTEGRATIONASSOCIATION,CARICOMANDTHEACPGROUP

CARICOMhas global

political clout

Read sections 5.2.3 to 5.2.6 and 5.4.1 in chapter 3 of the prescribed book.The Caribbean Community and Common Market (CARICOM) is theregional trade grouping of the Caribbean and an important role player inthe decision-making process of the Africa, Caribbean and Pacific (ACP)group. In fact, in the past, although relatively unimportant in globalterms, CARICOM dictated policy for the ACP group against the wishesof the numerically more important African countries, including SouthAfrica, thatmake up the bulk of the ACP group.

3.2.6 ASEAN

study the ASEAN tradecharacteristics insection 5.3.2

Read section 5.3.1in chapter 3 of the prescribedbook, but study the tradecharacteristics of theAssociation of South East AsianNations (ASEAN) insection 5.3.2 so that you are able to compare these with the tradecharacteristics of other regional economic trade blocs.


38

3.2.7 ASIA-PACIFICECONOMICCO-OPERATION (APEC)

read section 5.3.3 Read section 5.3.3 in chapter 3 of the prescribed book.

3.2.8 CAIRNSGROUP

(Study section 5.3.4 in chapter 3 of the prescribed book.)


When you have studied and read the relevant sections of the prescribedbook, make a few notes onwhat you regard as the importance for SouthAfrica of its relationship with the Cairns Group. Focus on the importanceof the World Trade Organisation (WTO) negotiations the Cairns Groupconducts for its18 member countries, including South Africa, all of whomrely heavily on agricultural exports. (Read section 5.3.5 on the Gulf Co-operation Council (GCC).)

3.2.9 INDIANOCEANRIMASSOCIATION(Study section 5.3.6 in chapter 3 of the prescribed book.)


When you have studied and read the relevant sections of the prescribedbook, make a few notes onwhat you regard as the importance for SouthAfrica of its trade relationshipwith the Indian Ocean Rim Association.

3.2.10 AFRICA

(Study the introduction to sections 5.4 and 5.4.2.6 in chapter 3 of theprescribed book. Read sections 5.4.2.1, 5.4.2.2, 5.4.2.3, 5.4.2.4, 5.4.2.5 and5.4.2.7.)

SADC Study SADC's role in economic development, its objectives, andorganisational structure in section 5.4.2.6 in chapter 3 of the prescribedbook, with reference to Box 3.

3.2.11 FREETRADEAGREEMENTSfocus on the link with theEU

Wewill approach the regional trade blocs in Africa by focusing on the EUand South and SouthernAfrica and then looking a bitwider.This approachis based on the fact that the EU, as the largest global regional trade group,is the agreement partner of the ACP group, which includes all the Africancountries.The EU also has important bilateral trade and aid relationshipswithmany African countries, including South Africa.


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3

STUDY

free tradeagreementssections to study

Study the following sections in chapter 3 of the prescribed book:

. section 6 on free trade agreements and, specifically, the entire section6.3 on the trade relationship between the EU and South Africa

. section 6.3.9 on the implications for Southern Africa of theTrade,Development and Cooperation Agreement (TDCA) between the EUand South Africa

. section 7 on the implications of regional trade blocs for South Africaincluding the criteria for successful regional trade blocs in section 7.1

. section 7.2 on the implications of regional trade blocs for South Africanbusiness

. section 7.2.2 on the importance of the EU and NAFTA

. section 7.3 on the role of theWTO


In the previous sections of the study guide you were asked to study andread certain sections of the prescribed book and then to make notes onthe importance for South Africa of its trade relationshipwithNAFTA, theCairns Group, and the Indian Ocean Rim Association. Now completethese notes by adding in the reasons why the EU-South Africa traderelationship is very important for the South African economy and forSouth African business.

ACTIVITY 3.2.1

You intend to deliver a paper at a local Chamber of Commerce meeting.Review the notes you have made on the importance of the EU, NAFTA,the Cairns Group, and the IndianOcean RimAssociation for South Africa.Then drawup a comparative table inwhich you rate the trade relationshipof each group with South Africa. Finally, extend your findings to includeSouthern Africa. You will need to consult national newspapers andjournals as well as the Internet for facts to include in your report.

ASSESSMENT


. define a regional trade bloc

. describe and compare the trade characteristics of the EU and NAFTA


40

. evaluate the implications of the euro for South African business

. summarise the relative importance of the euro and dollar zones in theglobal context

. discuss the relative importance of the Cairns Group and the IndianOcean Rim Association for South Africa

. make a critical analysis of the importance of regional tradeblocs for theSouth African economy

SUMMARYIn this study unit we identified the most important regional trade blocsthat exist in Europe, the Americas, Asia and Africa. We then paidparticular attention to the importance of the trade relationshipsbetween South Africa and the EU, NAFTA, the Cairns Group, the IndianOcean Rim Association and SADC, with specific reference to the SouthAfrican economy and for South African business. Finally, we looked at theimplications of the TDCA and of regional trade blocs for South andSouthern Africa.

TOPICSUMMARYIn study unit 3.1 we defined economic integration and reviewed theanalytical basis for measuring the effects of economic integration.Wealso discussed the various forms of trade blocs and identified the keyadvantages and disadvantages of these regional trade blocs.

In study unit 3.2 we continued the discussion of economic integration bystudying themost importantregional tradeblocs thatexist in the differentgeographical areas of the world today.We focused on the EU in Europe,NAFTA in the Americas, the Cairns Group and the Indian Ocean RimAssociation in Asia, and SADC in Africa. In each case, we identified thesignificance of the trade relationship between these trade blocs andSouth Africa. Finally, we looked at the implications of regional trade blocsfor the South African economy and for South African business in general.


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TOPIC 4

The internationalcultural environment

TOPIC 5

Political, legal andtechnologicalenvironments

TOPIC 6

The internationaleconomic environment

Part 2GLOBALBUSINESSENVIRONMENTS

INTRODUCTIONTOPART 2Part 2 of this course deals with the global cultural, political, legal,technological and economic environments facing business, and with theimplications of the various forces inherent in these environments forinternational business in general and international business managementin particular.

Under topic 4 we discuss the international cultural environment withwhich international businesses have to contend. In study unit 4.1we definethe concept of culture and discuss the characteristics and the elements of

MNI301J/1 43

culture in general as a frame of reference for our study of culture and itsimplications for business and internationalmanagement in study unit 4.2.

In topic 5 we discuss the political, legal and technological environments inwhich international businesses have to compete. In study unit 5.1we lookat the political systems of countries, the nature and characteristics ofthese systems, and their implications for international business. The legalsystems of countries, how they differ, and the implications of thesedifferences are covered in study unit 5.2. In study unit 5.3 we brieflyexplore the international technological environment in the context ofinternational business.

Topic 6 focuses on the international economic environment in whichinternational businesses have to operate. In study unit 6.1 we exploreeconomic systems of countries, the concept and importance of economicfreedom' of countries, the classification of countries, importantmacroeconomic issues and how all these impact on international businessoperations. In study unit 6.2 we look at economies in transition, and theimportance of such transitions for international business.

GLOBAL BUSINESS ENVIRONMENTS

44

The international culturalenvironment

Study unit4.1

The concept,characteristics andelements of culture

Study unit4.2

Implications of culturaldifferences for business

topic 4 THEINTERNATIONALCULTURALENVIRONMENT

AIMThe aim of this topic is to provide youwith an overview of themeaning ofculture, to discuss the importance of culture with reference to itscharacteristics and elements, and to highlight these in the context ofinternational business in study unit 4.1.With this frame of reference, wethen go on to discuss culture and its implications for business andmanagement in study unit 4.2.

LEARNINGOUTCOMES


. define the concepts of culture, society, and nation state

. understand the importance of culture in international business

. identify the characteristics of culture

. identify, describe and evaluate the elements of culture

. describe and discuss culture in theworkplace

. analyse and interpret the implications of culture for internationalbusiness andmanagement

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4

KEYCONCEPTS


international business political philosophyculture economic philosophysociety social structurenation state social stratificationindividualism religioncollectivism ethical systemsdemocracy languagetotalitarianism educationcharateristics of culture culture in theworkplaceelements of culture management and culturelevels of culture business implications of culture

study unit 4.1 THECONCEPT,CHARACTERISTICSANDELEMENTSOFCULTURE


Key concepts

Overview

4.1.1 The importance of culture in international business

4.1.2 Definition of culture

4.1.3 The characteristics of culture

4.1.4 The elements of culture

Assessment

Summary

Topic 4: THE INTERNATIONAL CULTURAL ENVIRONMENT

46



. define the concepts of culture, society and the nation state


. identify and describe the characteristics of culture


. describe and evaluate the levels of culture

KEYCONCEPTS

international business charateristics of cultureculture elements of culturesociety levels of culturenation state political philosophyindividualism economic philosophycollectivism social structuredemocracy social stratificationtotalitarianism religionlanguage educationethical systems

OVERVIEWIn study unit 4.1we define themeaning of culture, society andnation state,anddiscuss the importance of culture in internationalbusiness.We explorethe characteristics of culture, and discuss and evaluate the elements andlevels of culture in the international bsiness context. The implications ofall these issues for international business are discussed in study unit 4.2.

4.1.1 THE IMPORTANCEOF CULTURE IN INTERNA-TIONALBUSINESS


why internationalbusiness is different

International business differs from domestic business in that it has tocontend with differences between countries. Domestic businessesoperating within the national borders of a single country only have tocontend with the local culture and practices, political and legal systems,and economic policies. In study unit 4.1 and in study unit 4.2 we explore

Study unit 4.1: The concept, characteristics and elements of culture

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4

the concept and characteristics of culture, the implications of culturaldifferences between countries and the implications of these differencesfor internationalmanagement.

knowledge of foreigncultures

Tobe successful in the internationalbusiness arena, internationalmanagersand leaders should broaden their perspective and their knowledge offoreign cultures to adapt their business practices to the unique cultures ofthose countrieswithwhich theydo business.This imperative for successfulinternational management is explored further in study unit 7.2 where weconsider the importance of and the need for developing a global mindset,and in topic 8 where the importance of cultural differences in developinginternational strategies is discussed.

global business practices Understanding the cultures of groups of people is necessary becausebusiness employs, sells to, buys from, is regulated by, and is owned bypeople. An international company must consider these differences inorder to predict, plan, organise, control and manage its globalrelationships and operations.

cultural competence

Cultural competence is recognised as a keymanagerial skill in internationalmanagement because it explains many important facets of individual andgroup behaviour. It also allows international managers to capitalise ontheir knowledge of consumer behaviour in foreign markets, and tomanage effectively foreign employees under their supervision, whichcould result in the firm achieving a sustainable competitive advantage inboth these important operational areas.

adapting to foreigncultural environments

In this section, it should be clear that the accustomed (home country) orethnocentric way of doing business may not always be the best way, andthat the international manager should be competent enough to decidewhat adjustments might be necessary for efficient operation in foreignmarkets, based on identified cultural, and other, differences.

4.1.2 DEFINITIONOFCULTURE


In this section we look at the meaning of the concepts of culture, societyand the nation state.

meaning of cultureThe culture of a group or society basically comprises the values, norms,beliefs and attitudes that characterise the behaviour of individuals in thatgroup or society. Note the definitions of culture provided in this section,and ensure that you understand the meaning of the concepts of values,attitudes, beliefs, norms and symbols, traditions and rituals as they relateto the concept of culture. Specifically note the diifferences in prioritisationof culturalvalues in theUnited States, Japan andArab countries in table 4.1.

meaning of society

The concept of a society may have more than one meaning. In someinstances, a society may be the equivalent of a particular country.However, a society may comprise of several sub-cultures within thenational borders of a particular country, or may even span across more


48

than one country. It is imperative that international managers understandthe meaning of society to know how to demarcate and segment theirforeignmarkets.

While there does not seem to be a satisfactory definition of a society,Daniels and Radebaugh (2000:187) contend that the concept of a nationprovides aworkable definition for society.

culture, society and thenation state

In using the nation state as a point of reference, remember that somecountries have

. muchgreatergeographical, economic and internal variation than others

. decentralised laws and government programmes, which may increaseregional separation

. various linguistic, religious, and ethnic differences within them

. many possible relationships between human variables and businessfunctions

. different attitudes and values, which may affect how any businessfunction should be conducted

Ensure that your understand themeaning of the concepts discussed in thissection and their interrelated nature.

4.1.3 THECHARACTERISTICSOFCULTURE


characteristics of cultureThus far we have seen that culture is learned, and gradually changes overtime.Note the seven characteristics of culture outlined in this section andhow they supplement the meanings of culture and society, which wediscussed in previous sections. Could this information provide anyadditional insights to awould-be internationalmanager? Substantiate youranswer.

4.1.4 THEELEMENTSOFCULTURE


4.1.4.1 Introduction

A number of factors that impact on and shape cultural values and normshave been identified.These factors are referred to as elements of culture'and include

elements and levels ofculture

. the prevailing political philosophy in a society

. the prevailing economic philosophy in a society

. the social structure of a society

. the religion and ethical systems of a society

. language and communication in a society

. education in a society


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4

Religion

Socialstructure

Politicalphilosophy

Language Economicphilosophy

Education

The way in which these elements shape the values, norms, attitudes andbeliefs which characterise a specific culture, is illustrated in exhibit 4.1.

FIGURE4.1

THE ELEMENTSOF CULTURE

Culture,norms

and valuesystems

Source: Hill (2007:93)

interrelatedness ofculture and its elements

It is important to note thatwhile, over time, these elements influence andshape the value systems and therefore the culture of a society, theemergent values and norms may, in turn, influence some or all of theseelements in a number of ways.

importance of theelements of culture

levels of culture

In studying each one of the elements in this section, identify andsummarise the aspects and issues of importance to international businessin general, and to the international business manager in particular. Aspreviously mentioned, a superior knowledge of cultural differences andissues, and appropriate information on such issues for decision-makingpurposes, may be regarded as sources of competitive advantage forinternational businesses. Study the following elements of culture whichare only referred to briefly here, thoroughly. Note that culture alsomanifests itself at different levels in a country or nation state, as discussedin section 6 in chapter 4 of the prescribed book.

4.1.4.2 Political philosophy


dimensions of politicalphilosophy

Political philosophy influences the values, norms, beliefs and attitudes of asociety in very specific and definite ways. Note the way in which politicalsystems can be evaluated in terms of the following interrelated sets ofdimensions:

. collectivism as opposed to individualism

. democracy as opposed to totalitarianism


50

impact of politicalphilosophy on cultureand internationalbusiness

Analyse and evaluate these dimensions to determine why and to whatextent they impact on the culture of a country.Of what importance areyour findings for a firm involved in international business?

4.1.4.3 Economic philosophy


economic systems andculture

It is evident that there is a strong relationship between political ideologyand economic systems. Study and evaluate the following four types ofeconomic systems (which are discussed in more detail in section 3 inchapter 6 of the prescribed book) and themain characteristics of each:

. a market economy

. a command economy

. a mixed economy

impact of economicphilosophy on cultureand internationalbusiness

Assess and summarise the characteristics and cultural issues of each ofthese economic systems, as well as the potential benefits, costs and risksassociatedwith doingbusiness in each of these economic systems.Ofwhatsignificance are your findings for international business and internationalmanagers?

4.1.4.4 Social structure


characteristics ofsocietal structure

In general, societies are characterised by the extent to which they arestratified and have class systems which influence the mobility ofindividuals within them.

individuals, families andgroups

In all societies, individuals live in family units, work together in groups andare members of numerous other social groups. Study the importance ofthe individual and family-based groups in the context of the culture of asociety.We also find gender-based and aged-based groups in societies.Evaluate the importance of all these groups in the context of theirinfluence on culture and their importance to international business.

social stratification

Societies are typically stratified into classesbased on factors such as familybackground, birth, occupation, education and income. Why is thisknowledge, including an understanding of the extent of stratification, thedifference between a class system and a caste system, and the influence ofstratification on the mobility of individuals of such importance to theinternationalmanager?

importance tointernational business

As we have seen, the social structure of a society or nation state is animportant determinant of cultural values, norms and beliefs that theinternationalmanagermust understand andmanage effectively.


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4

4.1.4.5 Religion and ethical systems


influence of religion onculture

We know, just by observing our own communities, that religion has aprofound influence on lifestyles, values, beliefs, attitudes, ethical issuesand interpersonal relationships. Note the definitions of religion and ofethical systems provided in the prescribed book. It is generally agreedthat the relationship between religion, ethics, and society is profound andcomplex. Yet the international business manager must understand theimportance and influence of religion and ethical systems in othercountries to succeed in doing business in foreign cultures.

It iswellknown that the influence or impactof religionvaries fromcountryto country, depending on

differences in religion. the country's legal system. the degree of the homogeneity of religious beliefs in the country. the tolerance of other religious viewpoints

major religious andethical systems

Even though there aremany religions in theworld, we briefly consider thefour dominant religions, namely Christianity, Islam, Hinduism andBuddhism, as well as Confucianism as an ethical system.

Study these religions and Confucianism in the prescribed book in terms of

implications of religionfor economics andbusiness

. their origins and current status in theworld

. the structure and dominant characteristics of each

. their cultural, social, economic and business implications

. the importance of a profound knowledge of religion as an element ofculture in international management with specific reference toimplications regarding

ö marketingö financeö human resources, including career opportunities and mobility of

individualsö management and control issuesö encouragement of an entrepreneurial orientation and cultureö collaboration, including international joint ventures and strategic

alliancesö international relations, integrity and trustö the potential benefits, costs and risks of doing business in countries

with specific religious and ethical orientations.

Summarise your findings in a report that would be suitable for theplanning purposes of an internationalmanager.

4.1.4.6 Language and communication


Language is and remains the most importantway thatpeople communi-


52

importance oflanguages

cate with one another. There are more than 4 000 languages and morethan 10 000 dialects spoken worldwide. As such, it is obvious thateffective communication with people from different cultures who alsohave different languages poses a daunting challenge for the internationalbusinessmanager.

lingua franca ofinternational business

Despite the fact that Chinese (mainlyMandarin) is themostwidely spokenfirst languagewith 20 per centof theworld speaking it, followedby Englishwith 6 per cent; Hindiwith 5 per cent,Russianwith 4 per cent and Spanishwith 3 per cent, English is the most widely spoken business languageinternationally, followed by French, Spanish and Chinese. Many countriesalso have more than one official language and in addition could havenumerous dialects, all of which complicate effective internationalcommunication in business.

importance of languagein internationalbusiness

Increased internationalisation and the continuous increase in MNEsworldwide, have made effective communication across national bordersimperative. There are many examples of poor proficiency in a foreignlanguage resulting in business disasters. On the other hand, a skill inforeign languages may be a source of competitive advantage in the globalmarketplace.

guidelines for effectivecommunication

Study the importance of language proficiency as well as of verbal and non-verbal communication in international business with reference to

. the underlying principles and requirements for effective internationalbusiness communication

. the examples of communication provided in the prescribed book asguidelines for effective international communication, with specificreference to areas such as international negotiation, marketing andadvertising

Consult information sources other than the prescribed book andsummarise your findings on the importance of language as an element ofculture in international business.

4.1.4.7 Education


importance of education

Education influences many aspects of culture and in every culture formaleducation plays a key role in society. It is an accepted fact that educatedpeople read more widely and have a better understanding of what ishappening in the world, which results in greater economic productivityand technological innovation. According to Porter (1980:395^7),education is an important determinant of national competitive advantage.Formal education is themedium throughwhich individualsmay learnmanyof the language, conceptual, mathematical and technical skills that areindispensable for economic growth in a modern society. In this way,formal education also shapes the cultural values and norms in a society.


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4

international emphaseson education

Different countries emphasise different aspects of education. In SouthKorea and Japan there is a strong emphasis on engineering and thesciences at university level. In Europe, the number of MBAs has increasedsharply in recent years, as is the case in the US.

4.1.4.8 Summary

In this sectionwe investigated the six elements of culture in terms of theirnature and characteristics. From this overview we conclude that cross-cultural literacy is of the utmost importance in international businessmanagement.

ACTIVITY 4.1.1

Study the newspapers and financial journals to identify a country whereleadership, power and authority are concentrated in the hands of only afew people.What type of political and economic structure would thissituation reflect? What are the possible implications for a South Africancompany wanting to do business in such a country? Provide your answerin a brief, written report.

ASSESSMENT


. define the concepts of culture, society, and nation state


. identify and describe the characteristics of culture


. identify and discuss the implications of culture for international business

. describe and evaluate the levels of culture

SUMMARY

In this study unit we discussed themeaning of culture and the importanceof culture in internationalbusiness as a frame of reference for internationalmanagement and decision making. A profound understanding of thecharacteristics and the elements as well as the levels of culture isimperative for any degree of success in international business. The


54

cultural and cross-cultural literacy of international management isregarded as a source of competitive advantage in the globalmarket place.In study unit 4.2 we take a closer look at the implications of culture forbusiness and internationalmanagement.

study unit 4.2 IMPLICATIONSOFCULTURALDIFFERENCES

FORBUSINESS


Key concepts

Overview

4.2.1 Introduction

4.2.2 Culture in theworkplace

4.2.3 Hall's low-context high-context approach

4.2.4 Ronen and Shenkar's cultural cluster approach

4.2.5 Hofstede's cultural dimensions

4.2.6 Trompenaars' cultural parameters'

4.2.7 Implications of culture for business andmanagement

Assessment

Summary

Topic summary




. explain Hall's approach to the contextualisation of culture

. explain Ronen and Shenkar's approach to cultural analyses

. explain Hofstede's and Trompenaars' approach to cultural analysis

. understand, discuss and evaluate the importance of culturewith regardto competitive advantage

. understand, discuss and explain culture and entrepreneurship

Study unit 4.2: Implications of cultural differences for business

MNI301J/1 55

4

. understand, discuss and explain culture and business ethics

. discuss and evaluate the implications of culture for business andmanagement

KEYCONCEPTS

international business collectivismculture in theworkplace uncertainty avoidancelow-context cultures masculinityhigh-context cultures femininitycultural dimensions competitive advantagepower distance business ethicsindividualism internationalmanagementcultural clusters entrepeneurial orientation

OVERVIEW

This study unit builds on study unit 4.1 and addresses the importance ofculture in the workplace in the context of international business bylooking at Hall's approach to the contextualisation of cultures, Ronen andShenkar's approach to cultural clustering of countries, Hofstede's culturaldimensions, Trompenaars' cultural parameters, culture and competitiveadvantage and business ethics. The discussion is concluded by looking atthe implications of cultural differences for business and internationalmanagement.

4.2.1 INTRODUCTION


importance of adaptingto culture

International managers must develop a global cultural awareness toenhance the likelihood of success when operating in different cultures.Given the international cultural differences, whichwere explored in studyunit 4.1, managers of international companies also have to evaluate theirbusiness practices to ensure that the cultural values and norms of thecountries they do business with are taken into account.

4.2.2 CULTUREINTHEWORKPLACE



56

values in theworkplace

It is extremely important for international businesses with operations indifferent countries to know how and to what extent a society's culturemay impact on and affect the values found in the workplace. In this studyunit we will briefly look at the classification and clustering of cultures,Hofstede's work on how culture relates to values in the workplace,culture and competitive advantage, culture and business ethics, and theimplications of cultural differences for international business andmanagement.

4.2.3 HALL'SLOW-CONTEXTHIGH-CONTEXTAPPROACH


contextual approach tocharacterise culture

There is general agreement that perceptions and non-verbal behaviouroccur within, and should be analysed in relation to, a specific context.Hall (1976:101) developed the low-context high-context approach tocharacterise differences in cultures.

high-context and low-context cultures

Hall found that in low-context cultures, the words used by a speakerexplicitly convey the speaker's message to the listener. Examples of low-context countries are Germany, the United Kingdom, the United Statesand some Anglo-Saxon countries like Canada. In high-context cultures,the context in which a conversation takes place is just as important asthe words actually spoken, and cultural clues are important tounderstand what is being communicated. Examples of high-contextcountries are Japan,China,Korea and the Arab countries.

cultural literacyStudy this section to determine how and to what extent businessbehaviours differ in the above-mentioned two cultural contexts. Identifythe areas of international business where this knowledge of the contextof cultures could be invaluable to the internationalmanager.

4.2.4 RONENANDSHENKAR'SCULTURALCLUSTERAPPROACH


cultural clusters

In their research, and as illustrated in figure 4.3 in chapter 4 of theprescribed book, Ronen and Shenkar (1985:435^ 454) grouped orclustered nearly 50 countries according to how employees in eachcountry responded to the following four sets of questions about

. the importance of various work goals

. the extent towhich various needs at work were satisfied

. autocratic versus democratic management styles

. work roles and interpersonal relations

Eight country clusters emerged, with four countries classified asindependent of any other particular cluster. Note that richer, more


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4

merits and limitations ofclustering

developed countries are closest to the centre of the diagram.Of what valuewould this cultural cluster approach be to an international manager forplanning and other purposes? What are the limitations of this approach?Summarise your answers to these questions in the form of a brief report.

4.2.5 HOFSTEDE'SCULTURALDIMENSIONS


culture and theworkplace

Still one of the most influential studies on how culture relates to theworkplace was undertaken by Geert Hofstede, a Dutch researcher,between 1967 and 1973, involving some 116 000 people in 40 countries.Hofstede initially identified four important dimensions along whichpeople seem to differ across cultures.These are

. power distance

. uncertainty avoidance

. individualismversus collectivism

. masculinity versus femininity

Hofstede subsequently added a fifth dimension, namely time orientation.

Hofstede's culturaldimensions

Power distance basically focuses on how a society deals with the fact thatpeople are unequal in physical and intellectual capacities. Uncertaintyavoidance essentially refers to the extent to which different culturesallow their members to accept ambiguous situations and tolerateuncertainty. Individualism versus collectivism focuses on the relationshipbetween the individual and his or her fellow workers. Masculinity versusfemininity refers to the relationship between gender andwork roles.Timeorientation refers to the extent to which members of a culture adopt along-term or a short-term outlook onwork and life.

cultural changeIt should also bekept inmind thatculture is notconstant, and that it evolvesand change over time.Cultural change in different countries, therefore, isalso an important factor for international businesses to consider.

differences andsimilarities in culture

Weknow that the culture of a society is unique. Although no two culturesare identical, there are certain similarities. Hofstede illustrated this byexamining the effect of the pairs of dimensions on culture. Study thissection, compile your own summary on each one of the pairs ofdimensions, and critically evaluate Hofstede's findings in terms of itsusefulness for international management and decision making, taking intoaccount the limitations of Hofstede's study.

4.2.6 TROMPENAARS' `CULTURALPARAMETERS'


Study the implications of Trompenaars' cultural parameters', as listed inBox 4.6 in this section of the prescribed book:

58


cultural parameters . Universalismvs Particularism. Collectivismvs Individualism. Neutral vs Emotional relationships. Specific vs Diffuse relationships. Achievement vs Ascription. Sequential vs Synchronic. Inner-directed vs Outer-directed

4.2.7 IMPLICATIONSOFCULTUREFORBUSINESSANDMANAGEMENT


4.2.7.1 Introduction

implications of culturefor internationalbusiness

We know that international business is different because countries aredifferent, also with regard to their cultures. There are four importantimplications for international business and international management: theconnection between culture and competitive advantage, culture andbusiness ethics, the need for cross-cultural literacy, and the connectionbetween culture and entrepreneurial orientation.We briefly discuss theimplications of each of these.

4.2.7.2 Culture and competitive advantage

effectivelymanagingcultural-related costsand risks

In the course of our discussions it has become clear that there is aconnection between culture and competitive advantage of a firm in theinternational marketplace.Hill (2007:117 18) analyses this relationship in thefollowing way: Cultural values and the norms of a country influence thecosts, and often also the risks, of doing business in that country.The costsandrisks of doingbusiness in a country influence the abilityof a firm to attaina competitive advantage. Stated in another way, the firm thatmanages thecost andrisk implications of culturebetter than its competitors shouldhavea competitive advantage over its rivals in themarketplace.

potential forcompetitive advantage

There are two reasons why the connection between culture andcompetitive advantage is important in international business. Firstly, thisconnection suggests inwhich countries we are likely to find themost viablecompetitors. Secondly, this connection has important implications whendeciding on countries inwhich to locate production facilities.Can you thinkof other benefits for international business emanating from this connectionbetween culture and competitive advantage? Study this section, noting theexamples which provide further guidelines in this regard.

4.2.7.3 Culture andbusiness ethics

In our discussion of religion and ethical systems in study unit 4.1we onlyprovided you with a cursory view of business ethics. However, althoughmany ethical principles are universal, not all of them are culturally bound.Where this is the case, international business may be faced with serious


MNI301J/1 59

4

60

business ethics isimportant

ethical dilemmas. Questions that arise here include: ` Whose ethicalsystems do you use in international business''? Study the rest of thissection, also with reference to the United Nations Declaration of HumanRights, to establish acceptable and consistent guidelines for ethicalbehaviour in the internationalmarketplace.

4.2.7.4 Cross-cultural literacy

achieving cross-culturalliteracy

It is of the utmost importance that international managers develop acultural awareness by acquiring cross-cultural literacy to avoid being illinformed about the practices of other cultures ö especially whenventuring abroad for the first time.Ways of enhancing cross-culturalliteracy include employing host country nationals in certain key areas,developing a cadre of cosmopolitan executives, appointing foreigners onthe company's board of directors, and using multi-cultural task teamswhenever possible.

4.2.7.5 Culture and entrepreneurial orientation

entrepreneurship andculture

It is well known that some societies are generally more entrepreneurialand, as a result, more competitive than others largely owing to culturalfactors. In their research, Lee and Peterson (2000:401^ 415) found astronger relationship between culture and entrepreneurial orientation insome societies than in others. More specifically, their research suggeststhat a culture that is low on power distance, weak in uncertaintyavoidance, masculine in nature, individualistic and achievement orientedwill encourage a strong entrepreneurial orientation that will ultimatelylead to increased entrepreneurship and global competitiveness.

4.2.7.6 Summary

In this sectionwebriefly covered the implications of cultural differences forinternational business.We briefly discussed the important aspects of theconnectionbetween culture and competitive advantage aswell as businessethics, the importance of cross-cultural literacy and the relation betweenculture and entrepreneurial orientation in countries.We highlighted theimportant implications of the above for business andmanagement.

ACTIVITY 4.2.1

Using the information in both study units 4.1 and 4.2, as well as in othersources, explain why the culture of a country may influence the benefits,costs andrisks of doingbusiness in thatcountry. Substantiate all argumentsin a brief report to management.


ACTIVITY 4.2.2

It is unreasonable to expect Western businesses active in developingcountries characterised by less than optimal ethical systems to adhere tothe same ethical standards that they use at home? Discuss this statementcritically.

ASSESSMENT



. explain Hall's approach to the contextualisation of culture

. explain Ronen and Shenkar's approach to cultural analysis

. explain Hofstede's approach to cultural dimensions

. understand, discuss and evaluate culture and competitive advantage

. understand, discuss and explain culture and business ethics

. understand, discuss and explain culture and entrepreneurship

. discuss and evaluate the implications of culture for business andmanagement

SUMMARYIn this studyunitwe looked at the importance of culture in theworkplace.More specifically,we consideredHall's approach to the contextualisation ofcultures, Hofstede's cultural dimensions and Trompenaars's culturalparameters in the context of international business.We concluded ourdiscussion by reviewing the implications of cultural differences forbusiness, specifically in relation to competitive advantage, business ethics,and cross-cultural literacy and entrepreneurial orientation.

TOPICSUMMARYThis topic dealt with the cultural environments facing internationalbusiness. In study unit 4.1we defined themeaning of culture and discussedthe importance of culture in international business with reference to thecharacteristics and elements of culture and their implications forinternational business.

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Study unit 4.2: Implications of cultural differences for business 4


62

In study unit 4.2 we continued our discussion by looking at culture in theworkplace, the classification and dimensions of culture, culture andcompetitive advantage and business ethics.The discussion was concludedby looking at the implications of cultural differences for business andmanagement in the international arena.

Political, legal andtechnological environments

Study unit5.1

Politicalenvironments

Study unit5.2

Legalenvironments

Study unit5.3

Technologicalenvironments

topic 5 POLITICAL,LEGALANDTECHNOLOGICALENVIRONMENTS

AIMThe aim of this topic is to provide you with an overview of theinternational political, legal and technological environments, to discusstheir nature and characteristics, and to identify the implications of theseenvironments for international business.

LEARNINGOUTCOMES


. define political systems and their functions

. explain the relationship between collectivism and totalitarianism

. explain the relationship between individualism and democracy

. discuss political involvement and its impact

. define and discuss political risk

. analyse and interpret the political spectrum

. assess the importance of the international legal environment

. define and describe the different legal systems

. discuss the importance of legal contracts and international law

. assess the legal environment and its impact on investment strategies

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. define the concepts of technology and technological innovation

. discuss the classification of technology

. discuss and explain the economic importance of technology

. discuss and explain themerits of technology transfer

KEYCONCEPTS


political systems political functionstotalitarianism collectivismdemocracy individualismpolitical risk political spectruminternational legal environment legal systemscommon law civil law (codified legal system)theocratic law international lawlegal contracts investment strategiestechnology technological innovationclassification of technology technology transfereconomic importance of technology

study unit 5.1 POLITICALENVIRONMENTS

CONTENTS


Key concepts

Overview

5.1.1 Importance of the international political environment

5.1.2 Political systems and their functions

5.1.3 Political involvement and its impact

5.1.4 Political risk

5.1.5 The political spectrum

Assessment

Summary

Topic 5: POLITICAL, LEGAL AND TECHNOLOGICAL ENVIRONMENTS

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KEYCONCEPTS

political systems political functionstotalitarianism collectivismdemocracy individualismpolitical risk political spectrum

OVERVIEWIn study unit 5.1 we define political systems and their functions, discusspolitical involvement and its impact, political risk and the politicalspectrum, and the implications of these issues for international business.

5.1.1 IMPORTANCEOF THEINTERNATIONALPOLITICALENVIRONMENT


analysing internationalbusiness environments

To be successful, international managers must analyse the various globalenvironments to determine if, and to what extent, company policies,strategies and procedures have to be adapted to these foreignenvironments. In this study unit we explore the interaction betweeninternational business and the political environments in the countries inwhich they operate.

5.1.2 POLITICALSYSTEMSANDTHEIRFUNCTIONS


The various international environments are illustrated in figure 1.2 in

Study unit 5.1: Political environments

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functions, inputs andoutputs in a politicalsystem

chapter 1. In studying this section, note the diverse nature of foreignpolitical environments, the interconnected global political order thattranscends national boundaries, the potential risk of unanticipatedpolitical events, and the factors that influence political systems over time.In this regard, refer to figure 5.1 that illustrates the interaction betweenthe process, functions, inputs and outputs in any political system.

political ideology andphilosophy

As already referred to in sections 5.2 and 5.3 in chapter 4 of the textbook,political systems can be evaluated according to the following twointerrelated dimensions from which a country's political ideology andpolitical philosophy emerge:

. the degree to which it emphasises collectivism as opposed toindividualism

. the degree towhich it is democratic or totalitarian

Collectivism emphasises collective goals as opposed to individual goals asin the case of individualism.There is general agreement that systemswhichemphasise collectivism tend to be totalitarian, and systems placing a highvalue on individualism tend to be democratic. A keyelement of democracyis freedom in the areas of political rights and civil liberties as illustrated inAppendix 1 in chapter 5. (See also sections 6.1 and 6.2 in chapter 5 of theprescribed book.) Refer to figure 5.2 for the ideologies underlyingdemocracy and totalitarianism.

5.1.3 POLITICALINVOLVEMENTANDITSIMPACT


government involve-ment in the economy

Governments in foreign countries have been known to encourage foreignbusiness involvement in some cases, but also to discourage internationalbusiness involvement by imposing restrictions in other cases.Governments also seem to play various roles in the economies ofcountries, ranging from having relatively high involvement in thepreviously centrally planned economies of central and eastern Europe, tohaving relatively little involvement in most capitalistic, free marketeconomies. A political factor of grave concern, however, is frequentchanges in government. Although such changes may be non-violent, eachchange to a country's government may result in a change in policy withregard to international business involvement ö a potential source ofpolitical risk and uncertainty. Study this section, noting the implicationsof political involvement onmarketing activities.

5.1.4 POLITICALRISK(Study section 5 in chapter 5 of the prescribed book.)

Political risk is defined as the impact of political change on an internationalfirm's operations and decision-making processes.


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importance of politicalrisk analysis

Note thatdeveloped and developing countries generally are not subject tothe same types of risk. In this regard, study Box 5.1,`Stable regimes lead toforeign investment'. Study the check list for assessing political risk in acountry. Could you add any items to this list? Access the Internet oracademic and trade journals for information in this regard. Refer also tothe discussion of political risk in study unit 7.1.

5.1.5 THEPOLITICALSPECTRUM


political spectrumPolitical ideologies worldwide are many and varied. Study the ideologiesunderlying democracy and totalitarianism, as illustrated in figure 5.2,noting that these two ideologies should ideally be seen as being at thetwo ends of a continuum, which implies that mixed political systems canbe found anywhere along this continuum, depending on the politicalstance of the country in question. As previously stated in section 5.1.2above, freedom in the areas of political rights and civil liberties are keyelements of democracy. Appendix 1 ranks countries according to thesetwo elements.

ACTIVITY 5.1.1

Based on this study unit and additional information from other sourcesincluding the Internet, summarise the important characteristics andaspects of the various political systems, and compile a written report onyour findings.

ACTIVITY 5.1.2

Study newspapers, financial journals and the Internet to find exampleswhere political issues in a country have influenced the benefits, costs, andrisks of business involvement in that country. Would a country likeZimbabwe be a good example in this regard? Substantiate your answer inawritten report.

ACTIVITY 5.1.3

Identify a company listed on the Johannesburg Securities Exchange (JSE)involved in international business, and determine to which markets it

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exports.Ranks the countries inwhich thesemarkets are located in termsof the two elements in Appendix1.

ASSESSMENT








SUMMARYThis study unit briefly dealt with the importance of the internationalpolitical environment, political systems and their functions, political riskand the spectrum of political systems. Of importance to internationalbusiness are that

. political systems between countries differ significantly

. political systems are not constant or permanent, but are evolving andchanging over time, for any number of reasons

. countries are characterised by various degrees of governmentinvolvement in their economies, resulting in various approaches to anddegrees of international business restrictions and protectionism

. countries are characterised by various degrees of political risk, and themore frequently governments in a country change, the higher theuncertainty of those considering international business involvement

. democracy and totalitarianism are twopolitical ideologieswhich do notessentially exist in their purest form ö the political systems of mostcountries contain elements of both, though in various proportions

. systems thatemphasise collectivism tend tobe totalitarian, and systemsthat emphasise individualism tend to be democratic

The international manager should be aware of the potential politicalimpact and risk that may be inherent in the political systems of thecountries with which his firm conducts business and should plan effectivestrategies to cope with such uncertainties. Study all the sections in thisstudy unit thoroughly.


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study unit 5.2 LEGALENVIRONMENTS

CONTENTS


Key concepts

Overview

5.2.1 Importance of the international legal environment

5.2.2 The legal environment and its impact on investment strategies

Assessment

Summary






. assess the legal environment and its impact on investment strategies

KEYCONCEPTS

international legal environment legal systemscommon law theocratic lawcivil law (codified legal system) legal contractsinternational law investment strategies

OVERVIEW

This studyunit covers the international legal environment, the importanceof this international legal environment, the different legal systems, legalcontracts and international law.We conclude this discussion by looking atthe legal environment and its impact on investment strategies.

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5.2.1 IMPORTANCEOF THE INTERNATIONALLEGALENVIRONMENT


relevant legalenvironment

Internationalmanagers shouldhave a knowledge of the legal systems in thecountrieswithwhich theydobusiness.The international legal environmenthas the following three dimensions:

. the domestic legal system of the parent company

. the legal systems of each of the host countries with which the parentcompany conducts business

. international law

It is imperative that the internationalmanager isknowledgeable on andhasaccess to legal practitioners familiar with all three of the abovedimensions.

5.2.1.1 Different legal systems


Legal systems are normally classified into one of the following threecategories:

legal systems . common law. civil law (also referred to as a codified legal system). theocratic law

Study the characteristics of these three systems. Inwhich countrieswouldwe usually find these legal systems? What legal system does South Africahave?

5.2.1.2 Legal contracts

In this section we look at the purpose of legal contracts, and theimportance of written contracts with regard to international businessactivities.

importance of contracts The importance of accurate and binding legal contracts is obvious whenwe consider

. the loss of time, money and credibility in the case of disputes

. the high costs of arbitration

. the length of time it normally requires to settle international disputes

If you were involved in international business, how would you minimisethese potential disadvantages related to international legal contracts?


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5.2.1.3 International law

international law

International business activities may be subject to international law. Theprincipal sources of international law are treaties and conventions.Othersources of international law may be custom (international practicesaccepted as law) and the general principles of law or natural law (the basisof human co-existence). While no organised, official body exists to`enforce'' international law, it may fall under the jurisdiction of theInternational Court of Justice at The Hague in the Netherlands, althoughall actions are voluntary.

Costly errors and potential financial loss can be avoided if internationalmanagers are informed of all the legal and contractual issues related totheir firm's international business activities.

5.2.2 THELEGALENVIRONMENTANDITSIMPACTONINVESTMENTSTRATEGIES


investment strategies

International firms involved solely in exporting have little exposure to thepolitical, economic and legal environments of the foreign countries towhich they export. However, environmental risks in these areas becomeimportant when investing directly in foreign countries. In countries withinadequate legal systems and poor law enforcement, the risks may beextremely high. Situations like these would obviously require thoroughanalysis and risk evaluation prior to any decision to invest.

ACTIVITY 5.2.1

Study newspapers, financial and academic journals, and access the Internetfor an example of the impactof a country's legal systemon the internationaltrade or investment transactions of a company. Analyse andexplain the typeof impact, the reasons for this impact, and the way in which the issue wasresolved. Compile a brief written report. (As an example, Standard Bankand ABSA have introduced arrangements to accommodate Islamic bankingrequirements, the latter emanating from Islamic Law.)

ASSESSMENT



Study unit 5.2: Legal environments

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. assess the legal environment and its impact on investment strategies.

SUMMARY

In thisbrief exposition on the international legal environmentwe looked atthe importance of the international legal environment for internationalbusiness, the different legal systems commonly found in countriesworldwide and the importance of legal contracts and international law.We concluded the discussion by looking at the legal implications offoreign direct investments, and the importance to assess and evaluate thepotential benefits, costs and risks involved in doing business with orinvesting in a specific country.

Sound and binding legal contracts, a profound knowledge of the legalsystems and extent of law enforcement in other countries, and pre-emptive political and economic risk analyses are imperative for anydegree of success in international business.

study unit 5.3 TECHNOLOGICALENVIRONMENTS

CONTENTS


Key concepts

Overview

5.3.1 Introduction

5.3.2 Defining technology

5.3.3 The classification of technology

5.3.4 Economic importance of technology

5.3.5 Technology transfer

Assessment

Summary

Topic summary


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. discuss and explain themerits of technology transfer

KEYCONCEPTS

technology technological innovationclassification of technology economic importancetechnology transfer

OVERVIEWIn this study unit we define technology and technological innovation,discuss the classification and economic importance of technology, andexplore the reasons for and implications of international technologytransfer.

5.3.1 INTRODUCTION


technological progress

In the past two decades we have witnessedmajor technological advancesin the fields of elec tronics, aerospace, telecommunications,transportation, biotechnology, production, logistics, and in many moreinstances. In study unit1.1we saw that technology is one of the drivers ofthe process of globalisation. In this study unit we define the concepts oftechnology and technological innovation, and look at technology andcompetitive advantage, and technology transfer. Information technology,and more specifically its application in international marketing, isdiscussed in section 8.5.3 in chapter11of the prescribed book.

5.3.2 DEFININGTECHNOLOGY(Study section 9 in chapter 5 of the prescribed book.)

technology Technology is defined as a method or technique for converting inputs to

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outputs, in accomplishing a specific task. Note the importance of theterms `method'' and `technique'' in this regard.

technological innova-tion

Technological innovation refers to the increase in knowledge, theimprovement in skills, or the discovery of a new or improvedmeans thatextends a person's ability to perform a given task.

5.3.3 THECLASSIFICATIONOF TECHNOLOGY(Study section 9 in chapter 5 of the prescribed book.)

classification oftechnology

Technology can be classified in several ways, such as the distinctionbetween hard technology and soft technology, and between labour-intensive and capital-intensive technologies. Stonehouse et al (2000:231)classify technology as being either base, key, pacing or emerging, asillustrated in table 5.1.

TABLE5.1

TECHNOLOGYCATEGORIES

Category Description Investment level

Base Technological foundation of business;widely available to competitors

Needs littleinvestment

Key Technologies with the greatestimpact on competitive performance

Systematically built

Pacing Technologies in early developmentwhich have the demonstrated poten-tial to alter the basis of competition

Selectiveinvestment

Emerging Technologies with long-term promiseto alter the basis of competition

Monitored invest-ment

Source: Stonehouse et al (2000:231) (adapted)

What is also important in this regard is the purpose of classification, sincetechnology can be classified in different ways as indicated above,depending on the purpose of the classification and the informationrequired from such classification.

5.3.4 ECONOMICIMPORTANCEOFTECHNOLOGY


technology andeconomic development

The importance of technology for economic development is explained inthis section, and the relationship between technology and economicdevelopment is highlighted.

competitive advantage The link between technology and competitive advantage is well


74

established, the major areas for competitive advantage being design and

process technology.

5.3.5 TECHNOLOGYTRANSFER


reasons for technology

transfer

Technology transfer has taken place from developed to developing

countries, to achieve a variety of economic and social objectives. Study

this section and summarise the various reasons for and methods of

technology transfer.Of what importance is technology transfer for the

international business?

ACTIVITY 5.3.1

Consultnewspapers, journals and the Internet to identify anynewproduct

that has recently appeared on themarket.Evaluate the role of technology

in the entire process of getting the product on the market, and explain

your findings in a brief written report.

ASSESSMENT

You may want to check your understanding of the contents of this study

unit by demonstrating that you can




. discuss and explain the reasons for technology transfer

SUMMARY

This study unit briefly touched on the concepts of technology and

technological innovation, and the classification and economic importance

of technology. We concluded this studyunitwith a discussion of technology

transfer.

Study unit 5.3: Technological environments

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TOPICSUMMARYIn study units 5.1, 5.2 and 5.3 of this topic we explored the political, legaland technological environments. We explained the nature of theseenvironments and discussed the implications of each environment forinternational business.


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The internationaleconomic

environment

Study unit6.1

Economic systems andmacroeconomic issues

Study unit6.2

Transformation to amarket economy

topic 6 THEINTERNATIONALECONOMICENVIRONMENT

AIM

The aim of this topic is to provide you with an overview of theinternational economic environment for international business. In studyunit 6.1 we explain the importance of the international economicenvironment, look at existing economic systems, the concept ofeconomic freedom and the classification of countries. The discussion isconcluded with an overview of key macroeconomic issues of importanceto international management. In study unit 6.2 we discuss thetransformation to a market economy of countries previouslycharacterised by command andmixed economic systems.

LEARNINGOUTCOMES


. define the concept economic environment

. explain the importance of the international economic environment

. describe national economies

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. define the concept economic system

. define, evaluate and compare economic systems

. define and evaluate the concept of economic freedom

. describe levels and phases of economic development

. discuss the classification of countries

. discuss and evaluatemacroeconomic issues in international business

. describe and explain economic transition

. explain the transition of command economies tomarket economies

. define a market economy

. discuss and explain privatisation

. describe the process of transition to a market economy

. discuss and evaluate the requirements for successful transition to amarket economy

KEYCONCEPTS

economic environment inflationeconomic systems balance of paymentscommand economy external debtmarket economy privatisationmixed economy innovation and entrepreneurshipeconomic freedom economic transitionclassification of countries purchasing power paritylevels of economic development economic growthphases of economic development requirements for economic

transition

study unit 6.1 ECONOMICSYSTEMSANDMACROECONOMICISSUES

CONTENTS


Key concepts

Overview

6.1.1 Introduction

Topic 6: THE INTERNATIONAL ECONOMIC ENVIRONMENT

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6.1.2 Importance of the economic environment

6.1.3 Economic systems

6.1.4 Economic freedom

6.1.5 Classifying countries

6.1.6 Macroeconomic issues in international business

Assessment

Summary





. define the concept economic system






KEYCONCEPTS

economic environment inflationeconomic systems balance of paymentsmarket economy external debtcommand economy privatisationmixed economy innovationeconomic freedom entrepreneurshiplevels of economic development classification of countriespurchasing power parity economic growthphases of economic development

OVERVIEWIn study unit 6.1 we discuss the international economic environment, aswell as existing economic systems and the concept of economic freedomin the context of international business.We look at the classification ofcountries according to economic criteria, and conclude our discussion by

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identifying a number of macroeconomic issues of importance tointernational business.

6.1.1 INTRODUCTION

(Study section1in chapter 6 of the prescribed book.)

political economy

It is generally accepted that there is a strong relationship between thepolitical, economic and legal systems of a country. The term `politicaleconomy'' was first defined in study unit 2.1, and the international politicaland legal environments with which business is faced were discussed instudy units 5.1 and 5.2 respectively. In this study unit we explain thedifferent economic systems, the concept and importance of economicfreedom, the classification of countries according to levels as well asphases of economic development, and briefly look at the macroeconomicissues of importance to international business. In study unit 6.2 weinvestigate economies in transition and their implications for internationalbusiness.

6.1.2 IMPORTANCEOF THEECONOMICENVIRONMENT


The importance of and primary reason why international managersanalyse the economic environment is to assess the opportunities formarketing a company's products or services abroad, and to evaluate thecosts and risks involved.

importance of the

economyThe potential benefits of doing business with another country are largelydetermined by

. themarket size (essentially the population)

. its current wealth (in terms of purchasing power)

. its future economic growth prospects

The political ideology, legal environment and economic systemwill largelydetermine the potential benefits costs and risks of doing business in aparticular country. It is also known that a country's political systeminfluences the type of economic system it has. The level of economicdevelopment of a country, the size and purchasing power of thepopulation, the potential for social unrest, political instability, and theprospects for economic growth are important factors that influence theeconomic attractiveness of countries for international business.Information that is typically important for international managers whenscanning the economic environments of other countries is presented inBox 6.2, `South Africa: Economic growth, domestic demand and


80

consumption trends'. There are four broad types of economic systems,whichwe discuss below.

6.1.3 ECONOMICSYSTEMS

(Study section 3 in chapter 6 of prescribed book.)

nature of economicsystems

A country's economic system encompasses all the mechanisms andinstitutions that have been established to facilitate the making andimplementation of decisions concerning production, consumption,expenditure and incomewithin an economic framework.

types of economicsystems

There are three broad types of economic systems.They are

. market economies

. command economies

. mixed economies

economic systems These systems range from market economies, based on free marketprinciples and private ownership at the one extreme, and commandeconomies, characterised by state-owned assets and central planning bythe government at the other extreme. Amixed economy has elements ofboth a freemarketeconomy and a commandeconomy. It is clear that eachof these systemswill have a different effect on theway inwhich business isconducted in the economy concerned. Study these types of economicsystems and summarise the main characteristics of each, also indicatingthe implications of each system for international business.

6.1.4 ECONOMICFREEDOM

(Study section 4 in chapter 6 of the textbook.)

The Index of Economic Freedom has been published since 1995, with theprimary goal of developing a systematic empirical measure to rankcountries worldwide in terms of economic freedom, based on objectiveeconomic criteria'.

defining economicfreedom

Economic freedom is defined as the absence of government coercion orconstraint on the production, distribution or consumption of goods andservices beyond the extent necessary for citizens to protect andmaintainliberty itself' (Miles et al 2006:56).

Even at this point it is obvious that internationalmanagementwouldpreferdoing business with countries that are highly ranked in terms of economicfreedom.

composition of the Indexof Economic Freedom

In section 4.1 in chapter 6 of the prescribed book, note the ten broadcategories on which the assessment of economic freedom is based, andhow factors within these categories are scored to arrive at the overallscore for economic freedom of a country.


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Importance of EconomicFreedom

The final Indexof Economic Freedom score is thengroupedinto one of thefour broad categories of economic freedom:

. Freeö countries with an average overall score of1,99 or less

. Mostly freeö countries with an average overall score of 2,00 to 2,99

. Mostly unfreeö countries with an average overall score of 3,00 to 3,99

. Repressedö countries with an average overall score of 4,00 or higher.

Research has confirmed that countries with most economic freedommeasured in terms of the10 broad categories of variables have

. higher rates of economic growth

. higher standards of living

. and are relativelymore prosperous

than those countries with less economic freedom. See table 6.1 on therelationship between economic freedom and per capita income in thisregard.

Implications forinternational business

Now study the list of institutional factors or determinants of economicfreedom that are addressed and accommodated in the overall index andrankings. The weighted average score for each major region appears inthe table on p.125, and the top12 countries ranked by economic freedomin 2006 in table 6.2. In summary, the Indexof economic freedomprovides avaluable framework for evaluating economic success.

6.1.5 CLASSIFYINGCOUNTRIES(Study section 5 in chapter 6 of the prescribed book.)

difficulty of classifyingcountries

A country's economic scope, level of development, and internationalcompetitiveness is influenced by numerous factors which complicate thedecision on which criteria to use in classifying countries. It is difficultbecause there are various methods of classification. However, it is mostimportant to decide on the purpose of the classification, in order for theinternational manager to be provided relevant and usable information fordecision making. Often, once the purpose for classification has beendecided, the criteria andmethod to be used become apparent.

criteria for classifyingcountries

In section 6.1.2 above, we noted that market size (ie market demand) isvery important for international strategic and market planning. In thisregard, population size and per capita income are important indicators.They are expressed by two widely used measures for classifyingcountries: per capita gross national product (GNP) and per capita grossdomestic product (GDP). Ensure that you understand these concepts asdefined in section 5.2 in chapter 6 of the textbook.

In the World Development Report, the World Bank classifies countriesinto the following five categories according to their GNP (also referred toas Gross National Income,GNI) per capita:

. low-income

. middle-income*


82

. lower-middle-income

. upper-middle-income

. high-income

(* Middle-income comprises both lower-middle-income and upper-middle-incomecategories.)

economic classificationof countries

Low-income and middle-income countries are often referred to as lessdeveloped or developing countries, and upper-middle and especially high-income countries as developed, and sometimes, industrialised countries.TheWorld Bank classification of countries appears in table 6.3 of chapter6 of theprescribedbook.Classification of countries according to phases ofdevelopment is discussed and explained in section 5.3.3 in chapter 6 of theprescribedbook.Box 6.2,`The twoKoreas ö worlds apart' illustrates thevalue of the economic classification for international businesses. Study thissection, noting specifically themethods (and their criteria) of classification,as well as the purpose of the classification.

6.1.6 MACROECONOMICISSUES ININTERNATIONALBUSINESS


In this sectionwebriefly refer to keymacroeconomic issues of importanceto international business.

purchasing powerparity

Themeasures ofGNP andGDPpercapita betweencountries do notmakeprovision for differences in the cost of living of those countries, and cantherefore be misleading. To accommodate such differences, the GNP andGDP per capita can be adjusted by introducing purchasing power ögenerally referred to as purchasing power parity (PPP), which allows for amore accurate comparison of living standards, and therefore also ofeconomic growth in different countries, as discussed in section 5.2.2 inchapter 6 of the prescribed book.

economic growth

Both GNP and GDPmeasures, evenwhen adjusted for PPP, provide staticdata at a specific point in time. South Africa's real GDP between 2001and2006 is illustrated in figure 6.2 in chapter 6 in the prescribed bookindicating the volatility of these growth rates in the short term inparticular. Table 6.4 indicates sectoral contribution to GDP in 2005.Economic growth rates of countries have to be compared over time,using trend or time-series analyses, to determine whether the differencein economic growth between two or more countries is increasing ordecreasing over time ö which would obviously be of importance to theinternational manager (see section 6.2 in chapter 6 of the prescribedbook). The expected growth rates in GDP for selected regions in 2007appear in table 6.5, the lowest rate of 1.8 expected for the Eurozone (EUof12), and the highest rate of 7.2 for South Asia.The top growth countriesin terms of GDP in 2007 are presented in table 6.6, Azerbaijan at17,5 percent occupying the top position.


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innovation andentrepreneurship

It is widely accepted that innovation and entrepreneurship drive theeconomic growth in a country. Innovation is related to new products,services, processes, organisations, practices and strategies. Furthermore,innovation is an important element in entrepreneurial behaviour andactivity. The political economy and concomitant economic system in acountry will largely determine its entrepreneurial spirit as discussed insection 6.7 in chapter 6 of the prescribed book.You should recall thatcertain elements of a country's culture, such as its political and economicphilosophy, social structure and religion will either encourage ordiscourage its entrepreneurial orientation.

impact of inflation

Inflation is known to affect interest rates, exchange rates, the cost of livingand the general political and economic confidence in a country. It istherefore of critical importance that the international manager assesscountries targeted for potential international business in terms of theireconomic policies, which include their monetary and fiscal policies. Inpart, determining a country's ` real'' disposable income requires thatmonetary values be adjusted for inflation. Changes in the consumer andproduction price indices for South Africa between 2003 and 2006 appearin table 6.7 in the prescribed book. Changes in consumer prices forselected high-income andmiddle-income countries for 2006 and 2007 arein table 6.8. Ensure that you understand how inflation is defined, thevarious measures of inflation, and the importance of this information forthe international manager as outlined in section 6.3 in chapter 6 of theprescribed book.

balance of payments

The balance of payments is an important component of any country'snational accounts, since it reflects the value of a country's economicrelations with the rest of theworld.The balance of payments is defined asa systematic record of all transactions between the residents of a countryand the rest of the world during a given period of time (usually a year, aquarter or a month). Its operation is comparable to that of an income andexpenditure account or income statement, rather than a balance sheet.Study this section and section 6.4 in chapter 6 of the prescribed book toestablish how the balance of payments is structured, and the importanceof the current account of the balance of payments. The format of SouthAfrica's balance of payments including the current account and financialaccount appear in Appendices 1, 2 and 3 in chapter 6 of the prescribedbook. South Africa's balance of payments on current account for 2005and 2006 is included in table 6.9.

external debt

External debt is typically measured in two different ways.When it isexpressed as a percentage of GNP, it provides a useful measure ofwhether a country's external debt levels are acceptable. Study thissection in terms of this important measure in international economicanalyses with reference to section 6.5 in chapter 6 of the prescribedbook, and determine the extent to which the demise of the AsianTigersin the late1990s öKorea,Taiwan, Singapore and Indonesia öwas due tounrealistically high external debt levels. Table 6.10 in the prescribed bookcontains information onmajor international debtor countries.


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privatisation

Privatisation involves the movement of ownership from the public to theprivate sector, andholdsmany advantages, amongst them the attractingofforeign direct investment from abroad. (See section 6.6 in chapter 6 of theprescribed book.) Study this section and consult the newspapers, journalsand the Internet to find out which South African institutions have beenrecently privatised, or have been targeted for privatisation, and thereasons for the decision to privatise.

This brief overview highlighted a number of key macroeconomic issues ofvital importance to the international manager in analysing foreigneconomic andmarket potential.

ACTIVITY 6.1.1

Describe and discuss a typical political, economic, legal and culturalenvironment that will encourage entrepreneurial behaviour andinnovation (consult the material in study units 4.1, 4.2, 5.1, 5.2 in compilingyour answer). Substantiate your answer.

ACTIVITY 6.1.2

Study the newspapers and financial journals and access the Internet to findinformation on a South African organisation that has recently beenprivatised. Outline the theoretical arguments for and againstprivatisation, and summarise the reasons why the organisation wasprivatised. Put down your findings in a brief written report.

ACTIVITY 6.1.3

Compile a list of the top ten countries in terms of their rankings withregard to political rights', civil liberties' (both from Appendix 1 in chapter4 of theprescribedbook, and economic freedom' (see section 6.1.4 above).Comment on your findings in terms of their importance for internationalbusiness. (For information on the Index of Economic Freedom, you canaccess the following websites: www.heritage.org andwww.wsj.com)


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ASSESSMENT




. define the concept of an economic system






SUMMARYWebegan this study unit by looking at the concept of a political economy,and then explained the importance of economic analysis to identify newinternational markets. We considered the three types of economicsystems, explained the concept of economic freedom and its implicationsfor international business, and explained the rationale for and problemsinvolved in classifying countries thus. In closing, we discussed a number ofkeymacroeconomic issues of importance to the internationalmanager.


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study unit 6.2 TRANSFORMATIONTOAMARKETECONOMY

CONTENTS


Key concepts

Overview

6.2.1 Introduction

6.2.2 Transition and international business

6.2.3 Realities of transition to a market economy

6.2.4 Transition from state-owned to private enterprises

6.2.5 Requirements for successful transition to market economies

Assessment

Summary

Topic summary

STUDY 6.2 LEARNINGOUTCOMES





. discuss and explain the role of privatisation in economic transition


KEYCONCEPTS

economic transition economies in transitioncommand economy transition and international businessmarket economy privatisationmixed economy process of transition

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ideological and economic issues requirements for successful transitionderegulation democracy

OVERVIEWThis study unit covers the phenomenon of transition from command andmixed economies to market economies. The realities of a transition to amarket economy, the privatisation of state-owned enterprises, theprocess of transition and the requirements for successful transition arethen discussed.

6.2.1 INTRODUCTION

(Study sections 7.1and 7.2 in chapter 6 of the prescribed book.)

economies in transition

Since the fall of the Berlin Wall in 1989, most of the centrally plannedeconomies of the former East Bloc countries and Soviet Union have beeninvolved in a transition process to market economies. These countriesinclude the Russian Federation, Poland, Hungary, Romania, the CzechRepublic, Belarus, Ukraine, Latvia, Estonia and Lithuania. They are oftenreferred to as countries with economies in transition (CEITs). Althoughsince 1989, the Central and East European countries and Russia havereceived a lot of attention as economies in transition, a complete list ofcountries in transition would have to include Asian states such as Chinaand Vietnam, as well as African countries such as Angola, Ethiopia, andMozambique. In other countries in Asia, Latin America and evenWesternEurope, privatisation and deregulation have also resulted in a movetowards freer markets for both ideological and economic reasons asdiscussed in section 7.2 of the prescribed book.

aspects of transitionIn this study unit we look at some of the realities of the transition to amarket economy, the role of privatisation in the transition from state-owned to private enterprises, the process of transition, and therequirements for successful transition.

6.2.2 TRANSITIONANDINTERNATIONALBUSINESS


importance of transitiontomarket economies

The importance of the transition of former centrally planned or commandeconomic systems andmixed economic systems tomarket economies liesin the accessibility of previously closed markets, given that theseeconomies are not all transforming at the same rate, nor are they allcharacterised by the same types of transformation, or the same typesand levels of risk.


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implications oftransition tomarketeconomies

Some of the implications of the above transition to market economies forinternational businesses are

. opportunities for expansion into new (previously closed) markets

. access to natural and other resources not previously accessible

. new opportunities for knowledge and technology transfer

. new destinations for foreign direct investment, given acceptable risklevels

. new opportunities for expatriate managers to acquire cross-culturalliteracy

. new opportunities for international collaboration through jointventures and strategic alliances

These implications and opportunities will become clearer in thediscussions that follow.

6.2.3 REALITIESOFTRANSITIONTOAMARKETECONOMY

(Study section 7.4 in chapter 6 of prescribed book.)

shortcomings andopportunities

The political changes after 1989 were accompanied by far-reachingeconomic shifts in a number of important areas. Czinkota et al (2002:229^230) identify several shortcomings and opportunities forinternational business wanting to expand into countries involved in theprocess of making a transition to a market economy. Some of the mainshortcomings are

. the severe limitations in infrastructure of these countries, including adearth of market intermediaries

. major shortages of capital primarily because investors often perceivethese markets as risky and would rather invest in more attractiveinvestment opportunities elsewhere

. demand conditions characterised by vague and undefined consumerneeds

. largely inaccurate or, at times, non-existentmarket information

. a general lack of managerial skills

. less than optimal commitment by both managers and employees totheir work

. resistance to change

. an environment and culture that complicates decisionmaking

. poor planning and resource allocation

On the positive side, these emerging democracies often have abundantknowledge resources, for example in their researchers and engineers,whose skills are not optimally utilised. Study this section for aperspective on the realities of change in these economies and how theserealities influence international business.Why should the internationalmanager have an informedknowledge of these issues?

Study unit 6.2: Transformation to a market economy

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6.2.4 TRANSITIONFROMSTATE-OWNEDTOPRIVATEENTERPRISES


privatisation In study unit 6.1 (section 6.1.6) we briefly looked at privatisation of state-owned enterprises as a key macroeconomic factor for internationalbusiness. Here we consider privatisation in the context of economies intransition where most of the assets and the means of production were,and to an extent still are, state-owned.

benefits and risks ofprivatisation

Given the advantages of privatisation, including private ownership and thepotential for increased efficiency, it is clear that there is a great need forprivatisation in countries in transition and that the benefits thereof areenormous. You should recall, however, that privatisation often requiresforeign direct investment (FDI) in the countries in transition, whichmeans that before potential investors become involved in privatisation,they must first consider the risks of such a prospect.This underlines theimportance of privatisation but also its complex nature.

6.2.5 REQUIREMENTSFORSUCCESSFULTRANSITIONTOMARKETECONOMIES


The rationale for economic transformation worldwide is that countrieswith command, and even mixed economic systems to a certain degree,did not live up to expectations, leaving their people relatively poorer.Transformation processes generally involve these steps:

. deregulation

. privatisation

. creation of legal systems to protect property rights.

requirements fortransition

It is accepted that successful transition to a market economy requires thefollowing conditions:

. the development and implementation of sound policies

. easing up on protectionism and barriers to entry, and the extensiveliberalisation of prices and trade regimes

. importance of privatisation and an effective system of property rights

. the development of sound and effective legal and financial systems forreforms to succeed

. a commitment to the development of human capital to cope with themarket economy

Ensure that you know why these requirements exist, and howtransformation could be affected by the absence of one or more of theseconditions.

A country's transition to amarket economydoes not guarantee economicsuccess, as may be illustrated by the fact that the majority of the world's

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factors influencingtransition

developing and poorer countries qualify as countries with economies intransition. These countries vary widely in terms of the factors that mayaffect their growth, irrespective of their degree of transformation.Thesefactors include

. the educational level of the population

. the quality and distribution of natural resources

. the degree of national cohesiveness

. access to investment capital

. the extent of existing industrial structures

. entrepreneurial experience among the population

. the development of infrastructure

As we saw in section 6.2.3 above, most of the shortcomings in East andCentral Europe and Russia relate to the above.

ACTIVITY 6.2.1

Study the newspapers and financial journals and access the Internet toestablish how any one of the countries currently involved in making atransition to a market economy is progressing.Write a brief report onyour findings.

ACTIVITY 6.2.2

Select a country in the process of economic transition.Write a briefreport on the potential benefits, costs and risks for a South Africaninternational business considering direct foreign investment in theselected country. Substantiate your views in this regard.

ASSESSMENT





Study unit 6.2: Transformation to a market economy

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. discuss and explain the role of privatisation in economic transition


SUMMARYIn this studyunitwe investigated the transition of former centrallyplannedeconomies to market economies.We looked at the realities, as well asrequirements for successful transition to market economies, and theimplications of such transition for international business.

TOPICSUMMARYIn study unit 6.1 we discussed the international economic environment,existing economic systems, the concept of economic freedom and theclassification of countries. In conclusion, we identified a number ofmacroeconomic issues of importance to international business.

In studyunit 6.2we discussed thephenomenon of transition fromcentrallyplanned economic systems to market economies.We highlighted therealities of the transition to a market economy, the privatisation of state-owned enterprises, and discussed the requirements for successfuleconomic transition.


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TOPIC 7

Internationalmanagementand leadership: developing a

globalmindset

TOPIC 8

Global competitive strategies

Part 3GLOBALBUSINESSLEADERSHIPANDSTRATEGIES

INTRODUCTIONTOPART 3

Part 3 of this course deals with global business leadership and strategies toattain a sustainable competitive advantage in the international businessarena.

In topic 7, we discuss the important issues of global business managementand leadership. Study unit 7.1 opens with the definition of a number ofimportant concepts related to international business and management.We discuss these concepts and draw a distinction between theirmeanings.We cover the cultural dimensions of global leadership in studyunit 7.2. In addition, we define the concept of a global mindset, indicatethe need for this global mindset in cross-cultural leadership and how itmust be fostered through appropriate education and training, andconcludewith the requirements for global leadership.

The aim of topic 8 is to examine, within the context of globalisation andthe rapidly-changing global business environments, the strategic optionsavailable to firms thatwant to expand their operations internationally.

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Study unit 8.1 commences with a brief reference to globalisation andhighlights relevant elements of the global business environment as aframe of reference for identifying sources of competititve advantage andthe development of appropriate international strategies.

Study unit 8.2 focuses on the selection of appropriate internationalstrategies, taking account of the strategic orientation of internationalfirms, the relationship between competitive advantage and strategy, andthe various pressures that influence the choice of strategy.The study unitis concluded by looking at modes of foreign market entry, and combiningthesewith the competitive business strategies in developing an integrated,international strategic management framework.

GLOBAL BUSINESS LEADERSHIP AND STRATEGIES

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Internationalmanagementand leadership: developing

a globalmindset

Study unit7.1

International manage-ment and leadership

Study unit7.2

Developing a globalmindset

topic 7 INTERNATIONALMANAGEMENTANDLEADERSHIP:DEVELOPINGAGLOBALMINDSET

AIM

The aim of this topic is to provide you with an overview of thefundamentals underlying, and the importance of, internationalmanagement and leadership.We do this in study unit 7.1, and then go onto draw a distinction between management and leadership, and exploretheir importance in the context of the global cultural environment. Instudy unit 7.2 we define a global mindset and emphasise how importantthis is to global management and leadership.We also discuss how todevelop and cultivate a global minset. In conclusion, we look at theimportance of cross-cultural leadership and socialising the globalmanagerin themultinational enterprise (MNE).

LEARNINGOUTCOMES

After studying this topic, you should be able to

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. define the relevant concepts related to international management,leadership and strategy

. compare and evaluate the concepts of management and leadership

. discuss international management in the context of its variousenvironments

. define and discuss risk in international business

. discuss and evaluate the concepts of leadership and culture

. define a globalmindset

. identify and discuss the need for a globalmindset

. discuss how to develop and cultivate a globalmindset

. evaluate the relationship between a global mindset, culture, and cross-cultural leadership

. explain the requirements for effective global cross-cultural leadership

. explain the importance of mindset for global leadership

. discuss the need for and importance of training and development

KEYCONCEPTS


international business international business enterprisemultinational enterprise (MNE) global enterprisetransnational enterprise international strategymultidomestic strategy global strategytransnational strategy internationalmanagementinternational leadership cross-cultural leadershipinternational risk globalmindsetneed for a globalmindset transactional leadershipdeveloping and cultivating a global transnational capabilitiesmindset transformational leadership

charismatic leadership training and development in a globaleducation and training for global contextmanagers

Topic 7: INTERNATIONAL MANAGEMENT AND LEADERSHIP: DEVELOPING A GLOBAL MINDSET

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study unit 7.1 INTERNATIONALMANAGEMENTAND

LEADERSHIP


Key concepts

Overview

7.1.1 The importance of internationalmanagement and leadership

7.1.2 Basic concepts in internationalmanagement

7.1.3 The context of internationalmanagement

7.1.4 Internationalmanagement challenges

7.1.5 Cross-cultural leadership

Assessment

Summary





. discuss international management in the context of its variousenvironments

. define, discuss and evaluate risk in international business


KEYCONCEPTS

international business international business enterprisemultinational enterprise global enterprisetransnational enterprise international strategymultidomestic strategy global strategytransnational strategy internationalmanagement

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international leadership cross-cultural leadershipinternational risk

OVERVIEW

In study unit 7.1we discuss the fundamental principles and the importanceof international management and leadership. International managementand leadership are compared in the context of international business. Inclosing, we discuss the role of internationalmanagement in the context ofthe global business environment how risk is managed in this turbulentenvironment, and the importance of cross-cultural leadership in thisregard.

7.1.1 THEIMPORTANCEOFINTERNATIONALMANAGEMENTANDLEADERSHIP


international manage-ment and leadership

The above topic lies at the heart of international business. Given thedynamics and scope of international business, and the variousinternational institutions of international business that we discussed inpart 1, and the environments in which international businessess operatethat we discussed in part 2, it should be clear that internationalmanagement and leadership are responsible for initiating and executingthe strategies and actions of international businesses.

Buthow important ismanagement and leadership in internationalbusinessreally? In this study unit, we will attempt to provide the answer to thisquestion, and then go on to show why business leaders need to cultivatea global mindset to ensure continued success in international business. Inthis study unit, we first define a number of important concepts in thecontext of international management and leadership, then discuss therequirements for effective international management and leadership andfinally explore the importance of cross-cultural leadership. Thedevelopment of a globalmindset is the subject of study unit 7.2.

7.1.2 BASICCONCEPTS ININTERNATIONALMANAGEMENT

(Study sections 2, 2.1and 2.2 in chapter 8 of the prescribed book.)

management versusleadership

In addition to the concepts and terminology that you have come across inthe module thus far, we shall now define a number of concepts which areextremely important for the remainder of the topics in this module.Ensure that you understand the difference between management in apurely domestic sense and international management, as well as thedifference betweenmanagement and leadership.


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necessity of leadership In his groundbreaking work,The leadershipmystique, Manfred Kets deVries(2001:210) poses the following incisive question:

Why do people need leaders anyway ö political leaders, businessleaders, cultural leaders?

His own succinct answer to this question is

... becausewe live in aworld of change.

Study these sections thoroughly to establish how international leadershipdiffers from international management and what the requirements foreffective international leadership are. Global leadership abilities arediscussed in study unit 7.2 (section 7.2.4).

basic conceptsAlso ensure that you understand the other concepts in this section.Theseinclude terms such as ` affiliates and subsidiaries''; ` international,multidomestic, global and transnational enterprises and strategies'';`international, global andworldwide activities''.

7.1.3 THECONTEXTOFINTERNATIONALMANAGEMENT


environments andmanagement

While the international environment, in its broadest sense, comprises thetotal world environment, the relevant international environment for anMNE would be the sum total of the environments of each of the nation-states or countries with which the enterprise trades or in which it hasinvested.

global environmentalforces

In studying this section, take note of the numerous political, legal,economic, social, cultural and technological issues and forces that a MNEfaces, with specific reference to the following key areas:

. the changingnature of the internationalbusiness environment, includingmajor demographic shifts, ever growing urbanisation, and growth inwhatwe have come to know as `minority groups''

. changing consumer behaviour reflecting increasing demands for andinsistence on value

. trade liberalisation, deregulation and privatisation

. exploding information, communication andbiological technologies, thatare totally changing the global competitive environment andresulting inkey new competitive forces

. the emerging `new economy'' (including the `old economy'' with newtechnology), as reflected in e-business which is changing the way welook at traditional businessmodels

. the emergence of the EU as an economic force, and the euro as acurrency of note

. changing political systems, including the dramatic changes in Easternand Central Europe as well as in Russia after the demise of communism

Study unit 7.1: International management and leadership

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. increasing economic integration and the formation of viable trade blocs

. critical health, finance, education and government issues in the PacificRim, the Far East and in Africa, and the way in which these issues arebeing dealt with

. an increasing consolidation of business throughmergers and acquisitions

. management becoming increasingly globalised, including extensiverestructuring, downsizing and rightsizing of organisations andoutsourcing of activities

. unacceptable levels of corruption and social disorder worldwide

. the need to scan the competitive environment continuously andsystematically search for business opportunities (Kets de Vries2001:211^212; Hough &Neuland 2000:202)

environmental scanningand competitiveintelligence

Effective internationalmanagementrequires that these key issues be dealtwith appropriately. The relevant environments and their implications forinternational business were discussed in topic 4. Gathering appropriateand timely information for market and competitor analyses, as well as forother strategic purposes through environmental scanning and competitiveintelligence (CI) is imperative for continued success, survival and growth.Whereas environmental scanning is a well-established technique instrategic analysis, CI has recently emerged as an indispensable aid toobtain vitally important pre-emptive intelligence on major political,economic, social and market trends as well as on emerging competitiveforces. Hence, we explain the CI approach and the evolution of CIprogrammes in this section. In the section that follows we briefly look atthemanagement of risk in the international environment.

risk in the internationalenvironment

It is generally accepted that the international business environment ischaracterised by continuous change, uncertainty and risk. Theinternational manager needs to identify and manage these riskseffectively. In this section, note the elements of both internal andexternal risk, and how to deal with them. Study Box 8.1, Risk factors inSouth African business' in this regard. Political risk is an importantelement of external risk and almost always occurs without any priorwarning, as evidenced by the terror attacks on the US World TradeCenter and the Pentagon on 11 September 2001. Sectors such as theinsurance, air transportation, tourism, hospitality, finance and real estateindustries, to namebut a few, were dramatically affectedby this tragic andunexpected event.

7.1.4 INTERNATIONALMANAGEMENTCHALLENGES


We know that international managers need to cope with and manage ahost of global issues such as those that we summarised in section 7.1.3above.


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demands on interna-tionalmanagement

Study the issues, discussed in section 7.1.3 above, the groups of competingfactors identified by Coade, Miller's requirements for successful SouthAfrican managers, and the issues that multinational managers face aspointed out by Beamish.To illustrate some of these developments, studyBox 8.2, `Developing to meet changing demands.' Summarise these issuesto obtain a profile of the major environmental trends and issues ininternational business. Given this background, we now look at theimportant topic of cross-cultural leadership.

7.1.5 CROSS-CULTURALLEADERSHIP


culture and leadership

In study units 4.1and 4.2 we defined the concept of culture, discussed thecharacteristics and determinants of culture, and highlighted theimplications of culture for international business. In this section we seekto identify how culture impacts on leadership internationally. In thisregard,Kets deVries (2001:223^228)makes the following observation:

With the increasing globalisation ofbusiness,we canno longer ignorethe fact that there's a strong cultural dimension to leadership ö thatis, that there are variations in what's acceptable as a leadership styledepending on one's national culture.

He sees the cultural values of a nation or society as the building blocks forbehaviour, action, leadership practices and institutional arrangements, andargues that if we understand the building blocks of culture, it will help toexplain the differences in leadership styles among cultures. Aspects ofleadership are affected by cultural differences because of the fact that:

. attitudes toward authoritymaydiffer fromcountry to country andmayaffect how leadership is perceived (by both leaders and followers).

. in global corporations in particular ö which often attempt to`streamline'' behaviour patterns in the organisationö the interfacebetween national and corporate culture is `tightly interwoven''

. styles of decisionmaking that vary from one culture to another

. motivation and control can be understood only in the context of cross-culturalmanagement

. themanagement ofmulticultural teams requires a cooperative blendingof elements fromvarious cultures

analysing culturalpatterns

Basedon the above, study the approaches that areused to simplify culturalpatterns. In this regard, review Hall's low-context-high-context approachand Hofstede's cultural dimensions in study unit 4.2.

differences in themeaning of leadershipacross cultures

As already mentioned, the culture in which leaders grow up stronglyinfluences their values, attitudes and behaviours, which means that themeaning of leadership may vary across countries. Study the examples inthis section which evidently confirm this view.Of what importance is thisinformation to the internationalmanager?

Study unit 7.1: International management and leadership

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It has been found that the following cultural distinctions can affect thevalues associatedwith leadership:

extent towhich the

values of leadersmay

vary across countries

. traditionalism andmodernism

. particularism and universalism

. outer-directed versus inner-directedworld values

We conclude this discussion of the attributes and skills relevant to cross-cultural leadership with reference to the research by Yeung and Ready(1995:529^547), as well as Chow et al (1997:6^7).

Study these findingswith reference to tables 8.1, 8.2 and 8.3 in chapter 8 oftheprescribedbook. In closing, takenote of themanagementdevelopmentmodel that McFarlin and Sweeney (1998:23) propose for South Africa.Compile your own summary of the necessary attributes andrequirements for effective cross-cultural leadership in general.

Study this section, noting once again the importance of this informationfor effective leadership in international business.

These discussions on cross-cultural leadership form the basis for ourdiscussion of the attributes and competencies of cross-cultural globalleadership in study unit 7.2 (section 7.2.5).

ACTIVITY 7.1.1

Comparemanagement and leadership critically in terms of roles, functionsand attributes. Summarise your findings in a brief written report.

ACTIVITY 7.1.2

Write a brief report to management, outlining the types of risks thatinternational businesses face, and how these risks should bemanaged.

ASSESSMENT



102



. discuss international management in the context if its variousenvironments

. define, discuss and evaluate risk in international business


SUMMARY

cross-cultural leadershipfor success

In this study unit we highlighted a number of important issues related tointernational management and leadership, and the importance of cross-cultural leadership for any degree of success in the global marketplace. Infact, recent research in this field confirms the direct relationship betweeneffective cross-cultural management and the possession of attributes andskills in culture-based cross-cultural management. Cross-culturalproficiency requires, amongst other things, that managers and leaderscultivate and develop a global mindset. This issue is dealt with in studyunit 7.2.

study unit 7.2 DEVELOPINGAGLOBALMINDSET


Key concepts

Overview

7.2.1 Introduction

7.2.2 Defining a globalmindset

7.2.3 The need for a globalmindset

7.2.4 Developing a globalmindset

7.2.5 Mindset and cross-cultural global leadership

7.2.6 Socialising the new breed of global managers in multinationalenterprises

Assessment

Summary

Topic summary

Study unit 7.2: Developing a global mindset

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. discuss how a globalmindset is developed and cultivated

. evaluate the relationship between a global mindset, culture and cross-cultural leadership

. explain the requirements of effective global cross-cultural leadership

. explain the importance of a global mindset for global cross-culturalleadership


KEYCONCEPTS

globalmindset individualmindsetorganisationalmindset need for a globalmindsetdeveloping a globalmindset transactional leadershipcharismatic leadership transformational leadershiptransnational capabilities education and trainingdeveloping globalmanagers leadership development in a global contexttraining and development in a global context

OVERVIEW

This study unit covers the concept of a globalmindset, and emphasises theimportance of a globalmindset for global and transnational leadership in arapidly changing global business environment.We look at themeaning of amindset, the need for a global mindset, and how to develop this globalmindset. The importance of cross-cultural leadership is explained, andthe study unit is concluded by identifying educational and training needsfor globalmanagers.

7.2.1 INTRODUCTION


newbusiness challengesIn study unit 7.1we discuss international management and leadership, andthe increasing importance of cross-cultural leadership. In this study unit,


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we broaden our perspective to focus on the importance of a globalmindset for both companies and individuals in order to meet thechallenges of an increasingly global business world. Here we build on theaspects of leadership, and cross-cultural leadership in particular, that wediscussed in study unit 7.1.

transition to a globaleconomy

Pucik (1992:3) states that successful global organisations will increasinglyneed to develop individuals who can think, lead and act from a globalperspective, and possess a global `mind'' and `global skills''. As thepressuremounts for more South African firms to move from domestic toglobal markets, these firms will have to learn how to overturn traditionalassumptions about howbusiness shouldbe conducted in order to ensure asuccessful transition to international business. In the discussions thatfollow, we first look at the need for a global mindset, the link between aglobal mindset and personal characteristics, developing and cultivating aglobal mindset, the development of cross-cultural leadership, andsocialising the newbreed of globalmanagers in MNEs.

7.2.2 DEFININGAGLOBALMINDSET


defining global mindsetfor individuals

Political and economic restructuring in places like Eastern and CentralEurope, China, some Latin American countries and in Southern Africapose tremendous challenges to businesses in those countries and regionsto remain competitive. If we consider that such restructuring occurs overand above the increasing globalisation of the world economy, one of therequirements for businesses in these areas to remain competitive is thatthe organisations as well as the managers and leaders develop `a globalmindset''.

Before elaborating on the need for a global mindset, we first need todefine this important concept.Govindarajan and Gupta (2001:111) define aglobalmindset as

a mindset that combines an openness to and awareness of diversityacross cultures andmarkets with a propensity and ability to synthe-sise across this diversity.

Jeannet (2000:11) provides the following definition of a mindset in thecontext of global business:

a state ofmind able to understand a business, an industry sector, or aparticular market on a global basis to see across multiple territoriesand focus on commonalities across many markets rather than em-phasising the differences among countries.

Essentially, a mindset refers to the way in which a person receives andinterprets information.This process is illustrated in section 3.1 of chapter8 in terms of the following three key concepts:


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. openess to diversity across cultures andmarkets

. knowledge about diversity across cultures andmarkets

. the ability to integrate diversity across cultures andmarkets

defining a globalmindsetfor organisations

An organisation's mindset, on the other hand, comprises the aggregatemindset of a collective of individuals, adjusted for the distribution ofpower and mutual influence among the people making up this collectiveof individuals (Gupta & Govindarajan 1999:1). Now study Box 8.3, `Doesyour organisation have a global mindset?' for specific requirements in thisregard.Note the implications of these two conceptsboth formanagementand organisations.

7.2.3 THENEEDFORAGLOBALMINDSET


During the past two decades, the world economy has been affected byseveral significant changes, the most important of which were listed insection 7.1.3. These changes have forced both businesses and governmentto adapt to the changing world environment, and have required far-reaching changes in the practice of management (Jeanett 2000:17).

the need for globalmindsets

Govindarajan and Gupta (2001:105) contend that any company that wantsto emerge as a global leader in its industry has to be a leader in

. discovering newmarket opportunities

. establishing presence in keymarkets

. converting such a presence into global competitive advantage

According toYip (2003:6^16), the globalisation of the world economyrequires global managers to service their global customers by means of avariety of processes.These include

. orientatingmarket focus

. redistributing resources

. readjusting organisational structures

. carefully selecting appropriate communicationmodalities

Study the rest of this section on the need for and importance of a globalmindset, while noting the differences between an individual and anorganisationalmindset.

the value of a globalmindset

Thinking globally anddeveloping a globalmindset is imperative for industryleadership.Without it, management tends to pursue only those obviousopportunities it, and one would assume its competitors, discern. It isargued that the central value of a global mindset lies in enabling thecompany to combine speedwith accurate response. Study the rest of thissection on the need for developing a globalmindset. In section 7.2.4 belowwe look at the differences between a traditional and a globalmindset.


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7.2.4 DEVELOPINGAGLOBALMINDSET(Study sections 3.2, 3.3 and 3.4 in chapter 8 of the prescribed book.)

important personalcharacteristics

Note the most important personal characteristics linked to a globalmindset as discussed in sections 3 and 4 of chapter 8 of the prescribedbook. As an interesting example, study Box 8.4, `Developing acompetency to deal with Chinese diversity'.

Rhinesmith (1993:28^29) developed six competencies as a basis fordeveloping a globalmindset.These arebasedon the followingrelationships:

. globalmindsets as they are linked to personal characteristics

. global competencies as they are linked to personal characteristics

Study the elements involved in the above two relationships as a basis forthe development of a globalmindset in sections 3 and 4 in chapter 8 of theprescribed book.

In table 7.1below we compare a number of broad current and future traitsof executives ö the latter important in respect of acquiring a globalmindset.

TABLE7.1

EXECUTIVE TRAITSNOWAND INTHEFUTURE

Now The future

All knowing Leader as learner

Domestic vision Global vision

Predicts future frompast Intuits the future

Caring for individuals Caring for institutions and individuals

Owns the vision Facilitates vision of others

Uses power Uses power and facilitation

Dictates goals andmethods Specifies processes

Alone at the top Part of an executive team

Value order Accepts paradox of order amidst chaos

Monolingual Multicultural

Inspires the trust of boards,shareholders

Inspires the trust of owners, customers,and employees

Source: Beamish, et al (1997:182^184).

Govindarajan and Gupta (2001:122) state that even if an organisationdecides to stay local, having a global mindset has at least two advantages.A globalmindset

. will enhance its ability to compete against international competitors inits own domestic market


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. will allow the organisation to benchmark itself against leadinginternational firms

developingmindsets They state that the cultivation and development of a global mindset has anumberof phases (series of s-curves) as illustrated in figure 8.3 in chapter 8of theprescribedbook. It appears that the speedwithwhich organisationsor individuals can cultivate a globalmindset is driven by the following fourfactors:

. curiosity about theworld and a commitment to becoming smarter

. an explicit and self-conscious articulation of a currentmindset

. exposure to diversity and novelty

. a disciplined attempt to develop an integrated perspective andknowledge about foreign cultures andmarkets

Given the significant changes in the global business environment in recentyears, it appears that the need to develop a global mindset is clearlyjustified.

7.2.5 MINDSETANDCROSS-CULTURALGLOBALLEADERSHIP


global demands onleadership

From our previous discussions it is clear that the changing businessenvironment (section 7.1.3) and continuing globalisation demand a globalperspective with regard to international management and leadership, andas illustrated in section 7.2.3 above, a global mindset to succeed in thecompetitive international business arena.

leadership styles Based on our discussion in section 7.3.4 above, we can identify threegeneric leadership styles.They are

. charismatic

. transactional

. transformational

Of these three leadership styles, transformational leadership has beenproved to be generally most effective in international management.Amplifying on this view, Kets de Vries identifies the following five cross-cultural leadership models, which are dependent on cultural differences(the countries inwhich eachmodel is predominant appear in brackets):

. the consensusmodel (Scandinavia, the Netherlands and Japan)

. the charismatic model (Anglo-Saxon and Latin countries)

. the technocratic model (Germanic countries)

. the political processmodel (France)

. the democratic centralism model (Russia, some Middle Eastern andAfrican countries)


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Kets de Vries (2001: 239^240) accordingly identifies the followingcharacteristics and abilities which have been shown to be indispensablefor effective cross-cultural leadership:

cross-cultural global

leadership characteris-

tics

. charismatic qualities

. an openness to change

. an interest in the socioeconomic and political life of other countries

. an ability to relatewell to people from other cultures

. good nonverbal communication skills

. an interest in and anunderstandingof thewaycultural differences affecttheway people function

. awillingness to listen to and attempt to understand different views

. relative fluency in a second language (and an interest in languagesgenerally)

. a desire to travel, learn new things, and try various cuisines

. a sense of ease in culturally ambiguous situations

. the ability towork well in (and enjoy) multicultural teams

. proficiency in teambuilding skills

. awillingness to take risks when the potential for payoff is high

. a high tolerance for frustration and ambiguity

. an adaptability to new situations

. an internal orientation (having a perception of control over one's ownlife)

. a sense of humor

transnational compe-

tencies

Adler and Bartholomew (1992:52^65) list five transnational competenciesneeded by global leaders. All the perspectives on a global mindset andcross-cultural leadership that we have presented thus far are neatlyencapsulated in these following five competencies:

. Global leaders must understand worldwide business, political andcultural environments from a global perspective.

. Global leaders must learn about many cultures' perspectives, tastes,trends, technologies and approaches to conducting business.

. Global leaders must be skillful at working with people from manycultures simultaneously and should no longer deal with each country'speople on a separate, and therefore, sequential basis.

. Global leadersmustbe able to adapt to living in other cultures andneedcross-cultural skills on a daily basis throughout their career, and notonly during expatriate assignments.

. Global leaders must interact with international colleagues as equals,rather than from within clearly defined hierarchies of structural orcultural dominance and subordination.

Study the rest of this section to acquire a clear understanding of the globalcross-cultural competencies and skills that successful global managersshould have.


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7.2.6 SOCIALISINGTHENEWBREEDOFGLOBALMANAGERS INMULTINATIONALENTERPRISES


phasing in of globalmanagers

It has been established that human resource development andmanagement should be a balance between strategic considerations(investment in junior staff resources and individual careers) andmanagerial considerations (ensuring effective and smooth expatriationand repatriation), with a decided emphasis on education and training.Study section 5 in chapter 8 of the prescribed book on the training anddevelopment of global managers and leaders, as well as this section withspecific reference to the way in which newcomers should be treated, andwhy successful internationalmanagers shouldnotberelegated to the`slowtrack'' after repatriation to their home country.

ACTIVITY 7.2.1

Briefly compare traditional management and leadership with the globalmanagement and cross-cultural leadership required in our globalisedeconomy. Provide reasons why this transition has become necessary.Present your findings in a brief written report.

ACTIVITY 7.2.2

Consult relevant sources, including books, journals, company reports andthe Internet to identify a local or foreign company that has adopted theapproach of global mindsets in management and leadership. Explain howthis came about. Summarise your findings in a brief written report.

ASSESSMENT

You may want to check your understanding of the contents of this studyunit by ensuring that you can



. discuss how a globalmindset is developed and cultivated


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. evaluate the relationship between a global mindset, culture and cross-cultural leadership

. explain the requirements for effective global cross-cultural leadership

. explain the importance of a globalmindset for global leaders


SUMMARYIn this study unit we defined the concept of a global mindset, for bothindividuals and organisations, identified and illustrated the need for aglobal mindset in international business, and explored the relationshipbetween a global mindset, required leadership attributes and successfulcross-cultural leadership.We concluded our discussions by identifyingappropriate education and trainingmethods to cultivate a globalmindset,andhowglobalmanagers shouldbe socialised in amultinational enterprise.Underlying this entire study unit is the extreme importance of a globalmindset for success in international business.

TOPICSUMMARYIn topic 7 we looked at international businessmanagement, leadership andstrategy.

In studyunit 7.1we definedimportantconceptsrelated tomanagement andleadership. The two concepts of management and leadership werecompared in the context of the global business environment, and withreference to the cultural dimensions of this environment.

In studyunit 7.2we continued ourdiscussionby identifying the importanceof a global mindset, defining a global mindset, and indicating how a globalmindset can be developed and cultivated.We looked at cross-culturalglobal leadership, and how global leaders can be trained.


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Global competitivestrategies

Study unit8.1

Global businessenvironment and

competitiveadvantage

Study unit8.2

Internationalstrategies andmarket

entry strategies

topic 8 GLOBALCOMPETITIVESTRATEGIES

AIM

The aim of this topic is to examine, within

. the context of globalisation; and

. rapidly-changing, volatile global business environments,

the strategic options available to firms that want to expand theiroperations to foreignmarkets.

Our focus thus far in thismodule hasbeen onglobalisation and theprocessof internationalisation discussed in chapter 1, the dynamic global businessenvironments discussed in chapters 2 to 6, and global management andleadership discussed in chapter 8.

The focus in this topic now shifts from the environment and therequirements for effective global leadership and management to the firmitself. In particular, we now focus on the actions that leaders andmanagerscan take to compete more effectively in international business andincrease their profitability by adopting appropriate competitive strategiesand foreignmarket entry strategies for sustainable competitive advantage.

In study unit 8.1we commence with a brief reference to globalisation andhighlight relevant elements of the global business environmentmerely as aframe of reference for and background to identifying sources ofsustainable competitive advantage and the development of appropriateinternational strategies.

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Study unit 8.2 focuses on and explains the selection of appropriateinternational competitive strategies, taking into account the importanceof the strategic orientation of a firm, the relationship betweencompetitive advantage and strategy, and the influence of pressures forcost reductions and customisation on the choice of strategy. Assessingthe importance of alternative foreign market entry strategies, andcombining these with competitive business strategies in an integrated,international strategic management framework concludes our discussion.

LEARNINGOUTCOMES


. assess the importance of the global business environment as a frame ofreference for appropriate international competitive strategy selection

. explain the importance of industry analysis in international strategydevelopment

. define the concept of competitive advantage in the context ofinternational business

. explain the importance of the strategic orientation of an internationalfirm

. discuss and evaluate the two main pressures that impact oninternational strategy development and selection

. distinguish between the four possible international competitivestrategies on the basis of their characteristics and appropriateness inspecific circumstances

. define foreignmarket entrymodes and distinguish between the variousalternative entrymodes

. develop an integrated international strategic management framework

KEYCONCEPTS


globalisation international competitive strategyglobal business environment international strategyindustry environment multidomestic/localisation strategyglobal competitive advantage global strategynational competitive advantage transnational strategycompetitive advantage at firm level modes of foreignmarket entrystrategic orientation global strategic management

Topic 8: GLOBAL COMPETITIVE STRATEGIES

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study unit 8.1 GLOBALBUSINESSENVIRONMENTAND

COMPETITIVEADVANTAGE

CONTENTS


Key concepts

Overview

8.1.1 Introduction

8.1.2 Globalisation:The context of international business strategy

8.1.3 The global business environment

8.1.4 The industry environment

8.1.5 Global competitive advantage

Assessment

Summary


Once you have studied this study unit, you should be able to

. assess the importance of the global business environment as a frame ofreference for appropriate international competitive strategy selection

. explain the importance of industry analysis in international strategydevelopment

. define the concept of competitive advantage in the context ofinternational business

KEYCONCEPTS

globalisation national competitive advantageglobal business environment competitive advantage at firm levelindustry environment global competitive advantage


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OVERVIEW

In study unit 8.1 we refer to globalisation and the global businessenvironment as the context within which international competitivestrategies have to be developed. Competitive advantage is generallyassociated with a specific firm in terms of core competencies andcapabilities. However, in international business, competitive advantagemay also originate from foreign countries and markets. A brief overviewof competitive advantage concludes our discussion.

8.1.1 INTRODUCTION


international businessexpansion

As is evident from chapter 1, firms primarily expand their businessoperations internationally to increase profitability and growth. Thisgenerally happens reactively when firms respond to saturated domesticmarkets, or proactively as part of a firm's deliberate strategic initiatives toexpand itsmarket.

global andenvironmentalinfluences

To develop appropriate sustainable international strategies, all relevantstrategic factors and issues, trends and events should be considered bymanagement.This includes a profound knowledge of global environmentalas well as industry trends. This topic on global competitive strategiesaccordingly commences with reference to globalisation and someenvironmental factors as the context for international strategydevelopment.

In this study unit 8.1wewill look at

. globalisation: the context of international competitive strategy

. the global business environment

. the industry environment

. global competitive advantage

In study unit 8.2 we will focus on relevant international competitivestrategies and strategies to enter foreign markets.The study unit is thenconcluded by developing an integrated, global strategic managementframework for international business firms.

8.1.2 GLOBALISATION:THECONTEXTOFINTERNATIONALBUSINESS STRATEGY


Globalisation is defined in chapter1, and again referred to in chapter 2 as acontext for the discussion of international trade.

globalisation andinternational business

Although globalisation can be defined from different perspectives, for ourpurposes it is important to realise thatglobalisation in the economic sense

Study unit 8.1: Global business environment and competitive advantage

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is a shift away from distinct national markets and economies to aninterdependent and interlinked global economic system.

Study this section to reaffirm the important phenomena of theglobalisation of markets and of production, and the driving forces ofglobalisation. Apart from the phasing out of barriers to internationaltrade and investment, and rapid advances in technology referred toearlier, other important factors and forces in this regard are:

driving forces of

globalisation. regional economic integration. multinational enterprises (MNEs). global competition. escalating costs of research and development. government/industrial and competition-related policies

Also note why purely domestic firms are not entirely isolated from theeffects of globalisation.

internationalisation has

become imperativeIt has therefore become imperative that firms should consider globalexpansion strategies, and even more so for managers to acquire anddevelop a globalmindset, as discussed in chapter 8 of the prescribedbook.

8.1.3 THEGLOBALBUSINESSENVIRONMENT


levels of the global

business environment

industry change

For strategy development purposes, the global business environmentshould be analysed and understood at the global, regional, country,industry and market levels, aptly illustrated in figure 9.1. Study theevolving trends in the global technological environment in this section,being aware that most if not all industries are characterised by variousdegrees of change and complexity world wide.

8.1.4 THEINDUSTRYENVIRONMENT


All firms are involvedin andpartof one ormore industries, the latter beingthe case for diversified firms.

importance of industry To determine the profit potential of an industry or industry sub-sector,Porter developed his so-called Five-forces-model' for industry analysis.These interrelated forces are:

. threats of new entrants into the industry

. bargaining power of buyers

. bargaining power for suppliers

. threat of substitute products

. rivalry among competing firms in the industry


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Note that in the context of international business, a sixth force,government intervention, has been added. (See figure 9.2.)

Study the factors proposed by Lasserre which could influence the sixforces. Is Lasserre correct in including a sixth force? Expand on the issueof government-related factors fromyour own experience.

appropriateglobal industriesstandardised

Of importance for the choice of the competitive international strategy orstrategies, the firm must know in what type of industry it is involved, forexample, a global industry thatproduces global products, or products thathave to be customised for each foreign country market.This will becomeevident in our discussion of the international strategies in study unit 8.2.

8.1.5 GLOBALCOMPETITIVEADVANTAGE


defining competitiveadvantage

Competitive advantage can generally be defined as the extent to which afirmmanages to successfullymatch its internal strengths in competencies,capabilities and resources to the key factors in the external environment,including the industry environment. This definition typically applies to afirmwithin one country.

However, to identify andestablish competitive advantage for an internationalfirm the framework for an analysis of competitive advantage needs to beextended to include the impact of the firm's international environments.

The goals underlying a firm's long-term objective of wealth maximisationfalls into three categories:

. the firm's efficiency in its current activities across internationalmarkets

. the effectivemanagement of the risks related to all its activities

. the extent towhich the firm develops learning capabilities to be able toinnovate and adapt to change

determinants of globalcompetitive advantage

If these are thus achieved by

ö exploiting differences in input and output markets across thecountries inwhich the firm is involved,

ö striving to attain economies of scalewherever possible, andö exploiting synergies across diverse activities,

the firm should enjoy global competitive advantage'.

attaining globalcompetitive advantage

Now study the examples of sources of competitive advantage forinternational firms at the following levels:

. Level of national country environments

. Level of industry environments

. Organisational level, involving the firm's resources and capabilities

In the section that follows,we explore the conceptof national competitive


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advantage' of a country through its industries according to themethodology developed by Michael Porter.

8.1.5.1 National competitive advantage


or i g in o f n a t ion a lcompetitive advantage

Based on extensive research, Porter established that the internationalbusiness success of nations were closely linked to the success of theirindividual firms, and that this national competitive advantage comes frominternationally successful firms that

. continually innovate and improve their processes; and

. continually improve their products and services

More specifically, Porter found that national competitive advantage of acountry is determined by four interdependent and interacting industry-related attributes (See figure 2.2 in chapter 2):

determinants of nationalcompetitive advantage

. Factor conditions

. Demand conditions

. Related and supporting industries

. Firm strategies, structures and rivalry

Determinewhy these factors, if positive,will enhance the competitivenessand efficiencyof firms, and of the industryor industries inwhich such firmsare involved. Porter subsequently added two more attributes to theexisting four: the role of government and chance events.

Porter's framework for analysing national competitive advantage is widelyused.

8.1.5.2 Competitive advantage at firm level


At the level of the individual firm, the sources of competitive advantageinvolve:

. achieving efficiencies through strategies of cost leadership and/ordifferentiation

. effectivelymanaging economic, political and competitive risks

. continuously innovating, learning and adapting to a changing, globalisingbusiness environment

Of critical importance is that firms should exploit all potential sources ofcompetitive advantage at the global, national, industry and firm levelbetter than their competitors.

sustainable competitiveadvantage

At the firm level in particular, competitive advantages shouldpreferablybe

. difficult to imitate or replicate; and

. non-tradable


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to be sustainable in the long term.

In summary, competitive advantage at the firm level originatespredominantly from innovative value creation related to productdifferentiation and/or low cost leadership, and the firm's strategies shouldexploit these advantages.

ACTIVITY 8.1.1

Select a SouthAfrican companydoing internationalbusiness, or a companythat is a subsidiary of an overseas multinational enterprise (MNE), byexamining the business sections of newspapers, business journals,company annual reports and the Internet.

(a) Establish inwhich industryor industries (if a diversified company) yourselected firm is involved, and list its core product(s) or service(s).

(b) What are themajor opportunities and threats facing this company inthe foreseeable future? List at least five opportunities and five threats.(Also refer to Section 6 in chapter1, and chapters 3 to 6 as well as theInternet for additional guidelines in this regard.)

(c) According to your information sources, whatwould you regard as thecompany'smain competitive advantage(s)?

Write a brief report on the selected company, its main products and theindustry (industries) in which it operates, its major opportunities andthreats, and itsmain competitive advantage(s).

ASSESSMENT

You may want to check your knowledge and understanding of thecontents of this study unit by demonstrating that you can

. explain why scanning the global business environment is an importantstep in the development of appropriate international competitivestrategies

. explainwhy industry analysis is an important component of the analysisof the macro business environment when identifying information forstrategy development

. define the conceptof competitive advantage'andexplain its importancefor developing international competitive strategies


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SUMMARY

In this study unit we briefly explored the concept of globalisation in termsof its strategic importance in international business, highlighted theimportance of the macro business environment at the global, countryand industry levels as a frame of reference for developing internationalcompetitive strategies, and scrutinised the industry environment and itsimportance in this regard. Lastly we defined the concept of competitiveadvantage and its importance in strategy development.

A first key aspect of our discussions in this study unit is that globalisationand environmental forces, trends and events impact on a firm's operationsand activities. A second key aspect is that competitive advantage can bederived fromboth internal and external, including international sources.

study unit 8.2 INTERNATIONALSTRATEGIESANDMARKET

ENTRYSTRATEGIES

CONTENTS


Key concepts

Overview

8.2.1 Introduction

8.2.2 International competitive strategies

8.2.3 Strategies for entering foreignmarkets

8.2.4 Developing an international strategic management framework

Assessment

Summary

Topic summary


Once you have studied this study unit, you should be able to

. explain the importance of the strategic orientation of an internationalfirm


120

. discuss and evaluate the two main pressures that impact oninternational strategy development and selection

. distinguish between the four possible international competitivestrategies on the basis of their characteristics and appropriateness inspecific circumstances

. define foreignmarket entrymodes and distinguish between the variousalternative entrymodes


KEYCONCEPTS

competitive advantage global strategystrategic orientation transnational strategyinternational competitive modes of foreignmarket entrystrategy global strategic managementinternational strategy integrated international strategicmultidomestic/localisation management frameworkstrategy

OVERVIEW

Study unit 8.2 focuses on and explains the various internationalcompetitive strategies available to firms intent on international expansionand the selection of appropriate strategies, taking into account thestrategic orientation of a firm, the relationship between competitiveadvantage and strategy, and the influence of pressures for cost reductionand customisation on the choice of strategy. Alternative foreign marketentry modes are discussed next, and competitive strategies and marketentry modes combined into an integrated international strategicmanagement framework.

8.2.1 INTRODUCTION

Study unit 8.1provides an overview of the globalisation and environmentalcontexts for the development of international competitive strategies, andexplains the concept of competitive advantage.

In study unit 8.2 we explain the various international strategies thatinternationalising firms can pursue.These include:

. an international strategy

Study unit 8.2: International strategies and market entry strategies

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. a multidomestic or localisation strategy

. a global strategy

. a transnational strategy

We thenhighlight the importance of the strategic orientation of a firm andhow pressures for cost reductions and customisation influence the choiceof strategy.This is followed by an overview of alternative foreign marketentry modes. Developing an integrated international strategicmanagement framework concludes our discussion.

8.2.2 INTERNATIONALCOMPETITIVESTRATEGIES


To succeed in the dynamic and competitive global business environmentfirms need to have viable and sustainable strategies. In this section wefirst consider the strategic orientation of international firms, and thenlook at the pressures for cost reductions and customisation that impacton the choice of strategy before discussing the four internationalstrategies.

8.2.2.1 Strategic orientation of global firms


orientation of global

firms

Multinational enterprises (MNEs) typically adhere to one of the followingfour orientations, beliefs, ormindsets:

. an ethnocentric orientation

. a polycentric orientation

. a regiocentric orientation; and

. a geocentric orientation

Study the four orientations, and note in particular that

. an ethnocentric orientation implies a home- or parent-companyapproach to international business activities

. a polycentric orientation emphasises a stronghost country involvementin international business activities

. a geocentric approach reflects a strong regional influencewhere a firm'soperations occur in certain geographic regions

. in a geocentric orientation, a globally integrated systems approach toforeign business activities and strategic decisions is adopted

As will become clear in our discussions in section 8.2.3 below, strategicorientation is extremely important in the strategic structuring andstaffing of international operations.


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8.2.2.2 Competitive advantage and strategy


need for appropriatestrategies

Briefly, firms need to have appropriate competitive strategies to capitaliseon and benefit from the deployment of their distinctive competitiveadvantage(s) ö generally core competencies and resources.

extending competitiveadvantage international-ly

However, firms can increase their profitability by extending theircompetitive advantage(s) to foreign markets, which now requireappropriate international strategies' to capitalise on their inherentcompetitive advantage(s). But, the firm's ability to benefit from suchinitiatives can be constrained by certain industry characteristics orpressures ö in this case pressures for local responsiveness orcustomisation. In the next section we evaluate the implications of thepressures for cost reductions and for local responsiveness.

8.2.2.3 Pressures forcostreductions andlocal responsive-ness


two types of pressures International firms generally face two types of conflicting competitivepressures:

. pressures for cost reductions

. pressures for local responsiveness

sources of pressures forlocal responsiveness

Study this section to identify the sources of pressures for localresponsiveness. These pressures are directly related to the type ofproducts which are produced by firms in multidomestic industries, andprimarily result from cultural differences in various foreignmarkets.

multidomesticindustries and products

Where pressures for local responsiveness exist with regard to certainproducts, these products cannot be standardised and sold acrossmultiplemarkets. Such firms obviously cannot benefit from economies of scalederived from producing large volumes of standardised products.Examples of products that need to be adapted for each foreign marketinclude food products and most beverages, personal banking, clothingand textiles, and some cosmetics.

global industries andproducts

Pressures for cost reductions are characteristic of global industriesproducing global', standardised products that can be mass-produced,need not be adapted or customised for individual foreign markets, andare sold to price sensitive buyers.

Firms in these industries achieve economies of scale and compete entirelyon low cost, and not in terms of product differentiation.

Examples of global' products include audio and video equipment,communications equipment, pharmaceuticals, machine tools,semiconductors andmicrochips.


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strategic implications ofcost and localisationpressures

It should be obvious at this point that

ö firms in different industries (thus producing products with differentcharacteristics) cannot adopt the same international competitivestrategy

ö the type of pressure that a firm experiences in terms of its product(s)will largely influence the firm's choice of strategy.

8.2.2.4 Strategies for international business


critical internationalstrategy decisions

The main purpose of our discussion on the topic of global competitivestrategies' thus far has been to prepare the ground for the following twocritical strategic decisions facing a multinational enterprise (MNE):

. Identifying the appropriate international competitive strategies thatcanbe pursued; and

. Selecting the appropriate strategy or strategies given the specificcircumstances of the firm

four internationalcompetitive strategies

In response to the firstdecision,MNEs canuse anyone or a combination ofthe following four strategies:

. An international strategy

. Amultidomestic or localisation strategy

. A global strategy

. A transnational strategy

These strategies are explained in detail in terms of their characteristics,advantages and disadvantages in section 6.4 in chapter 9 of the prescribedbook, and it goes without saying that international managers need to befully informedon these strategies tobe able to select themost appropriatestrategy or strategies.

selecting internationalcompetitive strategies

In response to the second critical decision, the appropriateness of eachstrategy will vary with the extent to which pressures for cost reductionsor local responsiveness are inherently characteristic of the firm's industryor industries, and therefore, the firm's products. Study this section in theprescribedbook thoroughly to establishwhy the foregoing considerationsprovide a basis for the selection of appropriate strategies. Theseimportant relationships are aptly illustrated in figure 9.3.

strategyimplementationrequirements

Once the firm has selected the appropriate strategy (or strategies) thatsuits its own unique circumstances, some requirements, which may notbe the same for each of the four strategies, need to be considered in theimplementation of these strategies. Some important considerations in thisregard include the following:

. A worldwide product division organisational structure with apredominantly ethnocentric staffing policy could be most appropriatefor an international strategy


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. Aworldwide area organisational structure and a polycentric staffingpolicy could be most appropriate for firms pursuing a multidomesticor localisation strategy.

. A worldwide product division organisational structure and bothgeocentric and, to a lesser extent, ethnocentric staffing approachescould be appropriate for a global strategy.

. A matrix organisational structure and geocentric staffing policy couldbemost appropriate for a transnational strategy.

In our discussion of strategies for international business' in section 6.4 wehighlighted the importance of a profound knowledge regarding the fourstrategies, and the basis on which appropriate strategies are selected. Inthe next sectionwe look at strategies for entering foreignmarkets.

8.2.3 STRATEGIESFORENTERINGFOREIGNMARKETS


foreignmarket entry Having decided on the appropriate international competitive strategy orstrategies the following three questions nowbecome relevant:

. whichmarket(s) to enter?

. when to enter the selectedmarket(s)?

. onwhat scale to enter the selectedmarkets?

. how to enter the selectedmarkets?

The first three questions require in-depth country, industry, market andresource analyses. The fourth question, however, concerns the best wayfor the firm to enter its foreignmarket(s).

8.2.3.1 Foreignmarket entrymodes


The foreignmarket entrymodes available to international firms include

foreignmarket entrymodes

. Exporting

. Turnkey projects

. Licensing

. Franchising

. Strategic alliances

. Joint ventures

. Wholly-owned subsidiaries

Each of these seven foreign market entry modes has its own uniqueadvantages, disadvantages and risks, all of which need to be consideredwhen deciding on an optimal entrymode.

Most manufacturing firms, and especially SMEs that consider inter-


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nationalisation start off by exporting, and only later switch to one of theothermodes.

The seven market entry modes are discussed in detail in section 7.1 inchapter 9 of the prescribed book, and should be studied thoroughly withreference to the illustration in figure 9.4. As will become clear, both thecompetitive strategies discussed in section 8.2.3 above and market entrystrategies become part of the international strategic managementframework which is discussed in section 8.2.4 below.

selection of entrymodes The important strategic decision for international management now isselecting an optimal entry mode for their intended internationalexpansion. Study the guidelines which are provided as a possible basis fordeciding on an optimal foreignmarket entrymode for a firm.

8.2.4 DEVELOPINGANINTERNATIONALSTRATEGICMANAGEMENTFRAMEWORK

(Study sections 8 and 8.1in chapter 9 of the prescribed book.)

In this section we describe the process of and provide the necessaryguidelines to develop a framework for international strategicmanagement.

Generally, the strategic management process comprises three phases:

. strategy formulation

. strategy implementation

. strategy evaluation and control

While these phases apply to both domestic and international firms,international involvement adds significantly to the complexity of theprocess and, therefore, the demands on leadership andmanagement.

In section 8.1 in chapter 9 in the prescribed book, the internationalstrategic management process is illustrated and explained with referenceto figure 9.5.For ease of following the various phases outlined in figure 9.5,they are numbered to reflect the sequential process and decision-makingsteps. Study the various steps in this process thoroughly with reference tofigure 9.5, specifically noting that

internationalimplications for strategicmanagement

ö the decision to become international would be reflected in thestrategic intent, vision, mission and long-term objectives of the firm,where relevant

ö the internal and external environmental analyses can be donesimultaneously, the outcomes of which will provide the input for theSWOT analysis

ö the decisions on mode of foreign market entry, appropriateinternational strategies and, where relevant, location of foreignoperations are of no concern to a domestic business firm

ö aligning the organisational structure, systems and procedures toaccommodate international activities are extremely important and


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the strategy implementation process accordinglymuchmore complexthan for a purely domestic firm.

In closing, note that there are distinct differences in both context andcontent, as well as in themajor decision-making steps in the internationalstrategic management process, compared to the process for a purelydomestic firm.

ACTIVITY 8.2.1

Your South Africa-based company is a leading manufacturer ofsophisticated medical equipment and plans to market a technologicallyadvanced, high value laser-optic device that has already gainedinternational acceptance for use in open-heart surgery in the EuropeanUnion (EU). It has been established that there is a demand for this devicethroughout the EU.TheCEO of your company has requested you towritea report andmake recommendations on the following:

. The choice of a suitable EU member country, based on political,economic, legal, cultural and technological considerations (also consultchapters 3 to 6 of the prescribedbook, and other sources including theInternet)

. The appropriate international strategy to be deployed in this case

. The appropriatemode of foreignmarket entry that the firm shoulduse.

(Substantiate andmotivate your recommendations.)

ACTIVITY 8.2.2

Identify a South African company involved in international business thatyou are familiar with or onwhich you can obtain information from annualreports, the business media, and the Internet. Given the industry (orindustries) in which the company is involved, and its main product line,write a brief report on your findings that specifically addresses thefollowing:

. The industry characteristics (being basically global ormultidomestic)

. Theperceived international strategyor strategies that the firm appearsto pursue

. Themode(s) of foreignmarket entry that the firm had adopted


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ASSESSMENT


. explain the importance of strategic orientation of an international firmwith specific reference to the development and choice of internationalcompetitive strategies

. discuss and evaluate the two pressures that impact on and largelydetermine the choice of international competitive strategy for a firm

. compare the four international competitive strategies available tointernational firms on the basis of their characteristics and theirappropriateness in specific circumstances

. define foreignmarket entrymodes and compare the various alternativeentrymodes in terms of their advantages, disadvantages and risks


SUMMARYIn this study unit we focused on the four international competitivestrategies available to international firms, and explained why the strategicorientation of the firm and the impact of either pressures for costreductions or for local responsiveness largely determine the identificationof an appropriate international strategy or strategies for individual firms.

Foreign market entry modes were highlighted next, with guidelines forselecting the optimal market entry mode.We concluded our discussionsby combining all relevant aspects that we discussed in topic 8 into aninternational strategic management framework, and explained thisinternational strategic management process in the context of the globalbusiness environment.

TOPICSUMMARYIn studyunit 8.1webriefly highlighted thephenomenon of globalisation froman international strategy perspective, emphasised the importance of theglobal business environment and the concept of competitive advantage.

Study unit 8.2 explored the international competitive strategies that firmscan pursue, and explained the importance of the strategic orientation andthe pressures for cost reductions and local responsiveness that internationalfirms typically face in foreignmarkets.The choice of competitive strategy aswell as foreignmarket entrymodeswere then addressed, and the discussionin this topic concludedbycombining all relevant factors into a framework forinternational strategicmanagement.


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TOPIC 9

Global collaboration andstrategic alliances

TOPIC10

Economic and socialdevelopment initiativesfor South Africa andAfrica

PART 4ECONOMICDEVELOPMENTANDGROWTHIMPERATIVES

INTRODUCTIONTOPART 4Part 4 of this course deals with international cooperation in SouthernAfrica.We also discuss future perspectives for South Africa and Africa.

Under topic 9 we analyse global cooperation and strategic alliances withspecific reference to business enterprises in South Africa.

Topic10 focuses on the socio-economic profile and economic developmentpotential of Africa. Current development initiatives are reviewed, andsocio-economic development initiatives recommended for futureeconomic growth.

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Global collaboration andstrategic alliances

Study unit9.1

Global collaboration

Study unit9.2

Strategic alliances

topic 9 GLOBALCOLLABORATIONANDSTRATEGICALLIANCES

AIM

The aim of this topic is to provide you with an overview of globalcollaboration and strategic alliances with specific reference to the SouthAfrican business context.

LEARNINGOUTCOMES


. explainwhat global collaboration is

. define the concept of strategic alliances

. evaluate the importance of strategic alliances for South Africancompanies

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KEYCONCEPTS


global cooperation foreignmarketsmodes of entry strategic alliances

study unit 9.1 GLOBALCOLLABORATION


Key concepts

Overview

9.1.1 Reasons for global collaboration

9.1.2 Modes of entry into foreignmarkets

9.1.3 Advantages and disadvantages of modes of entry

Assessment

Summary


After you have studied this study unit, youwill be able to

. describe the concept of global collaboration

. identify the various modes of entry a firm can use to enter foreignmarkets

. define and discuss the reasons for global collaboration

. analyse and interpret the advantages and disadvantages of the variousmodes of entry into foreignmarkets

Study unit 9.1: Global collaboration

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KEYCONCEPTS

global collaboration foreignmarketsentrymodes exportingturnkey contracts licensingfranchising joint ventureswholly owned subsidiaries strategic alliances

OVERVIEWIn study unit 9.1we discuss the reasons for global cooperation.We thendelineate the various modes of entry a firm can use to enter a foreignmarket and we analyse the advantages and disadvantages of thesedifferentmodes of entry.

9.1.1 REASONSFORGLOBALCOLLABORATION

(Study section1in chapter13 of the prescribed book.)

global frame ofreference

This section of the prescribed book creates a frame of reference in whichthe success of individual companies is tied to the ability tomeet supply anddemand requirements in a globalised market place. Study the six reasonsthat are cited to explain why companies are forming strategic alliances toachieve competitive success.

factors of countryselection and timing

You should also keep inmind that firms thatcontemplate entering a foreignmarket first have to decide which particular foreign market to enter aswell as the extent and timing of such entry.

9.1.2 MODESOFENTRYINTOFOREIGNMARKETS

(Study section 2 in chapter13 of the prescribed book.)

Section 2 refers to sevenmodes of entry into foreignmarkets.These entrymodes are discussed in chapter 9 (section 7) and in chapter11 (section 7) ofthe prescribed book.These are summarised below.

exporting. Many domestic firms make their first entry into a foreign market by

exporting goods to that particular foreign country.

licensing. When a firm disposes over intangible property such as patents,

copyright or trademarks, it may enter into a licensing agreement witha foreign firm that allows the foreign firm the rights to the intangibleproperty for a specified period of time against the payment of a fee orroyalty.

Topic 9: GLOBAL COLLABORATION AND STRATEGIC ALLIANCES

132

franchising . Franchising is similar to licensing except that the intangible property isusually a trademark and the foreign firm also has to agree to abide byspecific rules including quality control requirements.

turnkey project . In turnkey projects, the development, structuring and setting up of aplant as well as the training of personnel are usually provided in aforeign country so that the client companymay literally receive the keyto a fully operational plant.

joint venture . In a jointventure, the domestic company setsup a firmin a foreigncountryin partnershipwith a firm that is already established in that country.

international jointventures andconsortiums

. In this contextwemay also refer to an international joint venturewhichis usually a separate legal entity set up and owned by parent companiesfrom different countries. Similarly, we should note that not all jointventures have only two partners and that when a large number ofcompanies become involved in a joint venture we usually refer to theparticipative entity as a `consortium''. Such consortiums are commonin the EU where large organisations from different member countriesbecome involved in defence or manufacturing projects such as theaircraft industry.

wholly-owned subsidiary . In a wholly-owned subsidiary, the domestic firm sets up a subsidiarycompany of which it is the100 per cent owner in a foreign country, butalso bears all the risk of such a venture.Wal-Mart's modes of foreignmarket entry appear in table13.2 in the prescribed book.

9.1.3 ADVANTAGESANDDISADVANTAGESOFMODESOFENTRY

(Study table13.1in chapter13 of the prescribed book.)

advantages anddisadvantages

In table13.1 the advantages and disadvantages of each of the six modes ofentry into a foreign market, are set out. Study these carefully so that youare able to discuss these strategies and their implications for internationalbusiness in detail.

ACTIVITY 9.1.1

Your company has pioneered and nowmanufactures a new herbal remedythat has been found to be very beneficial for the treatment of colds andinfluenza. Research has indicated that the EU presents a significantmarket for this product.Write a report to the CEO of your company toindicatewhich mode of entry you have selected to introduce the productfirst in the UK and then in three other EU countries. Explain the reasonsfor your choice of the other three countries and the mode of marketentry you recommend.

Study unit 9.1: Global collaboration

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ASSESSMENT


. define the concept of global cooperation

. describe the reasons for global cooperation

. tabulate the variousmodes of entry into a foreignmarket

. describe and evaluate the advantages and disadvantages of the variousmodes of entry into foreignmarkets

SUMMARY

In this study unit we defined and discussed the concept of global co-operation and we explained the reasons for such global cooperation.Wealso detailed the various modes of entry a business could use to enter aforeign market and analysed and evaluated the advantages anddisadvantages of eachmode of entry.

study unit 9.2 STRATEGICALLIANCES

CONTENTS


Key concepts

Overview

9.2.1 Definition of strategic alliances

9.2.2 Importance of strategic alliances in South Africa

9.2.3 Strategic alliances profile of SA companies

9.2.4 Reasons for entering into strategic alliances

9.2.5 Success of strategic alliances

9.2.6 Factors to be consideredwhen forming strategic alliances

Assessment

Summary

Topic summary


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. define the concept of a strategic alliance

. demonstrate the importance of a strategic alliance

. identify the strategic alliances profile of SA companies

. list and evaluate the reasons companies have for entering into strategicalliances

. discuss the success of strategic alliances

. identify and evaluate the factors to be considered when formingstrategic alliances

KEYCONCEPTS

strategic alliances strategic alliances profilestrategic alliancemotivations success of strategic alliancesconsideration factors

OVERVIEW

This study unit defines the business relationship, which is known as a`strategic alliance''.We discuss the importance of strategic alliances inSouth Africa and provide a profile of SA firms involved in strategicalliances.We then review the reasons for entering into a strategic allianceand explain the success of strategic alliances. Finally, we evaluate thefactors to be consideredwhen entering into a strategic alliance.

9.2.1 DEFINITIONOFSTRATEGICALLIANCES


Note the references to

key words indicatingcollaboration

. inter-organisational relations

. long-term collaborative effort

. common orientation

. individual andmutual goals

in the definition of a strategic alliance.

Study unit 9.2: Strategic alliances

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objectives of strategicalliances

Also note the three objectives that are identified in section 3 in chapter13,of the prescribed book to explain why firms typically engage in strategicalliances.

pitfalls to consider However, there are also pitfalls to consider when strategic alliances areformed.

holding back

Amongst these is the possibility of one partner in the strategic alliancediminishing the chances of the project's successful outcome because itholds back on the provision of its share of funding, technology transfer ormanagement participation.

unequal sizeSecond, there is the possibility that two participating companies may begreatly unequal in size and that the larger organisation dominates thepartnership.

differences in corporateculture

Third, significant differences in the corporate cultures of participatingcompaniesmaygive rise to problems.For instance, larger companies tend tobe more bureaucratic and slower in decision making, while smallercompanies are oftenmore entrepreneurial and informal in their operations.

9.2.2 IMPORTANCEOFSTRATEGICALLIANCESINSOUTHAFRICA


ratio of overseas vsSA alliances

It is important to note that the analysis of the strategic alliances of SouthAfrican companies reflects that of the companies involved in strategicalliances 50 per cent are with South African companies while only 40 percent of these alliances are with overseas companies, as illustrated in table13.3 of the prescribed book.

What conclusions do you draw from these percentages?

9.2.3 STRATEGICALLIANCESPROFILEOFSACOMPANIES

(Study sections 5 and 6 in chapter13 of the prescribed book.)

Review tables13.4 and13.5 in this section of the prescribed book and notethe heavy bias towards marketing and distribution agreements in thestrategic alliances created by South African companies. Also note the lowbias towards R&Dpartnerships.Note that the choice of strategic alliancesis influenced by a great variety of factors.

What conclusions can you draw? In your opinion, will this trend continueinto the forseeable future?Why or why not?

9.2.4 REASONSFORENTERINGINTOSTRATEGICALLIANCES


reasons for alliances Make sure that you are familiar with the four dominant reasons for


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engaging in strategic alliances and study figure13.1 to establish the relativeimportance of strategic reasons for SA companies entering into strategicalliances.

9.2.5 SUCCESSOFSTRATEGICALLIANCES(Study section 8 in chapter13 of the prescribed book.)

the 5 Cs Consider the 5 Cs of complementary skills, commitment, co-operativecultures, compatible goals, and commensurate levels of skills.Commitment was only added to the original 4 Cs at a later stage.Withthis in mind, look at figure 13.3 and table 13.6 to see whether you candiscern any useful patterns.

9.2.6 FACTORSTOBECONSIDEREDWHENFORMINGSTRATEGICALLIANCES


Toshiba success factors Critically assess the factors attributed toToshiba's success in the formingand maintaining of strategic relationships. Compare these to the analysisof factors in figure13.4 where South African managers give their views onthe factors they regard as crucial when forming alliances with local oroverseas partners.

ACTIVITY 9.2.1

Study the newspapers, financial journals, and access the Internet to locatea company involved in a strategic alliance.Determine

ö the type of allianceö the reason(s) for the alliance.

Write a brief report on your findings.

ASSESSMENT


. define the term`strategic alliance''

. explainwhy youregard strategic alliances as important for SouthAfrica

. create a strategic alliances profile of South African companies

. list the reasons for entering into strategic alliances

Study unit 9.2: Strategic alliances

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. describe the success of strategic alliances

. tabulate and evaluate the factors to be considered when forming astrategic alliance

SUMMARYIn this study unit we introduced and defined the business relationship,which is known as a `strategic alliance''.We also discussed the value andimportance of strategic alliances in South Africa and we provided aprofile of the South African firms that are involved in strategic alliances.We then reviewed the reasons for entering into a strategic alliance andexplained the success of strategic alliances. Finally, we tabulated andevaluated the factors to be considered when entering into a strategicalliance.

TOPICSUMMARYIn study unit 9.1we discussed the reasons for global cooperation.We alsodelineated thevariousmodes of entry a firm can employ to enter a foreignmarket and we analysed the advantages and disadvantages of thesedifferentmodes of entry.

In study unit 9.2 we continued the discussion of global collaboration byintroducing the concept of strategic alliances. We discussed theimportance of strategic alliances in South Africa and provided a profile ofSA firms involved in strategic alliances.We then reviewed the reasons forentering into a strategic alliance and explained the success of this form ofdomestic or international business relationship. Finally, we tabulated andevaluated the factors to be considered when entering into a strategicalliance.


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Economic and social de-velopment initiatives forSouth Africa and Africa

Study unit10.1

Profile and growthpotential of Africa

Study unit10.2

Socio-economic de-velopment initiatives

topic10 ECONOMICANDSOCIALDEVELOPMENTINITIATIVESFORSOUTHAFRICAANDAFRICA

AIMThe aim of this topic is to provide an overview of the socio-economicprofile and economic development potential of Africa in study unit 10.1. Instudy unit 10.2 initiatives to enhance the socio-economic development ofAfrica, South Africa and Southern Africa are explored.

LEARNINGOUTCOMES

After studying this topic you should able to

. discuss and explain the potential of the African continent

. evaluate the status of Africa on the basis of socio-economic data

. identify, evaluate andexplain the causes of the economicmarginalisationof Africa

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. discuss and explain recent and current initiatives for Africa's socio-economic development

. explain the development initiatives for South Africa

. explain the role of regional economic development in Southern Africa

KEYCONCEPTS

economic development causes of economicmarginalisationsocio-economic development poverty related attritiondevelopment initiatives rural-urban resettlementregional economic integration redistribution of landeconomic revival initiatives NEPAD strategyCOTONOUagreement economic partnership agreements (EPAs)regional trade blocs COMESATDCA

study unit10.1 PROFILEANDGROWTHPOTENTIALOFAFRICA

CONTENTS


Key concepts

Overview

10.1.1 Definitions and terminology

10.1.2 The potential of the African continent

10.1.3 Statistics of the African continent

10.1.4 Causes of economic marginalisation of the African continent

10.1.5 Critical review of the outcome of donor aid to Africa

10.1.6 Previous initiatives to introduce economic revival in Africaneconomies

Assessment

Summary

Topic 10: ECONOMIC AND SOCIAL DEVELOPMENT INITIATIVES FOR SOUTH AFRICA AND AFRICA

140

STUDYUNIT10.1LEARNINGOUTCOMES




. identify, evaluate andexplain the causes of the economicmarginalisationof Africa

KEYCONCEPTS

economic development poverty-related attritionsocio-economic development rural-urban resettlementcauses of economic redistribution of landmarginalisation social development

OVERVIEWStudy unit 10.1 provides an overview of the unrealised potential of theAfrican continent based on salient statistics, and discusses the causes ofthemarginalisation of Africa.

10.1.1 DEFINITIONSANDTERMINOLOGY

(Study section1in chapter14 of the prescribed book.)

terms and definitions This introductory section defines and explains a number of key conceptsrelevant to this study unit.

10.1.2 THEPOTENTIALOF THEAFRICANCONTINENT

(Study section 2 in chapter14 of the study guide.)

Africa's potential Of note in this section is

. Africa's abundance of natural and ecological resources

. Africa's inability to exploit its resources to their full potential

. Africa's need for developmental initiatives underpinned by developedcountry support

This frame of reference sets the scene for further discussions.

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Study unit 10.1: Profile and growth potential of Africa 10

10.1.3 STATISTICSOF THEAFRICANCONTINENT


statistics of Africa In general, Africa has a growingpopulation of some 635million people, thehighest birth rate of any continent, but a below average life expectancy.More specifically study the following issues, factors and phenomena:

. Life expectancy

. Unemployment

. Backlog in social services

Of what value is this kind of socio-economic information to internationalbusinesses, with specific reference to trading with or investing in Africancountries?

10.1.4 CAUSESOFECONOMICMARGINALISATIONOF THEAFRICANCONTINENT


economicmarginalisation

Study the following most important causes of the marginalisation of theAfrican continent:

. The impact of slavery and colonialism

. The attrition caused by poverty

. The effects of rural-urban resettlement

. The influence of reduction in agricultural production

. The unsatisfied quest for the redistribution of land

What are thepotential prospects of alleviatingmost of these causes in theforeseeable future?What would the requirements in such cases be?

10.1.5 CRITICAL REVIEWOF THEOUTCOMEOFDONORAIDTOAFRICA

(Read section 5 in chapter 14 of the prescribed book for backgroundinformation.)

10.1.6 PREVIOUS INITIATIVESTOINTRODUCEECONOMICREVIVALTOAFRICANECONOMIES

(Read section 6 in chapter 14 of the prescribed book for backgroundinformation.)


142

ACTIVITY10.1.1

Study newspapers, periodicals, academic articles and access the Internet toreview and update the statistics related to Africa in terms of (1) lifeexpectancy, (2) unemployment, and (3) backlog in social services.Write abrief report onyour findings, and indicatewhy this information is importantfor international businesseswishing to tradewith or invest in Africa.

ASSESSMENT




. identify, evaluate and explain the causes of economic marginalisation ofAfrica

SUMMARYStudy unit 10.1 we looked at the unrealised potential of the Africancontinent in terms of specific measures and based on salient statistics.The study unit was concluded with a discussion of the causes ofmarginalisation of Africa.

study unit10.2 SOCIO-ECONOMICDEVELOPMENT

INITIATIVES


Key concepts

Overview

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Study unit 10.2: Socio-economic development initiatives 10

10.2.1 Recent and current initiatives for Africa's socio-economicdevelopment

10.2.2 Review of development initiatives for South Africa

10.2.3 Developing regional economic integration in Southern Africa

10.2.4 Future economic growth and development

Assessment

Summary

Topic summary



. discuss and explain recent and current initiatives for Africa's socio-economic development

. explain the development initiatives for South Africa

. explain the role of regional economic development in southern Africa

KEYCONCEPTS

development initiatives regional trade blocseconomic revival initiatives TDCACOTONOUagreement COMESAeconomic partnership NEPAD strategyagreements (EPAs)

OVERVIEWStudy unit 10.2 looks at recent and current development initiatives toenhance social and economic development as well as the internationalcompetitiveness of Africa, Southern Africa and South Africa.

10.2.1 RECENTANDCURRENTINITIATIVES FORAFRICA'S SOCIO-ECONOMIC DEVELOP-MENT

socio-economic(Study section 7 in chapter14 of the prescribed book.)

development initiativesfor Africa

More recent and current initiatives for Africa's socio-economicdevelopment include:


144

. The Cotonou Agreement

. Regional economic integration

. The NEPAD strategy

These initiatives are extremely important if the causes of marginalisationof the African continent referred to in section 10.1.4 above are to beeffectively addressed. Since the discussions of these initiatives are lengthy,you are advised to compile your own summaries subsequent to studyingthese initiatives.

10.2.2 REVIEWOFDEVELOPMENTINITIATIVESFORSOUTHAFRICA


development initiativesfor South Africa

In this section, the focus shifts fromAfrica to SouthAfrica in discussing thefollowing development initiatives:

. Impact of regional trade blocs on the South African economy

. EU-SA relations

These initiatives are undoubtedly important, and you need to understandthekey issues in this regard.You are once again advised to summarise theseinitiatives for your own purposes.

10.2.3 DEVELOPINGREGIONALECONOMICINTEGRATIONINSOUTHERNAFRICA


The focus now shifts from South Africa to the Southern African region.Note that Economic Partnership Agreements (EPAs) being considered bythe EU are seen as vehicles to integrate the ACP countries into theworldeconomy. Evaluate the merits of the EU's initiative regarding theestablishment of EPAswhen studying the following issues in this section:

. The preferred form of regional integration

. The Southern Africa regional integration conundrum: SADC andCOMESA

. The impact of EPAs on Southern Africa

. Implications of theTDCA for the Southern African region

10.2.4 FUTUREAFRICANECONOMICGROWTHANDDEVELOPMENT

(Study sections10 and11in chapter14 of the prescribed book.)

Africa's future economicgrowth

The strengths andweaknesses of the overall African economy need to beassessed and extrapolated in the form of future scenarios as a guide to thefuture of Africa. Study the rest of the section against this background to

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Study unit 10.2: Socio-economic development initiatives 10

develop your own framework for Africa's future direction, based on thedata provided in section10 and in section11, Summary and conclusions, inchapter 14 of the prescribed book. Summarise your findings andrecommendations in a brief written report.

ACTIVITY10.2.1

Write a brief report on the current initiatives of SADC in terms of itsgoals, strategies, and development priorities by accessing newspaperarticles, financial and other publications as well as the Internet.Two usefulwebsites are:

. SADC (www.sadc.int)

. Sadec Review (www.sadecreview.com)

In your report summarise your findings, also indicating the importance ofyour findings for international business.

SUMMARYIn study unit 10.2 we provided an overview of recent and currentdevelopment initiatives for the social and economic development as wellas the international standing of Africa, Southern Africa and South Africa.

TOPICSUMMARYStudy units 10.1 and 10.2 provided an overview and discussed the socio-economic profile and economic development potential of the Africancontinent, and recommended initiatives to enhance the socio-economicdevelopment of Africa, Southern Africa, and South Africa in the contextof the global economy.


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