International Business Lianguang Cui Business School Nankai University
Outline Introduction Understanding Institutions Culture Difference FDI Global Economic Integration Entering a Foreign Market Alliance and M&A International HRM CSR in International Business
FIRMS IN INTERNATIONAL BUSINESS multinational enterprise (MNE) firm that engages in foreign direct investments foreign direct investment (FDI) investments in, controlling, and managing value-added activities in other countries Note that international business also addresses domestic firms competing and/or collaborating with foreign entrants
THE IMPORTANCE OF EMERGING ECONOMIES IN INTERNATIONAL BUSINESS International business is not limited to firms competing in developed economies emerging economies (emerging markets) a term that has gradually replaced the term developing countries since the 1990s? Can you name three or four emerging economies?
THREE VIEWS OF GLOBALIZATION A new force in recent times A long-running historical evolution A pendulum swinging between extremes
UNDERSTANDING INSTITUTIONS Institutions rules of the game Institutional transitions Fundamental and comprehensive changes introduced to formal and informal rules of the game that affect firms as players Institution-based view Success and failure of firms are enabled and constrained by institutions
UNDERSTANDING INSTITUTIONS Institutional framework Formal and informal institutions governing individual and firm behavior Formal institutions Laws, regulations, and rules - may be imposed by home countries and host countries Norms Values, beliefs, and actions
INFORMAL INSTITUTIONS Regulatory pillar Coercive power of governments Normative pillar How values, beliefs, and actions of other relevant players influence behavior of focal individuals and firms Cognitive pillar Internalized, or taken for-granted, values and beliefs that guide individual and firm, or group, behavior
Can you describe the Chinese cognitive pillar? What is your understanding of the American cognitive pillar?
POLITICAL SYSTEMS Political system Rules of the game on how a country is governed politically Political risk Risk associated with political changes that may negatively impact domestic and foreign firms
TYPES OF POLITICAL SYSTEMS Democracy System in which citizens elect representatives to govern the country on their behalf Totalitarianism (dictatorship) System in which one person or party exercises absolute political control over the population
Can you give some examples of Totalitarianism (dictatorship)? What is the difference between Democracy and Totalitarianism? Do you see any advantages of Totalitarianism?
LEGAL SYSTEMS Legal system Rules of the game on how a country s laws are enacted and enforced
TYPES OF LEGAL SYSTEMS Civil law Comprehensive statutes and codes as a primary means to form legal judgments Common law English origin, shaped by precedents and traditions from previous judicial decisions Theocratic law Based on religious teachings
? Which system is used in your home country?
INTELLECTUAL PROPERTY RIGHTS Intellectual property Intangible property the result of intellectual activity Intellectual property rights (IPR) Rights associated with ownership of intellectual property
TYPES OF IPR Patent Legal rights awarded by government authorities to inventors of new products or processes Copyright Exclusive legal rights of authors and publishers to publish and disseminate their work Trademark Exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products from others
ECONOMIC SYSTEMS Economic system Rules of the game on how a country is governed economically
TYPES OF ECONOMIC SYSTEMS Market economy Characterized by the invisible hand of market forces; government takes a hands-off, or laissez faire, approach Command economy Government taking the commanding height in the economy; all factors of production are government- or state owned and controlled, and all supply, demand, and pricing are planned by the government Mixed economy Elements of both market economy and command economies
Culture difference
Daily meals
Social network
Mood and weather
Living style
Transportation means
Elderly people
Self-awareness
Weekend in the street
Kids
Standard of beauty
On time
Travel
Queue
Take a shower
How do we think about the others?
Express opinions
Party
In the restaurant
How to handle problems?
How to express anger?
Fashion
Leader
INFORMAL INSTITUTIONS Come from: Culture Ethics Norms Ethnocentrism To perceive one s own culture, ethics, and norms as natural, rational, and morally right.? Can you give an example of an ethnocentric statement?
CULTURE Culture The collective programming of the mind which distinguishes the members of one group or category of people from another.? How would you describe the culture in your home country/ hometown?
LANGUAGE English is the dominant language in international business Recent globalization has called for the use of one common language
RELIGION Religion is another major manifestation of culture Knowledge about religions is crucial even for nonreligious managers Largest religions: Christianity - 1.7 billion Islam - 1 billion Hinduism - 750 million Buddhism - 350 million
FDI VOCABULARY Foreign direct investment (FDI) Putting money in activities that control and manage value-added activities in other countries Multinational enterprise (MNE) Firms that engage in FDI Foreign portfolio investment (FPI) Holding securities, such as stocks and bonds, of companies in countries outside one s own but does not entail the active management of foreign assets Management control rights Authority to appoint key managers and establish control mechanisms
HORIZONTAL AND VERTICAL FDI Horizontal FDI Producing the same products or offering the same services in a host country as firms do at home Vertical FDI Firm moves upstream or downstream in different value chain stages in a host country through FDI
UPSTREAM AND DOWNSTREAM VERTICAL FDI Upstream vertical FDI Using FDI in an earlier activity in the value chain Downstream vertical FDI Using FDI in an later activity in the value chain
FDI FLOW AND STOCK FDI flow Amount of FDI moving in a given period (usually a year) in a certain direction FDI inflow FDI moving into a country in a year FDI outflow FDI moving out of a country in a year FDI stock Total accumulation of inbound FDI in a country or outbound FDI from a country
KEY TERMS ON ECONOMIC INTEGRATION Regional economic integration Efforts to reduce trade and investment barriers within one region General Agreement on Tariffs and Trade (GATT) Multilateral agreement governing the international trade of goods (merchandise) World Trade Organization (WTO) Official title of the multilateral trading system and the organization underpinning this system since 2005
WORLD TRADE ORGANIZATION: 1995-PRESENT General Agreement on Trade in Services (GATS) WTO agreement governing international trade of services Trade-Related Aspects of Intellectual Property Rights (TRIPS) WTO agreement governing intellectual property rights
TRADE DISPUTE SETTLEMENT WTO does not have enforcement capability WTO simply recommends that losing countries change their laws or practices and authorizes the winning countries to use tariff retaliation to compel the offending countries to comply with the WTO rulings
REGIONAL INTEGRATION Economic union Having all the features of a common market, members also coordinate and harmonize economic policies (in areas such as monetary, fiscal, and taxation) to blend their economies into a single economic entity Monetary union A group of countries that use a common currency Political union Integration of political and economic affairs of a region
TYPES OF REGIONAL ECONOMIC INTEGRATION Free trade area (FTA) Group of countries that remove trade barriers among themselves Customs union One step beyond an FTA, a customs union imposes common external policies on nonparticipating countries Common market Combining everything a customs union has, a common market additionally permits the free movement of goods and people
THE EU European Union (EU) Official title of European economic integration since 1993
THE EU TODAY Schengen Passport-free travel zone within the EU Euro Currency currently used in 16 EU countries Euro zone 16 EU countries that currently use the euro as the official currency
Entering a foreign Market
OVERCOMING THE LIABILITY OF FOREIGNNESS Liability of foreignness Inherent disadvantage foreign firms experience in host countries because of their nonnative status? Thinking of a foreign firm that has recently started doing business in your home country, what are some of the assets and liabilities of foreignness it is facing?
WHERE TO ENTER? Location-Specific Advantages and Strategic Goals Location-specific advantages Benefits a firm reaps from the features specific to a place Agglomeration Location-specific advantages that arise from the clustering of economic activities in certain locations
CULTURAL/INSTITUTIONAL DISTANCES AND FOREIGN ENTRY LOCATIONS Cultural distance Difference between two cultures along identifiable dimensions such as individualism Institutional distance Extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries
CULTURAL/INSTITUTIONAL DISTANCES AND FOREIGN ENTRY LOCATIONS Stage model Model of internationalization portraying slow stepby-step (stage-by-stage) process a firm must go through to internationalize its business
WHEN TO ENTER? First-mover advantages Benefits that accrue to firms that enter the market first and that later entrants do not enjoy Late-mover advantages Benefits that accrue to firms that enter the market later and that early entrants do not enjoy
HOW TO ENTER? Scale of entry Amount of resources committed to entering a foreign market Modes of entry Method used to enter a foreign market
EQUITY VS NONEQUITY MODES Nonequity mode Mode of entering foreign markets through exports and contractual agreements that tends to reflect relatively smaller commitments to overseas Markets Equity mode Mode of entering foreign markets through JVs and wholly owned subsidiaries that indicates a relatively larger, harder-to-reverse commitment
MAKING ACTUAL SELECTIONS Turnkey project Project in which clients pay contractors to design and construct new facilities and train personnel Build-operate-transfer (BOT) agreement Nonequity mode used to build a longer term presence by building and then operating a facility for a period of time before transferring operations to a domestic agency or firm
MAKING ACTUAL SELECTIONS Co-marketing Efforts among a number of firms to jointly market their products and services Joint venture (JV) New corporate entity created and jointly owned by two or more parent companies Wholly owned subsidiary (WOS) Subsidiary located in a foreign country that is entirely owned by the parent multinational
MAKING ACTUAL SELECTIONS Green-field operation Building factories and offices from scratch (on a proverbial piece of green field formerly used for agricultural purposes? Which of these options would you select if you were entering a foreign market?
DEFINING ALLIANCES AND ACQUISITIONS Strategic alliance Voluntary agreement between firms involving exchange, sharing, or co-developing of products, technologies, or services Contractual (non-equity based) alliances Associations between firms that are based on contracts and do not involve the sharing of ownership
DEFINING ALLIANCES AND ACQUISITIONS Equity-based alliances Alliances based on ownership or financial interest between the firms Strategic investment One firm invests in another as a strategic investor Cross-shareholding Both firms invest in each other to become crossshareholders.
DEFINING ALLIANCES AND ACQUISITIONS Acquisition Transfer of the control of operations and management from one firm (target) to another (acquirer), the former becoming a unit of the latter Merger Combination of operations and management of two firms to establish a new legal entity
HUMAN RESOURCE MANAGEMENT Human resource management (HRM) Activities that attract, select, and manage employees Staffing HRM activities associated with hiring employees and filling positions
STAFFING Host country national (HCN) Employees from the host country and often known as locals Expatriate (expat) Individuals working in a foreign country Parent country national (PCN) Employees from the parent country of the multinational enterprise (MNE) who work at its local subsidiary Third country national (TCN) Employees from neither the parent country nor the host country
APPROACHES TO STAFFING Ethnocentric approach Emphasizes the norms and practices of the parent company (and the parent country of the MNE) by relying on PCNs Geocentric approach Focuses on finding the most suitable managers; a geocentric approach is color-blind; the color of a manager s passport does not matter
APPROACHES TO STAFFING Polycentric approach Focuses on the norms and practices of the host country Expatriation Leaving one s home country to work in another country
TRAINING AND DEVELOPMENT Training Specific preparation to do a particular job Development Long-term, broader preparation to improve managerial skills for a better career? What specific types of training and development do you think you will need to land your ideal job?
DEVELOPMENT FOR REPATRIATES Repatriate Process of facilitating the expatriate s return Repatriation Process of facilitating the expatriate s return Psychological contract An informal understanding of expected delivery of benefits in the future for current services
CORPORATE SOCIAL RESPONSIBILITY (CSR) Corporate social responsibility (CSR) Consideration and response to issues beyond narrow economic, technical, and legal requirements to accomplish social benefits along with traditional economic gains which the firm seeks Stakeholder Any group or individual who can affect or is affected by the organization s objectives
PRIMARY AND SECONDARY STAKEHOLDERS Primary stakeholder groups Constituents on which the firm relies for its continuous survival and prosperity Secondary stakeholder groups Those who influence or affect, or are influenced/affected by, the corporation but are not engaged in transactions with the corporation and are not essential for its survival
PRIMARY AND SECONDARY STAKEHOLDERS Triple bottom line Economic, social, and environmental performance that simultaneously satisfies economic, social, and environmental performance measures of all stakeholder groups
INSTITUTIONS AND CSR Code of conduct (code of ethics) Set of written policies and standards outlining proper practices for the organization? Can you name at least three key issues that you would address if you were writing a code of conduct for a firm?
INSTITUTIONS AND CSR Reactive strategy Strategy that only responds to CSR causes when required by disasters and outcries Defensive strategy Strategy that focuses on regulatory compliance but with little actual commitment to CSR by top management
INSTITUTIONS AND CSR Proactive strategy Strategy that anticipates CSR and endeavors to do more than is required Accommodative strategy Strategy characterized by some support from top managers, who may view CSR as a worthwhile endeavor
Discussion Abuse of child labor is common in many developing countries. If you had the power to create employment laws to which domestic and foreign companies must adhere, what would you do to protect child laborers?
Discussion You are an executive visiting a foreign subsidiary in a poor country. You find that the subsidiary has hired a 12-year-old girl to work on a factory floor, in violation of the company s prohibition on child labor. You tell the local manager to replace the child and tell her to go back to school. The local manager tells you that the child is an orphan with no other means of support, and she will probably become a street child if she is denied work. What should you do?
Discussion You are overseeing a multinational s operations in a country where drug trafficking and lawlessness are rife. One day, a representative of a local big man approaches the manager and asks for a donation to help the big man provide housing for the poor. The representative tells the manager that in return for the donation, the big man will make sure that you have a productive stay in the country. However, you are well aware that the big man heads a criminal organization that is engaged in drug trafficking. You also know that the big man does indeed help the poor in the run-down neighborhood of the city where he was born. What would you do?