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MODULE-2: INTERNATIONAL MARKETING ENVIRONMENT

Environmental Foundations

Organizations generally formulate strategies to achieve their missions/objectives. Formulation of strategy is sometimes defined as establishing a proper “firm-environment” fit. Indeed, the mission/objectives themselves should be based on an assessment of the external environment and the organizational factors. External environment includes the study of business opportunities and treats. The internal environment includes the study of strengths and weaknesses. Therefore, strategy formulation is putting the organizational factors (internal environment.) against opportunities and threats in the external environment. Just as the life and success of an individual depend on his innate capability, including physiological factors, traits, and skills, to cope with the environment and the extent to which the environment is conducive to the development of the individual, the survival and success of a business firm depends on its innate strength – the resources at its command, including physical resources, financial resources, skill and organization- and its adaptability to the environment and the extent to which the environment is favorable to the development of the organizations. The facts that SWOT analysis is the first step in strategic management process, clearly indicates the importance of environmental analysis. I. LEVEL OF ENVIRONMENT Internal environment: Includes value system, missions and objectives, management structure, Internal power relationship, HRM, company image, physical assets, R&D capabilities, and so on. Micro environment (Task environment): Consists of factors in the company’s immediate environment that affects the performance of the company. They include suppliers, marketing intermediaries, competitors, customers and the public. Macro environment: Consists of larger societal factors that affect all actors in the company’s microenvironment. Macro environment includes demographic, economic, natural, technical, political, and cultural factors. II. INTERNATIONAL MARKETING ENVIRONMENT A firm in international business encounters three different sets of external environment:

1. Domestic Environment: A company that wants to do foreign trade must have relevant domestic environment. Many countries regulate foreign business of a domestic company.

2. Foreign Environment: It refers to the environment of the relevant

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foreign market.

3. Global Environment: It refers to those global factors that are relevant to business, such as WTO, international treaties, protocols, agreements, etc.

International companies, which wants to globalize must adapt to international standards and practices in several respects, like, accounting and reporting, governance and so on. III. Implications of differences in business environment Business environment decides the success or failure of international business strategy in a given market. In other words, the differences in business environment may call for different strategies to suit the environment of the markets. There are many exam0les of even mighty MNCs tasting bitter failure because of their inability to adapt to the idiosyncrasies of the foreign markets.

a. P & G stormed into Japanese market with American products, American managers, and American sales method and promotion strategies. The result was disastrous until the company learnt how to adapt products and marketing style to Japanese culture. P&G lost money until 1987 (from 1973) but by 1991 Japan became its second largest foreign market.

b. Texas instruments started making semiconductors in Japan in 1961 took American approach to hiring, pay, and benefits, dismissing the Japanese system of offering bonuses two times a year. The workers disagreed, morale crumbled and the company had a trouble recruiting employees. Later, Texas instruments changed its policies to suit Japanese environment, and went on to win Deming Prize for quality in 1985 in Japan.

In short, the business environment is a very important determinant of business strategy.

Technological Environment

The technological environment is changing at the light of speed. Semiconductor firms are now working to develop new memory chips for personal computers, other high-tech firms are trying to create technologies that will replace the PC with even better computing architecture. At the same time, computers, telephones, televisions and wireless forms of communications are being merged to create multimedia products and to allow users anywhere in the world to communicate with each other. Today, mobile phones allow rapid exchange of communication between persons wherever they are. Internet allows one to obtain information from literally millions of sources. In addition to these, some specific ways in which technology will affect International management in the next decade include:

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•Rapid advances in Biotechnology that is built on a precise manipulation of organisms, which will revolutionize the field of Agriculture, medicine and industry.

• Nanotechnology, in which nanomachines will possess the ability to remake the whole physical universe

• Satellite Communication: Communication firms will place tiny satellites into low orbit, thus making it possible for millions of people, even in remote places to send and receive voice, data, and digitized images through hand held devices.

• Automatic Translation telephones, which will allow people to communicate naturally in their own language with anyone in the world who has access to a telephone.

• Artificial Intelligence allows machines to enter the domain of thinking, which was earlier thought, was an exclusive trait of the humans.

• Computer chips containing millions of transistors, allowing computer power that now rests only in the hands of super computer users to be available on every desktop.

• Super computers those are capable of one trillion calculations per second, which will allow advances such as simulation of human body for testing new drugs, and computers that respond easily to spoken commands.

The employment fallout from technology: In international management, Technology also impacts the number of employees who are needed to carryout the operations. As MNCs use advanced technology to help them communicate, produce, and deliver their goods and services internationally they face a new challenge: how technology will affect the nature and number of people? In the last century, machines replaced millions of laborers. Steel and Auto industries are tremendously downsized by technology and the result has been the permanent restructuring of the factories. Many experts predict that in the future technology has the potential to largely displace employees in all industries, from those doing low-skilled jobs to those holding positions traditionally reserved for the human thinking.

For Example-

-Voice recognition is helping to replace telephone operators -ATMs have proved to be more effective than manned counters -Expert/smart systems (Credit analysis, E-rater, Robots) are removing need for human thinking

The new technological environment has both positives and negatives for MNCs and societies as a whole. On the positive side, the cost of doing business worldwide should decline, productivity should go up, and the prices should go down. On the negative side, many employees will find their job eliminated or their wages and salaries reduced. The precise impact that the advanced technological environment will have on international management over the next decade is difficult to forecast. One thing is certain, however: there is no turning back the technological clock.

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The impact of technology on Production: Advances in technology may cause relocation of production. For example, several companies in the advanced countries have shifted the TV production to developing countries to take advantage of the cheap labor. However, when further technological developments reduced the labor content of the TV some firms relocated their production back to the developed countries. The impact of technology on Global Competitiveness: As MNCs continue to expand their operations and begin to do business in every part of the globe, the competitive pressure will mount. In the type of competitive environment that we have talked about, all MNCs must become increasingly competitive. They must be able to compete with anybody, anywhere, anytime. Being third or fourth in an industry or the world market in this competitive environment is not sufficient in the long run. Organizations must strive to be WCOs (World-class organizations). Total quality remains a major issue for MNC today. One major reason is that in international market place, customers do not care who provides the goods and services they want; they simply want their expectations to be met or exceeded. To meet or exceed customer expectations at the minimum, the MNC must give attention to quality as well as cost. If companies can purchase something from an outside supplier at a lower price or with better quality than they can make it themselves, they will outsource it. As a result, MNCs, especially in the manufacturing, are now focusing on their core business while relying on outsiders to provide the rest of what they need. In case of auto manufacturers like Toyota, for example, it is common to find them purchasing most of the interior of the car from suppliers including seats, door locks, steering wheels, A/Cs, radios, etc. Outsourcers also provide most of the exterior of the car including lights, windshields, windows, tires and bumpers. Much of what is under the hood or below the car (shock absorbers, the battery, and the electrical system) is also provided by outsourcers. Most of the creative, innovative, and effective approaches of WCOs are supported by advanced, cutting edge technological support (Examples- Computer Aided Design, Computer Aided Manufacturing, Management Information System, Just-in-Time inventory system and so on.). The impact of IT on Global Business: Advances in information technology have revolutionized the modus operandi of production and marketing of products. The businesses horizon is humming with buzzwords such as the Internet, www, cyberspace, information superhighways, etc., which are changing the way of contacting customers, order receiving and processing, production scheduling, production process, inventory management and distribution systems. What constitutes the technological environment?

1.The type of technology in use – GSM/CDMA? 110V/230V 2.The level of technological developments 3.The speed, with which new technologies are developed, adopted and

diffused.

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Considerable time lags have been observed between countries in respect of introduction or absorption of technologies. This lag is not explainable in terms of the developed vs. developing countries differences. Although the TV arrived late in India, its adoption was far quicker than many developed nations (UK, for example). The time lags in the introduction of technologies may even result in some products not being able to reap the market. The computers became popular in India, even before the electronic typewriters could penetrate the market. Therefore, electronic typewriters could not achieve the growth. 4.The technology policy:

a. Preference for labor-intensive technology or preference for automation. B. Policy towards foreign technology. Over emphasis on indigenous technology, at times, may lead to high cost and distorted developments. c. The policy bias in favor of the small businesses or reservation of some product manufacturing to the small scale sector

Regulation of Technological progress: A number of regulatory measures have been taken by different countries to ensure that the technology chosen is best available and is appropriate to domestic conditions. The regulations include: a. The extent and terms of equity participation b. Phasing of domestic manufacturing – indigenization of foreign technology. c. Determining the appropriateness of the technology- permission to import

a particular technology based on priorities, requirements, etc. d. Payment terms and foreign exchange outflow – to ensure that

disproportionately high prices are not paid for any technology.

SOCIAL ENVIRONMENT

The Social Environment shapes the collective attitude towards MNCs. A strong home country or ethnocentric approach by the company may produce an extreme reaction, positive or negative. The product or service has to be acceptable in the society in the foreign market for which it is intended, and this is determined by some important element of the society.

1. Folkways or Conventions: They are learned or accepted social behaviors, followed habitually and do not require rationalizing. E.g.: Festivals, rituals, and so on

2. Morals: Morals are more strongly held and is unwise to change. E.g.: Unmarried couples living together, which is common in the USA, is unheard of in India.

3. Laws: Laws are the embodiment of mores or the social norms of the country, but laws are constantly under review. Laws are seldom more than a “freeze frame” of society’s views or wishes on a specific topic at a specific moment in time.

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4. Family Size: Individual living is common in western countries. 5. Habitat 6. Attitude towards employment 7. Occupational patterns – Women and children in work force. That the

wife and husband working means less time available for cooking at home, which may lead to “eat out” culture. Therefore, families operate differently across nations. The rise in double income families may increase demand for products.

8. Social stratification – May lead to clashes at times due to differences. 9. Level of Education 10. Income level & expenditure pattern

These social factors have profound impact on business. Therefore, it is essential to forecast the possible changes in the relevant social variables.

POLITICAL ENVIRONMENT Political Systems Political systems have two dimensions a. Degree of Collectivism vs. Individualism

b. Degree of Democracy vs. Totalitarianism These dimensions are interrelated; systems that emphasize collectivism tend towards totalitarian, while systems that place a high value on individualism tend to be democratic. However, a large gray area exists in the middle. It is possible to have democratic societies that emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian societies that are not collectivist. Collectivism Collectivism refers to a political system that stresses the primacy of collective goals over individual goals. The needs of society as a whole are generally viewed as being more important than individual freedoms. In such circumstances, an individual’s right to do something may be restricted on the grounds that it runs counter to “the good of society” or to “the common good.” Advocacy of collectivism can be traced to the ancient Greek philosopher Plato. In modern times the collectivist system is largely the domain of nations that have embraced socialism. Socialism Socialism traces its intellectual roots to Karl Marx (1818–1883), who argued that the few benefit at the expense of the many in a capitalist society where individual freedoms are not restricted. Capitalists expropriate for their own use the value created by workers, while paying workers only subsistence wages in return. Marx’s socialism is built on the premise that if the state owned the means of production, the state could ensure that workers were fully compensated for their labor. Thus, the idea is to manage state-owned

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enterprise to benefit society as a whole, rather than individual capitalists. This political perspective was the foundation of all communist nations. The ideology of socialism is split into two broad camps. a. Communism b. Social democracy Communists believed that socialism can only be achieved through violent revolution and totalitarian dictatorship. Communism reached its high point in the late 1970s, when the majority of the world’s population lived in communist states. It was swept out of Europe by the largely bloodless revolutions of 1989. Today, China is the last major Communist power left. Although China is still nominally a communist state with substantial limits to individual political freedom, in the economic sphere the country has moved sharply away from strict adherence to communist ideology. Apart from China, communism hangs on only in some small states, such as North Korea and Cuba. Social democrats committed themselves to achieving socialism by democratic means and turned their backs on the violent revolution and dictatorship advocated by the communist version of socialism. Social democracy has had perhaps its greatest influence in a number of democratic Western nations including Australia, Great Britain, France, Germany, Norway, Spain, and Sweden, where social democratic parties have from time to time held political power. Other countries where social democracy has had an important influence include India and Brazil. However, experience has demonstrated that in many countries, state-owned companies have performed poorly. Protected from significant competition by their monopoly position and guaranteed government financial support, many state-owned companies became increasingly inefficient. In the end, individuals found themselves paying for the luxury of state ownership through higher prices and higher taxes. In the 80s and 90s, many nations that were once socialist in orientation, devoted considerable effort to selling state-owned enterprises to private investors (a process referred to as privatization), which we will discuss later in the chapter. Individualism Individualism is the opposite of collectivism. In a political sense, individualism refers to a philosophy that an individual should have freedom in his or her economic and political pursuits. In contrast to collectivism, individualism stresses that the interests of the individual should take precedence over the interests of the state Like collectivism, individualism can be traced to an ancient Greek philosopher, in this case Plato’s disciple Aristotle (384–322 B.C.). According to Aristotle, communal property receives little care, whereas property that is owned by an individual will receive the greatest care and therefore be most productive. Individualism is built on two central tenets. The first is an emphasis on the importance of guaranteeing individual freedom and self-expression. The second tenet of individualism is that the welfare of society is best served by

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letting people pursue their own economic self-interest as opposed to some collective body (such as government) dictating what is in society’s best interest. Therefore, individual economic and political freedoms are the ground rules on which a society should be based. Some say that with the end of the Cold War, individualism has finally won a long battle with collectivism. It has clearly not. But as a guiding political philosophy, individualism has been on the ascendancy. This represents good news for international business, since in direct contrast to collectivism, the pro-business and pro-free trade values of individualism create a favorable environment within which international business can thrive. Democracy versus totalitarianism Democracy refers to a political system in which government is by the people, exercised either directly or through elected representatives. Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited. The democratic–totalitarian dimension is not independent of the collectivism–individualism dimension. Democracy and individualism go hand in hand, as do the communist version of collectivism and totalitarianism. However, gray areas exist; it is possible to have a democratic state where collective values predominate, and it is possible to have a totalitarian state that is hostile to collectivism and in which some degree of individualism—particularly in the economic sphere—is encouraged. For example, China also has seen a move toward greater individual freedom in the economic sphere, but the country is still ruled by a totalitarian dictatorship. Democracy Democracy, as originally practiced by several city-states in ancient Greece, is based on a belief that citizens should be directly involved in decision making. In complex, advanced societies with populations in the tens or hundreds of millions this is impractical. Most modern democratic states practice what is commonly referred to as representative democracy in which citizens periodically elect individuals to represent them? These elected representatives then form a government, whose function is to make decisions on behalf of the electorate and it is assumed that if elected representatives fail to perform this job adequately, they will be voted down at the next election. Safe guards of representative democracy An ideal representative democracy enshrines the following safeguards in constitutional law. (1) An individual’s right to freedom of expression, opinion, and organization; (2) a free media; (3) regular elections in which all eligible citizens are allowed to vote; (4) universal adult suffrage; (5) limited terms for elected representatives; (6) a fair court system that is independent

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from the political system; (7) a nonpolitical state bureaucracy; (8) a nonpolitical police force and armed service; and (9) relatively free access to state information. Totalitarianism Totalitarianism denies its citizens all of the constitutional guarantees asserted by representative democracies. The most widespread was once communist totalitarianism however, even in the surviving communist systems in China, Vietnam, Laos, North Korea, and Cuba, there are clear signs that the Communist Party’s monopoly on political power is under attack. Theocratic totalitarianism is found in states where political power is monopolized by a party, group, or individual that governs according to religious principles. The most common form of theocratic totalitarianism is based on Islam and is exemplified by states such as Iran and Saudi Arabia. Tribal totalitarianism is most common in African countries such as Zimbabwe, Tanzania, Uganda, and Kenya. Tribal totalitarianism occurs when a political party that represents the interests of a particular tribe (and not always the majority tribe) monopolizes power. Such one-party states still exist in Africa. Saudi Arabia is both a theocratic and a tribal state. Right-wing totalitarianism generally permits some individual economic freedom but restricts individual political freedom on the grounds that it would lead to the rise of communism. The fascist regimes that ruled Germany and Italy in the 1930s and 1940s were right wing totalitarian states. Until the early 1980s, right-wing dictatorships, many of which were military dictatorships, were common throughout Latin America. They were also found in several Asian countries, particularly South Korea, Taiwan, Singapore, Indonesia, and the Philippines. Since the early 1980s, however, this form of government has been in retreat. Politics of FDI

Typical investment by an MNC can be seen as positive. The businesses essentially think of it as beneficial to the host country. The following are some of the benefits the MNC manager may identify-

1. Capital for growth and development 2. Technology for modernization 3. Skills for the local industry 4. Access to foreign markets 5. Explicit contribution to BOT 6. Employment generation 7. Tax revenues

The host government may see foreign investment as potentially providing the benefits outlined above, but may also see the negative side to the investment, as explained below:

1. Increased Dependence –Many developing countries believe they need to develop their internal abilities rather than relying on others.

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2. Decreased Sovereignty – Any dependency on MNCs is seen as loss of control by the host government. Many countries, especially the small ones, feel that large MNCs can have a major, possibly dominant, an even harmful impact on their economic, social, and political systems. For example, encouragement of consumption, imposition of western values in place of traditional ones, or support to a particular political party may be seen as potentially harmful Example: East India company in the eighteenth century.

3. Increased Exploitation –MNCs are often seen as using Nonrenewable resources, repatriating profits rather than reinvesting them, and generally profiting at the expense of the local community. In addition, MNCs may make new products or services available locally. This can increase consumption, and decrease local savings and investment. Example- Euro Disney. French media termed it as a cultural Chernobyl.

4. Inappropriate Technology –In many cases, the technology provided by the MNCs is either outdated or too advanced. Sometimes it seems that an MNC is getting rid of its old technology by sending it to the host. LDC hosts believe that many MNCs pay little attention to the real needs of the country from a technological point of view, and that technology is seldom to local needs.

5. Displacement of Local Firms – Local firms may feel that they cannot compete with the MNC and may forgo local investment. Moreover, when unemployment is the concern, some governments believe that local investments would have been labor intensive, while foreign investments are capital intensive, thus the net impact of FDI on employment is actually negative.

6. Outflow of Foreign Exchange- The apparent foreign exchange benefits from investment and exports can be more than offset, over time, by payments for imported machinery and parts, and repatriation of profits through dividend payments and other intra-firm transfers.

RELATIONSHIPS The host countries wants the economic benefits of improved trade balances, increased employment, more foreign exchange, as well as increased power and prestige, but fear the potential negative consequences such as loss of sovereignty, technological dependence, and foreign control of key economic sectors. These results in a variety of host-government policies designed both to attract and confine MNCs. We need to understand purpose of these restrictions and incentives because they provide both opportunities and challenges for the firm.

INCENTIVES 1. Tax holidays 2. Exemption from duties 3. Tax incentives 4. Monopoly rights 5. Low interest loans 6. Government concessions and guarantees

RESTRICTIONS

1. Local ownership – Eg. Malaysia 2. Local content

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3. Local personnel 4. Location 5. Profit repatriation 6. Forex use

NEGOTIATIONS The ultimate objective of negotiations, of course, is to minimize the negative impact of restrictions imposed by the government and to maximize the benefits associated with incentives. The outcome, however, depends on the strengths of each side. The strength of each party depends on how much each party needs the other and how much control each side can exert on the other. The strength of the bargaining position of a firm is also influenced by its home government and the relationship between the home government and the host government. A positive relationship between the two governments is likely to smooth negotiations, whereas a negative relationship may complicate issues. A MNC can expect a support from a home government as long as the interests of MNC coincides with that of the home government. A foreign invest can be viewed as either good or bad by the home country. In reality whatever the MNCs earns in a foreign location is returned to the home-country shareholders in the form of dividends and capital appreciation. Employees in the home country are also benefited from the foreign operations because a profitable firm can pay higher wages. Further, the home country also benefits generally through increased tax collection. However, a decision to invest in a foreign location may also be seen as not investing in home, and certain groups will be negatively affected by this decision. For example;

a. Jobs will be created in the host country rather than in the home country

b. Foreign suppliers may be chosen over home country suppliers c. The prices of certain goods may change

Those groups feeling the adverse effects will push for home-government restrictions on MNCs. POLITICAL RISK Political risk embrace a vide variety of factors varying from government confiscation of the assets of the an MNC to government encouragement of negative attitudes toward foreign business. To include this wide range of factors, the Political risk is defined as the possibility of unwanted consequences of political activity or the uncertainty associated with political events and activities. Major categories of political risks:

1. Forced Divestment: A situation where in government acquires all the assets of a company against its will. At worst, the host government may confiscate company assets-I.e. take them over without any

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compensation. Alternatively, the host forces the company to sell its assets to local parties, usually the government itself. Forced divestment can take the form of

a. Expropriation – The take over of single firm b. Nationalization – Take over of an entire industry

Forced divestment is legal under international law as long as it is accompanied by prompt and equitable compensation. Such a take over does not involve the risk of total loss of assets unless they are confiscated by the government. However, greater risks are that the payment will be

i. Less than what the company considers equitable ii. Payment in nonconvertible currency iii. Non-negotiable government bonds iv. Losses due to impact on other business operations

2. Unwelcome regulation:

It refers to any government imposed requirements that make it less profitable for a company to operate in a particular location. These include:

1. Corporate or income taxes 2. Local ownership requirements 3. Restrictions on reinvestment and repatriation of profits 4. Limitation on employment and location

The incidents of unwelcome regulations occur regularly and companies should be alert to these possibilities. In contrast to forced divestment, governments do not reimburse companies for losses in profitability resulting from the imposition or regulations: therefore, the potential impact of such regulation must be carefully considered.

3. Interference with Operations This type of risk may include:

1. Government encouragement of Unionization 2. Government voicing negative sentiments about foreigners 3. Discriminatory government support to locally owned businesses

Such activities are seen as improving a government’s popularity and thus enabling them to stay in power for long While the forced divestment and unwelcome regulations have an immediate and identifiable impact on operations, the activities described as interference with operations may be less obvious and the effects unclear. The effects can have great impact over time (through lost sales, increased costs, difficult labor relations, and so on); thus, companies should weigh this political risk with equal attention.

VULNARABILITY TO RISK The degree of risk faced by company is a function of both the country and company factors. R=f (c,c) Country characteristics- Type of government, Level of economic development, Stability of social and political systems

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In general, instability is associated with increased risk. This is because instability implies uncertainty, which implies risk. Frequent government changes, an unstable economy, and social disorder would obviously increase a business risk. The acts of terrorism are especially worrisome to international firms. Examples: Bomb planting by IRA in London Stock Exchange

Crashing of passenger planes to WTO building in New York

Bomb blasts in BSE Bombing of Pan Am flight over Scotland Company factors- Industry, technology, ownership, management Some industries appear to be more subject to political risk than others because they are seen as being important to development and the government wishes to maintain control over them. In addition, these industries are often highly visible to the local population as the government can use them as a means to maintain political control. Businesses that use natural resources, banking and insurance companies, as well as companies involved in infrastructure projects such as railroads, airlines or communications have historically been most affected by the government intervention. High-tech firms with solid grounding research are less affected by govt. intervention, as local governments would be unable to manage such companies themselves. A company’s ownership is also an important component of its vulnerability to risk, because the local ownership is usually seen favorably by the government. Wholly owned subsidiaries are at risk, while joint ventures with local partners are less risky. Management make-up also determines the risk. 100% foreign management is never viewed favorably.

The Legal Environment Facing Business

Managers must be aware of the legal systems in the countries in which their firms operate, the basic nature of the legal profession (both domestic and international) and the legal relationships that exist between and among countries. Legal systems differ both in terms of the nature of the system and the degree of independence of the judiciary from the political process. A. Kinds of Legal Systems Common Law. Common law originated in the United Kingdom and is based upon tradition, precedent, custom and usage; therefore, courts play an important role in interpreting the law. Civil Law. Civil law, also known as codified law, originated with the Romans and is based upon a detailed set of laws that make up a detailed code that includes rules for conducting business; courts play an important role in applying the law. Theocratic Law. Theocratic law is based upon religious precepts. The best example is Islamic law, or Shair’a. The key for businesses is to adhere to the constraints of ancient Islamic laws while maintaining sufficient flexibility to operate in a modern global economy.

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Islamic law is primarily a moral rather than a commercial law, and is intended to govern all aspects of life. The foundation for Islamic law is the holy book of Islam, the Koran, along with the Sunnah, or decisions and sayings of the Prophet Muhammad, and the writings of Islamic scholars who have derived rules by analogy from the principles established in the Koran and the Sunnah. Although Islamic law is primarily concerned with moral behavior, it has been extended to cover certain commercial activities. An example is the payment or receipt of interest, which is considered usury and outlawed by the Koran. To the devout Muslim, acceptance of interest payments is seen as a very grave sin; the giver and the taker are equally damned. Consumer Safeguards: Different legal systems provide varying safeguards with respect to product liability and other legal issues. For example, access to and assistance from the legal community, legal fees and the ability to use foreign lawyers all differ across countries. Four legal issues important to international business are contract law, property rights, protection of intellectual property, product safety and liability and contract law Property rights Property Rights refer to a resource over which an individual or business holds a legal title; that is, a resource that they own. Resources include land, buildings, equipment, capital, mineral rights, businesses, and intellectual property (such as patents, copyrights and trademarks). Countries differ significantly in the extent to which their legal system protects property rights. These rights could be violated through private action or public action. Private Action refers to theft, piracy, blackmail, and the like by private individuals or groups. While theft occurs in all countries, a weak legal system allows for a much higher level of criminal action in some than in others. One example was Russia, in the chaotic period following the collapse of Communism. An outdated legal system, coupled with a weak police force and judicial system, offered both domestic and foreign businesses scant protection from blackmail by the “Russian Mafia.” Public Action occurs when public officials, such as politicians and government bureaucrats, extort income or resources from property holders. This can be done through a number of legal mechanisms such as levying excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership without compensating the owners. It can also be done by illegal means, or corruption, by demanding bribes from businesses in return for the rights to operate in a country, industry, or location. Corruption has been well documented in every society, from the banks of the Congo River to the palace of the Dutch royal family, from Japanese politicians to Brazilian bankers, and from Indonesian government officials to the New York City Police Department. No society is immune to corruption. However, there are systematic differences in the extent of corruption across countries. It is so important for managers to understand the systematic differences that agencies regularly publish reports that rank corruption in different nations.

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Protection of intellectual property Intellectual property refers to property that is the product of intellectual activity, such as computer software, a screenplay, a music score, or the chemical formula for a new drug. Ownership rights over intellectual property are established through patents, copyrights, and trademarks. A patent grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarks are designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products. In the high-technology “knowledge” economy of the 21st century, intellectual property has become an increasingly important source of economic value for businesses. Protecting intellectual property has also become increasingly problematic, particularly if it can be rendered in a digital form and then copied and distributed at very low cost via pirated CDs or over the Internet (e.g., computer software, music and video recordings). The philosophy behind intellectual property laws is to reward the originator of a new invention, book, musical record, clothes design, restaurant chain, and the like, for his or her idea and effort. Such laws are a very important stimulus to innovation and creative work. They provide an incentive for people to search for novel ways of doing things, and they reward creativity. For example, consider innovation in the pharmaceutical industry. A patent will grant the inventor of a new drug a 20-year monopoly in production of that drug. This gives pharmaceutical firms an incentive to undertake the expensive, difficult, and time-consuming basic research required to generate new drugs (it can cost $500 million in R&D and take 12 years to get a new drug on the market). Protection of intellectual property rights differs greatly from country to country. While many countries have stringent intellectual property regulations on their books, even among the 96 countries that have signed the Paris Convention for the Protection of Industrial Property, the enforcement of these regulations has often been lax. Piracy in music recordings is rampant. The International Federation of the Phonographic Industry claims that forty percent of all CDs and cassettes around the globe were illegally produced and sold in 2001, suggesting that piracy cost the industry over $4.3 billion per annum. The computer software industry also suffers from lax enforcement of intellectual property rights. Estimates suggest that violations of intellectual property rights cost computer software firms revenues equal to $10.97 billion in 2001.

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International businesses lobby their respective governments to push for international agreements to ensure that intellectual property rights are protected and that the law is enforced. Trade Related Aspects of Intellectual Property Rights (or TRIPS), as of 1995 a council of the World Trade Organization is overseeing enforcement of much stricter intellectual property regulations. These regulations oblige WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. Rich countries had to comply with the rules within a year. Poor countries, in which such protection generally was much weaker, had 5 years’ grace, and the very poorest have 10 years. An exception to this general trend toward the protection of intellectual property is the move by the government of South Africa to cheap, generic AIDS drugs into the country. Product safety and liability Product Safety and Product Liability laws set certain safety standards to which a product must adhere. Product liability involves holding a firm and its officers responsible when a product causes injury, death, or damage. Product liability can be much greater if a product does not conform to required safety standards. There are both civil and criminal product liability laws. Civil laws call for payment and monetary damages. Criminal liability laws result in fines or imprisonment. Both civil and criminal liability laws are probably more extensive in the United States than in any other country. Country differences in product safety and liability laws raise an important ethical issue for firms doing business abroad. When product safety laws are tougher in a firm’s home country than in a foreign country and/or when liability laws are more lax, should a firm doing business in that foreign country follow the more relaxed local standards or should it adhere to the standards of its home country? Legal Issues in International Business National laws may affect the business climate both within and beyond a country’s borders and pertain to both domestic and foreign firms. Areas addressed include health and safety standards, employment practices, antitrust prohibitions, contractual relationships, environmental practices, intellectual property, cross-border investment flows, tariffs and non-tariff barriers, to name but a few. In addition, international treaties among nations may also affect the nature and extent of business operations.

The Economic Environment I. INTRODUCTION

Understanding the economic environments of foreign countries and markets is vital to helping managers predict the ways in which trends

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and events will likely affect their firms’ future performance there. Questions to be addressed include both the size and the nature of the market. Answers are often complex.

II. AN ECONOMIC DESCRIPTION OF COUNTRIES

Companies do business abroad for a variety of reasons. Factor conditions (production factors) include essential inputs to the production process such as human resources, physical resources, knowledge resources, capital resources and infrastructure; they are crucial for investments made for production purposes. Demand conditions (market potential) include the composition of local demand (quality of demand), the size and growth of local demand (quantity of demand) and the internationalization of basic demand; they are crucial for market-seeking investments. Location-specific advantages incorporate the combination of factor and demand conditions, plus other relevant qualities. A. Countries Classified by Income

Size of national demand is indicated by Gross National Income (GNI), previously referred to as Gross National Product (GNP). The broadest measure of economic activity, GNI represents the market value of final goods and services newly produced by domestically owned factors of production. Gross Domestic Product (GDP) represents that value of production that takes place within a nation’s borders, without regard to whether the production is carried out by domestic or foreign factors of production. Per capita GNI is computed by dividing GNI by a country’s population. Because nominal exchange rates (unadjusted market rates) do not always reflect international differences in prices, purchasing power parity (PPP) is used as an indicator of the number of units of a country’s currency required to buy the same amounts of goods and services in its domestic market. The World Bank refers to low- and middle-income nations as developing countries, which are also known as emerging countries (a term also used to describe the capital markets in such countries). While developing countries in Asia and Latin America are generally moving forward, those in Africa are not making much progress. High-income nations are referred to as developed or industrialized countries.

B. Countries Classified by Region MNEs tend of organize their operations along geographic lines. Major geographic regions of the world include: East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, the Middle East and North Africa, and Sub-Saharan Africa.

C. Countries Classified by Economic System Every government struggles with the right mix of ownership and control of its economy. Ownership refers to the ownership of resources engaged in economic activity—the public sector (government), the private sector, or both. Control refers to the allocation and control of resources engaged in economic activity. Just as there is a relatively high correlation between economic freedom and political freedom, there is also a

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relatively high correlation between economic freedom and economic growth.

Economic systems There is a connection between political ideology and economic systems. In countries where individual goals are given primacy over collective goals, we are more likely to find free market economic systems. Types of economic systems In contrast, in countries where collective goals are given preeminence, the state may have taken control over many enterprises, while markets in such countries are likely to be restricted rather than free. We can identify four broad types of economic systems—a market economy, a command economy, a mixed economy and a state directed economy. Market Economy is an economy in which all productive activities are privately owned, as opposed to being owned by the state. The goods and services produced in a market economy, and the quantity in which they are produced, are not planned by anyone. Production is determined by the interaction of supply and demand and signaled to producers through the price system. For a market to work in this manner there must be no restrictions on supply. A restriction on supply occurs when a market is monopolized by a single firm. In such circumstances, rather than increase output in response to increased demand, a monopolist might restrict output and let prices rise. This allows the monopolist to take a greater profit margin on each unit it sells. Since this is bad for the welfare of society, the role of government in a market economy is to encourage vigorous competition between private producers. Governments do this by outlawing monopolies and restrictive business practices designed to monopolize a market (antitrust laws serve this function in the United States). Private ownership also encourages vigorous competition and economic efficiency. Command Economy is an economy in which the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government. Consistent with the collectivist ideology, the objective of a command economy is for government to allocate resources for “the good of society.” In addition, in a pure command economy, all businesses are state owned. Since the demise of communism in the late 1980s, the number of command economies has fallen dramatically. Some elements of a command economy were also evident in a number of democratic nations led by socialist-inclined governments. France and India both experimented with extensive government planning and state ownership, although government planning has fallen into disfavor in both countries. Mixed Economy is an economy in which certain sectors of the economy are left to private ownership and free market mechanisms while other sectors

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have significant state ownership and government planning. India, which was profiled in the opening case, has a mixed economy. Mixed economies were once very common throughout much of the world, although they are becoming much less so. There was a time not too long ago when Great Britain, France, and Sweden were mixed economies, but extensive privatization has reduced state ownership of businesses in all three. State-directed economy is where the state directly influences the investment activities of private enterprise through industrial policy. It is different from a mixed economy because the state does not always take private enterprises into public ownership. Instead the state nurtures and proactively directs investments made by private firms in line with the goals of its industrial policy. Japan’s industrial growth and success has been attributed to a state directed economy. III. KEY MACROECONOMIC ISSUES AFFECTING BUSINESS STRATEGY

Macroeconomic factors can have a major impact on both the profitability and the operating strategy of MNEs. Three key issues are economic growth, inflation and surpluses and deficits. A. Economic Growth

While history is often used to forecast future economic trends, it is certainly not perfect. Further, there exists significant differences in growth rates throughout the world. The direct impact of events such as the Asian financial crisis, terrorist activities such as 9/11 and corporate scandals such as Enron and WorldCom spreads quickly to international markets, but the effects are uneven. Thus, future growth is bound to be variable by region, even in the high-income countries.

B. Inflation The inflation rate represents the percentage increase in the

change in prices from one period to the next, usually a year. A common indicator of inflation is the consumer price index (CPI), which measures the cost of a fixed basket of goods and services and compares the price from one period to the next. Inflation occurs because aggregate demand is growing faster than aggregate supply. Ultimately it affects interest rates, exchange rates, the cost of living and the general confidence in a country’s political and economic systems.

C. Surpluses and Deficits Internal and external deficits are important indicators of a country’s economic strength and stability. Surpluses are rarely a problem. An internal deficit indicates that a government’s expenditures exceed its revenues; an external deficit indicates that a country’s cash outflows (payments) exceed its inflows (receipts). 1. The Balance of Payments. The balance of payments

account records commercial transactions and other financial flows between the residents of a given country and the rest of the world. a. The current account includes trade in goods and

services and income from assets abroad and

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payments on foreign-owned assets in the country. The merchandise trade balance reflects a country’s deficit or surplus with respect to trade in goods. The service account reflects transactions such as transportation and other international services and royalties and fees on licensing agreements. (Unilateral transfers include government and private relief grants and income transferred abroad.)

b. The capital account records transactions in real or financial assets between residents of a given country and the rest of the world. An inflow of capital is a positive transaction; an outflow is a negative transaction. Also included in the capital account are changes in the official reserve assets of a country, such as gold, special drawing rights and foreign currencies.

2. External Debt. External debt consists of money borrowed from foreign institutions. It can be measured in two ways: the total amount of the debt and debt as a percentage of GDP. The larger these two numbers, the more unstable an economy will become and the more likely economic growth will slow.

3. Internal Debt and Privatization. Government budget deficits result from an excess of government expenditures relative to revenues and contribute to a country’s overall debt position. As countries move to reduce their deficits, the privatization of state-owned enterprises may occur, thus relieving the government of the need to subsidize inefficient operations.

IV. TRANSITION TO A MARKET ECONOMY Many countries are undergoing the transition from command

economies to market economies because of the failure of the central planning process to generate satisfactory economic growth. In general, transition implies the liberalization of economic activity, the reallocation of resources to their most efficient use, macroeconomic stabilization, the privatization of state-owned assets, budgetary constraints and the development of an institution and legal framework to protect property and individual rights. A. The Process of Transition

The transition process can provide significant opportunities for MNEs as markets are opened and foreign direct investment opportunities expand. For Russia, the transition to a market economy has been especially difficult because the government has been trying to simultaneously change the country’s economic and political systems. The Chinese transition has been much more controlled—a change in that country’s political system is not part of the process.

B. The Future of Transition In the short-term, major challenges confronting the transition economies will include continued macro stability, economic growth, improvement in institutional and structural areas and

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the solution of social issues such as poverty, child welfare and HIV/AIDS. In the long-term, however, the challenges to the transition economies will virtually be the same as those of other developing economies.

V. Amartya Sen- Theory of social development The Nobel prize-winning economist Amartya Sen has argued that development should be assessed less by material output measures such as GNI per capita and more by the capabilities and opportunities that people enjoy. According to Sen, development should be seen as a process of expanding the real freedom that people experience. Hence, development requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as the intolerance of repressive states. In Sen’s view, development is not just an economic process, but it is a political one too, and to succeed requires the “democratization” of political communities to give citizens a voice in the important decisions made for the community. This perspective leads Sen to emphasize basic health care, especially for children, and basic education, especially for women. Sen’s influential thesis has been picked up by the United Nations, which has developed the Human Development Index (HDI) to measure the quality of human life in different nations. The HDI is based on three measures: life expectancy at birth (which is a function of health care), educational attainment (which is measured by a combination of the adult literacy rate and enrollment in primary, secondary, and tertiary education), and whether average incomes, based on PPP estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care). It is possible to make a few broad generalizations as to the nature of the relationship between political economy and economic progress.

CULTURAL ENVIRONMENT

The word ‘culture’ comes from the Latin cultura, which is related to cult or worship. In its broadest sense it refers to the result of human interaction. For the purposes of the study of international management, then culture is acquired knowledge that people use to interpret experience and generate social behavior. This knowledge forms values, creates attitudes, and influences behavior. I. What is Culture? Culture is the sum total of knowledge, beliefs, arts, morals, laws and customs and any other capabilities and habits acquired by humans as members of a society. Culture is a learned, shared, compelling, interrelated set of symbols whose meanings provide a set of orientations for members of

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a society. II. Characteristics of Culture:

A. Learned: Culture is not inherited, but is acquired. B. Shared: People as members of a group, organization, or society share

culture; it is not specific to single individuals. C. Transgenerational: Culture is cumulative, passed down from one

generation to the next. D. Symbolic: Culture is based on the human capacity to symbolize or use

one thing to represent another E. Patterned: Culture has structure and is integrated; a change in one

part will bring changes in another. F. Adaptive: Culture is based on the human capacity to change or adapt,

as opposed to the more genetically driven adaptive process of animals.

III. Behaviors influenced by cultures

1. Greeting rituals 2. Forms of address - titles, first/last name 3. Dress Code 4. Space 5. Language: Rich context or Low context - Members of low context

cultures put their thoughts into words and get down to business quickly (Example: USA, UK). Members of high context cultures take time in developing relationships and rely on the context, e.g., the surroundings, the business setting to convey much of the meaning. In a high context culture it is often unnecessary to put things into words. (Example: India)

6. Etiquettes IV. The Role of Culture in Business What does culture have to do with business? It helps us to understand what makes people the way they are. If you can understand why people believe as they do and act as they do and give importance to the things they do, then you can begin to understand why they behave in certain ways in certain situations. You can begin to do business with them. Culture affects the planning and implementation of all marketing activities. Culture is like the operating system on a computer in that it determines how you process information. It provides the foundation upon which everything runs. Culture determines business practices. Business practices are not neutral or universal or value free. An understanding of the impact of culture on behavior is critical to the study of international business, because different cultures exist in the world. The results can be quite disastrous, if the international managers do not know something about the cultures of the countries they deal with. Cultures can affect technology transfer, managerial attitude, managerial ideology, and even business-government relations. Perhaps most important, culture affects how people think and behave.

E.g.

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Culture Handshake USA Firm Asia Gentle. Handshake is unfamiliar and

uncomfortable for some. British Soft French Light and Quick, Not offered to superiors,

repeated on departure. Latin America Moderate grasp, repeated frequently. In overall terms, the cultural impact on international management is reflected by the basic beliefs and behaviors. Here are some specific examples where culture of a society can directly affect management approaches: Centralized or Decentralized decision making: It depends on power distance that exists in an organization. Power Distance is the extent to which societal members treat inequality in the society. Countries in which people blindly obey the orders of their superiors have high power distance. The organizations in low PD countries will have decentralized and flatter organizations. These organizations also will have a smaller proportion of supervisory personnel, and the lower strata of the work force often will consist of highly qualified people.

Safety vs. Risk – Countries with people who do not like uncertainty tend to have a high need for security and a strong belief in experts (Germany, Japan, and Spain). Cultures with low uncertainty avoidance have people who are more willing to accept that risks associated with the unknown that life must go on in spite of this (UK, Denmark).

Individual vs. Collectivism - The extent to which relations between individuals are strong. Individualism is the tendency of people to look after themselves and their immediate family only. Collectivism is the tendency of people to belong to groups or collectives and to look after each other in exchange for loyalty.

Informal vs. Formal procedures- In some cultures, much is accomplished through informal means. In others, formal procedures are set forth and followed rigidly.

High vs. Low organizational loyalty – Some cultures have great organizational loyalty (e.g. Japan) where as in some cultures job hopping is very common.

Cooperation vs. competition - Some societies encourage cooperation between their people. Others encourage competition between individuals.

Short-term vs. long-term horizons- Countries also differ in the extent to which individuals live for the present rather than the future because they see risks in delaying gratification and investing for the future.

Stability vs. innovation - Some cultures encourage stability and resistance change. However, some cultures value innovation and change. Monochronic Vs Polychronic – This refers to the orientation towards the

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time. Individuals in monochronic cultures treat time as linear and do one thing at a time. Individuals in polychronic cultures believe that many things can be done simultaneously Universalism Vs. Particularism – In universalistic cultures law applies to everyone where as in Particularism individuals seek exceptions. Achievement Vs. Ascription – In achievement cultures individuals gets position and respect due to their achievement and where as in some cultures the position and respect comes through their parents. V. Culture and the workplace Geert Hofstede conducted what is probably the most famous study about the connection between culture and values in the workplace. Hofstede made a study of IBM employees worldwide, and identified four dimensions that summarize different cultures: power distance, individualism vs. collectivism, uncertainty avoidance, and masculinity vs. femininity. Power distance Power distance deals with how a society deals with the fact that people are unequal in physical and mental activities. Individualism versus collectivism Individualism Vs Collectivism focuses on the relationship between the individual and his or her fellows. In individualistic societies the ties between individuals are loose and individual achievement is highly valued. In collectivism, everyone is supposed to look after the interests of the collective Uncertainty avoidance Uncertainty avoidance measures the extent to which different societies socialize their members into accepting ambiguous situations. Masculinity versus femininity Masculinity Vs Femininity looks at the relationship between genders and work roles. VI. Classification of Business Customs D.IMPERATIVES Cultural imperatives refer to the business customs and expectations that must be met and conformed to or avoided if relationships are to be successful. In some cultures a person’s demeanor is more critical than in other cultures. For example, it is probably never acceptable to lose your patience, raise your voice, or correct someone in public however frustrating the situation. In some cultures such behavior would only cast you as boorish, but in others it could end a business deal.

– E.g.: Eye contact in Japan & Latin America

E.ADIAPHORA Cultural adiaphora relates to areas of behavior or to customs that cultural aliens may wish to conform to or participate in but that are not required: in

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other words, it is not particularly important but permissible to follow the custom in question. The majority of customs fit into this category. One need not greet another man with a kiss, eat foods that disagree with the digestive system ( so long as the refusal is gracious), or drink alcoholic beverages (if for health, personal, or religious reasons). On the other hand a symbolic attempt to participate in adiaphora is not only acceptable but also may help to establish rapport. It demonstrates that the individual has studies the culture. For the most part adiaphora are customs that are optional, although adiaphora in one culture may be perceived as imperative in another.

F.EXCLUSIVES Cultural exclusives are those customs or behavior patterns reserved exclusively for the locals and from which foreigner is excluded. For example, a Christian attempting to act like a Muslim would be repugnant to a follower of Mohammed. There are few cultural traits reserved exclusively for locals, but a foreigner must carefully refrain from participating in those that are reserved.

VII. Cultural Knowledge: Cultural sensitivity and tolerance means being attuned to the nuances of a culture so that a culture can be viewed objectively. You must acquire not only factual knowledge about the culture but interpretive knowledge as well. Knowledge of how a culture is classified along various dimensions enables you to understand and predict how cultural values are likely to impact business. As a student of IB you must not only acquire knowledge about another culture but you must be able to adapt accordingly. You must understand business customs in a given culture and adapt you behavior accordingly. VIII. Cultural Change Culture is dynamic and it can change; however change is usually slow and there is often resistance. People often tend to be ethnocentric. Ethnocentrism means that people in a particular culture have an intense identification with their own culture and deep down they are convinced that their culture is the right one. People believe their culture is the center of human experience - hence ethnocentrism. Ethnocentrism can lead to complacency. We may not make an effort to look further than our own culture and we see little importance in understanding other cultures. IX. Dealing with cultures in business:

• Analyze culture. All the elements. • Try to manage the culture and don’t be reactive. • Remember all the elements are interrelated. • Be organized before ever having to deal with it in a real situation. • Recruit multilinguals, and train managers.

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INTERNATIONAL MARKETING STRATEGY

COMPETITIVE PRESSURES OPERATING ON GLOBAL COMPANIES Companies that compete in the global marketplace face competitive pressures for cost reductions and pressures to be locally responsive. These competitive pressures place conflicting demands on a company. Responding to pressures for cost reductions demands that a company try to minimize its unit costs. To accomplish this, a company must base its activities at the most favorable low-cost location, wherever in the world that might be. It must also offer a standardized product to the global marketplace in order to ride down the experience curve as quickly as possible. Reacting to pressures to be locally responsive requires a company to differentiate its product offering and marketing strategy from country to country. It must try to accommodate the diverse demands arising from national differences, which can lead to significant duplication and a lack of standardization, raising costs.

Figure : Pressures for Cost Reductions and Local Responsiveness

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Pressures for cost reductions arise from several sources.

Pressures for cost reductions are intense in industries producing commodity-type products that serve universal needs. For these products, differentiation on nonprice factors is difficult and price is the main competitive weapon. Pressures for cost reductions are also strong in industries where major competitors are based in low-cost locations, where there is persistent excess capacity, and where consumers are powerful and face low switching costs. Liberalization of the world trade and investment environment in recent decades has generally increased cost pressures by facilitating greater international competition.

Pressures for local responsiveness arise from several sources. One source of strong pressures for local responsiveness emerges when consumer tastes and preferences differ significantly between countries, for historic or cultural reasons. Products and marketing messages have to be customized for local tastes and preferences, leading to the delegation of production and marketing functions to national subsidiaries. However, some observers claim that consumer demands for local customization are on the decline worldwide, because modern communications and transportation technologies have led to a convergence of tastes and preferences. The result is the emergence of enormous global markets for standardized consumer products. However, other commentators have observed that in some industries, consumers have reacted to an overdose of standardized global products by showing a renewed preference for products that are differentiated to local conditions. Another source of pressures for local responsiveness emerge when there are differences in infrastructure and traditional practices between countries, creating a need to customize the product. This may necessitate the delegation of manufacturing and production functions to foreign subsidiaries. Pressures for local responsiveness may arise when a company’s marketing strategies have to be responsive to differences in distribution channels between countries. This may necessitate the delegation of marketing functions to national subsidiaries. Economic and political demands imposed by host country governments may require a degree of local responsiveness. Examples of threats from host governments include protectionism, economic nationalism, and regulations to ensure local content.

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Choosing a Global Strategy Companies use four basic strategies to enter and compete in the international environment: (1) international strategy; (2) multidomestic strategy; (3) global strategy; and (4) transnational strategy. Each of these strategies has advantages and disadvantages. The appropriateness of each strategy varies with the extent of pressures for cost reductions and local responsiveness. A firm must balance the pressures for costs reductions with the pressures for local responsiveness. In order to customize products to respond to local demands, the firm may have to give up some of the potential cost savings. Also, the firm may not be able to fully leverage its distinctive competencies.

Figure : Four Basic Strategies

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One global strategy is the international strategy, in which a firm tries to create value by transferring valuable skills and products to foreign markets where indigenous competitors lack those skills and products. International firms include the likes of McDonald’s, Kellogg, Google, Haier, Wal-Mart, and Microsoft. The international model relies on local subsidiaries in each country to administer business as instructed by the Head quarters. International companies create value by transferring differentiated product offerings developed at home to new markets overseas. They centralize product development functions at home. However, international companies also establish manufacturing and marketing functions in each major country. They undertake limited local customization of products and marketing strategy, but the head office retains tight control over these. An international strategy can be very profitable if a company has a valuable distinctive competency that indigenous competitors lack and if the pressures for local responsiveness and cost reductions are relatively weak. However, when pressures for local responsiveness are strong, companies pursuing this strategy lose out to companies that customize products for local conditions. Moreover, because they must duplicate manufacturing facilities, international companies suffer from high operating costs. Another global strategy is the multidomestic strategy, in which a firm orients itself toward achieving maximum local responsiveness. Multidomestic companies transfer skills and products developed at home to foreign markets, however, unlike international companies, they extensively customize both their product offering and their marketing strategy. Multidomestic firms also establish a complete set of value-creation activities in each major national market in which they do business. Multidomestic companies are unable to realize value from experience-curve effects and location economies, and therefore have a high cost structure and are unable to leverage distinctive competencies. A multidomestic strategy makes sense when there are strong pressures for local responsiveness and weak pressures for cost reductions. Another drawback of this strategy is that many multidomestic companies develop into decentralized federations in which each national subsidiary functions in a largely autonomous manner. They typically lack the ability to transfer local distinctive competencies to their worldwide subsidiaries. Ex: Johnson & Johnson, Unilever, A third global strategy is the global strategy, which focuses on increasing profitability by reaping the cost reductions that come from experience-curve effects and location economies. Firms pursuing a global strategy are attempting to be cost leaders. The production, marketing, and R&D activities of companies pursuing a global strategy are concentrated in a few favorable locations. Global companies do not customize their products and marketing strategy to local conditions because customization raises costs. Instead, global companies market a standardized product worldwide so that they can reap the maximum benefits from the economies of scale that underlie the experience curve. Global companies use their cost advantage to support aggressive pricing.

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A global strategy makes most sense when there are strong pressures for cost reductions, but minimal demands for local responsiveness. These conditions prevail in many industrial goods industries, but are not as common in consumer goods. Nokia, American Express and Texas instruments pursue global strategy. Every one of the preceding strategies has some serious drawbacks. Increasingly, companies must be both low cost and differentiated in order to compete, especially in the intense rivalry found in industries with many multinational competitors. A transnational strategy allows companies to pursue both goals simultaneously. A transnational strategy allows skills and products to flow in both directions between the home country and the foreign subsidiaries in a process referred to as global learning. The transnational strategy makes sense when a company faces high pressures for cost reductions and high pressures for local responsiveness. However, this strategy is not an easy one to pursue, because pressures for local responsiveness and cost reductions place conflicting demands on a company. To deal with cost pressures, companies can redesign their products to use identical components. Another tactic is to invest in a few large-scale manufacturing facilities sited at favorable locations and then augment those with assembly plants in each of its major markets, which allows for tailoring the finished product to local needs. Although a transnational strategy appears to offer the most advantages, it should not be forgotten that implementing it raises difficult organizational issues. The appropriateness of each strategy depends on the relative strength of pressures for cost reductions and pressures for local responsiveness.

Entry and Expansion Strategies When a company decides to go international, it faces a host of decisions. Which countries should it enter and in what sequence? What criteria should be used to select entry markets? Proximity, stage of development? Geographic Region? Cultural or linguistic criteria, the competitive situation, of other factors? How should it enter new markets? Should the new market be supplied with the imported product from the home country or third countries or locally manufactures product? This lecture addresses these questions and examines various strategies that a company can utilize to go international starting with exporting and advancing to FDI. These options are not mutually exclusive and may be used concurrently. The entry strategy is concerned with three closely related topics:

1. The decision of which foreign markets to enter, when to enter them, and on what scale

2. The choice of entry mode

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3. The role of strategic alliances. Any firm contemplating foreign expansion must first struggle with the issue of which foreign markets to enter and the timing and scale of entry. The choice of which markets to enter should be driven by a assessment of relative long-run growth and profit potential. BASIC ENTRY DECISIONS: a. Which foreign markets to enter? There are more than 180 nation-states in the world, but they do not all hold the same profit potential for a firm contemplating foreign expansion. Ultimately, the choice must be based on an assessment of a nation’s long-run profit potential. The attractiveness of a country as a potential market for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country. The long-run economic benefits of doing business in a country are a function of factors such as the size of the market, the present wealth (purchasing power) of consumers in that market, and the likely future wealth of consumers.

Generally, benefits and costs associated with doing business in a foreign country are a function of that country’s - Political system - Economic system - Legal system - Culture Etc.

Company managers need to identify the target country with the highest

sales potential. - Sufficient market size - Purchasing power of consumers in the target country - Future economic growth - Politically stable - Similar culture Etc.

b. Timing of Entry: Once attractive markets have been identified, it is important to consider the timing of entry. We say that entry is early when an international business enters a foreign market before other foreign firms and late when it enters after other international businesses have already established themselves. The advantages of frequently associated with entering markets early are commonly known as first-mover advantages. First-mover advantages:

1. The ability to preempt rivals and capture demand by establishing a strong brand name

2. The ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants. This cost advantage may enable the early entrant to cut prices below that of later entrants, therby driving them out of the market.

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3. The ability of early entrants to create switching costs that tie customers into their products or services. Such switching cost makes it difficult for later entrants to win business.

First-mover disadvantages: 1. Pioneering Costs- The cost that an early entrant has to bear that a

later entrant can avoid. Pioneering costs arise when the business system in a foreign country is so different from that in a firm’s home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game. Pioneering costs that include the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes. Pioneering costs also include the costs of promoting and establishing a product offering, including the costs of educating customers. These costs can be particularly significant when the product being promoted is unfamiliar to local consumers.

2. An early entrant may be put at a severe disadvantage, relative to a later entrant, if regulations change in a way that diminishes the value of an early entrant’s investments.

c. Scale of entry Entering a market on a large scale involves the commitment of significant amount of resources. The consequence of entering on a significant scale is associated with the value of the resulting strategic commitments. A strategic commitment has a long-term impact and is difficult to reverse. It is important for a firm to think through the implications of large-scale entry into a market and act accordingly. Of particular relevance is trying to identify how actual and potential competitors might react to large-scale entry into a market. Also, the large-scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantages associated with demand preemption, scale economies, and switching costs. Balanced against the value and risks of the commitments associated with large-scale entry are the benefits of a small-scale entry. Small-scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market. Small-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter. By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry. But the lack of commitment associated with small-scale entry may make it more difficult for the small-scale entrant to build market share and to capture first-mover advantages. The risk-averse firm that enters a foreign market on a small scale may limit its potential losses, but it may also miss the chance to capture first-mover advantages. MODES OF ENTRY A. Exporting: Many manufacturing firms begin their global expansion as exporters and only later switch to another mode for serving a foreign market. Exporting has two distinct advantages.

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1. It avoids the often-substantial cost of establishing manufacturing operations in the host country

2. Exporting may help a firm achieve experience curve and location economies.

Exporting has number of drawbacks.

1. Exporting from the firm’s home base may not be appropriate, if there are lower-cost locations for manufacturing the product abroad.

2. High transportation costs can make exporting uneconomical, particularly for bulk products.

3. Tariff barriers can make exporting uneconomical 4. Exporting arises when a firm delegates its marketing in each country

where it does business to a local agent. Foreign agents often carry the products of competing firms and so have divided loyalties. In such cases, the foreign agent may not do as good a job as the firm would if it managed its marketing itself.

B. Turnkey Projects: In turnkey projects, the contractor agrees to handle every detail of the project for a goring client, including the training of operating personnel. At completion of the contact, the foreign client is handed the “key” to a plant that is ready for full operation- hence the term turnkey. This is a means of exporting process technology to other countries. Turnkey projects are most common in the chenical, pharmaceutical, petroleum refining, and metal refining industries, all of which use complex, expensive production technologies. Advantages:

1. The turnkey projects are a way of earning great economic returns from that asset, particularly when the host government limits FDI.

2. A turnkey project can be less risky than conventional FDI Disadvantages:

1. The firm that enters into a turkey deal will have no long-term interest in the foreign country.

2. The firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor.

3. If the firm’s process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors.

C. Contractual entry modes Long-term, non-equity agreements between a company in home country and another in host country.

1. Licensing: A licensing agreement is an arrangement whereby a licensor grant the rights to intangible property to another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks. Advantages:

a. The firm does not have to bear the development costs and risks associated with opening a foreign market. Licensing is

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very attractive for firms lacking the capital to develop operations overseas.

b. Licensing can be attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market.

c. Licensing is also often used when a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investment.

d. Licensing is frequently used when a firm possesses some intangible property that might have business applications, but it does not want to develop those applications itself.

Disadvantages:

a. It does not give a firm the tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies.

b. Competing ins a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another. By its very nature, licensing limits a firm’s ability to do this.

c. Risk associated with licensing of technological know-how to foreign companies.

2. Franchising: Franchising is similar to licensing, although franchising

tends to involve longer-term commitments than licensing. Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. The franchise will also often assist the franchisee to run the business on an ongoing basis. As with the licensing, the franchiser will typically receive a royalty payment, which amounts to some percentage of the franchisee’s revenues. Advantage: The firm is relieved of many of the costs and risks of opening a foreign market on its own Disadvantages: The disadvantages are less pronounced than Licensing since franchising is often used by service companies, and there is no reason to consider the need for coordination of manufacturing to achieve experience curve and location economies. However, franchising may inhibit the firm’s ability to take profits out of one country to support competitive attacks in another. A more significant disadvantage of Franchising is quality control.

D. Investment entry modes • Partially owned vs. fully owned investment

1. Joint Venture: A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms. Advantages:

a. A firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems.

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b. When the development costs and /or risks of opening a foreign market are high, a firm might gain by sharing these costs and/or risks with a local partner.

c. In many countries, political considerations make joint ventures the only feasible entry mode

Disadvantages:

a. A firm that enters into a joint venture risks giving control of its technology to its partner.

b. It does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Nor does it give a firm the tight control over a foreign subsidiary that it might need for engaging in coordinated global attacks against its rivals.

c. The shared ownership arrangement can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be.

2. Wholly owned Subsidiaries:

In wholly owned subsidiaries, the firm owns 100 percent of the stock. Establishing a wholly owned subsidiary in a foreign market can be done in two ways. The firm can either set up a new operation in that country, often referred to as a “green-field venture”, or it can acquire an established firm in that host nation (Acquisition) and use that firm to promote its products.

Acquisitions are quick to execute, and a firm can rapidly build its presence in the target foreign market. However, acquisitions often fail because of the overpayment for assets of acquired company, clash between the cultures of the acquiring and acquired firm, and difficulties in realizing the synergies by integration of operations.

The big advantage of establishing a green-field venture in a foreign country is that it gives the firms much greater ability to build the kind of subsidiary company that it wants. However, green-field ventures are slower to establish and are also risky. As with any new venture, a degree of uncertainty is associated with future revenue and profit prospects. The choice between acquisitions and green-field ventures is very critical to success. The decision, in general, depends on the circumstances confronting the firm. If the firm is seeking to enter a market where there are already well-established incumbent enterprises, and where global competitors are also interested in establishing a presence, it may pay the firm to enter via an acquisition. However, if a firm is considering entering a country where there are no incumbent competitors to be acquired, then a gree-field ventures may be the only mode. Even when incumbents exists, if the competitive advantage of the firm is based on the transfer of organizationally embedded competences, skills, routines, and culture, it may still be preferable to enter via a green-field venture.

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Advantages of Wholly owned Subsidiaries: a. Protection of technology b. Ability to engage in global strategic coordination c. Ability to realize location and experience economies

Disadvantages of Wholly owned Subsidiaries: High costs and risks

Global Strategic Alliances

Global strategic alliances are cooperative agreements between companies from different countries that are actual or potential competitors. Strategic alliances vary considerably in the length of time and degree of interrelatedness they offer. Companies enter into strategic alliances with actual or potential competitors in order to achieve certain strategic objectives. Strategic alliances may facilitate entry into a foreign market. Strategic alliances allow companies to share the fixed costs and associated risks that arise from the development of new products or processes. Alliances bring together complementary skills and assets that neither company could easily develop on its own. Alliances help companies set technological standards for their industry, which can benefit the allied firms. One problem with global strategic alliances is that they can give a firm’s competitors a low-cost route to gaining new technology and market access. Unless it is careful, a company can give away more than it gets in return.

The Quest for Competitive Advantage in Foreign Markets There are three ways in which a firm can gain competitive advantage or offset domestic disadvantages by expanding outside its domestic markets:

a. Use location to lower costs or achieve greater product differentiation b. Transfer competitively valuable competencies and capabilities from its

domestic markets to foreign markets c. Use cross-border coordination in ways that a domestic-only competitor

cannot