PRINCIPLES OF GLOBAL BUSINESS MANAGEMENT
- Discuss the National Competitive Advantage Theory of International Trade. How this theory is different from other theories.
National Competitive Advantage Theory of International Trade
In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.
- Local market resources and capabilities (factor conditions). Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage.
- Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a sustainable competitive advantage in software products and services.
- Local suppliers and complementary industries. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity.
- Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness.
In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries.
Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories.
Different from other theories
International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.
People or entities trade because they believe that they benefit from the exchange. They may need or want the goods or services. While at the surface, this many sound very simple, there is a great deal of theory, policy, and business strategy that constitutes international trade.
In this section, you’ll learn about the different trade theories that have evolved over the past century and which are most relevant today. Additionally, you’ll explore the factors that impact international trade and how businesses and governments use these factors to their respective benefits to promote their interests.
He new trade theory tells us that increasing returns to specialization and first-mover advantages matter; and Porter tells us that all these factors may be important insofar as they affect the four components of the national diamond.
The following points have been made in this chapter:
- Mercantilists argued that it was in a country´s best interests to run a balance-of-trade surplus. They viewed trade as a zero-sum game, in which one country´s gains cause losses for other countries.
- The theory of absolute advantage suggests that countries differ in their ability to produce goods efficiently. The theory suggests that a country should specialize in producing goods in areas where it has an absolute advantage and import goods in areas where other countries have absolute advantages.
- The theory of comparative advantage suggests that it makes sense for a country to specialize in producing those goods that it can produce most efficiently, while buying goods that it can produce relatively less efficiently from other countries even if that means buying goods from other countries that it could produce more efficiently itself.
- The theory of comparative advantage suggests that unrestricted free trade brings about increased world production; that is, that trade is a positive-sum game.
- The theory of comparative advantage also suggests that opening a country to free trade stimulates economic growth, which in turn creates dynamic gains from trade.
- The Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce.
- The product life-cycle theory suggests that trade patterns are influenced by where a new product is introduced. In an increasingly integrated global economy, the product life-cycle theory seems to be less predictive than it was between 1945 and 1975.
- The new trade theory argues that a country may predominate in the export of a certain product simply because it had a firm that was a first mover in an industry that will profitably support only a few firms because of substantial economies of scale.
- Some new trade theorists have promoted the idea of strategic trade policy. The argument is that government, by the sophisticated and judicious use of subsidies, might be able to increase the chances of domestic firms becoming first movers in newly emerging industries.
- Porter´s theory of national competitive advantage suggests that the pattern of trade is influenced by four attributes of a nation:
(i) Factor endowments,
(ii) Domestic demand conditions,
(iii) Relating and supporting industries, and
(iv) Firm strategy, structure, and rivalry.
- Theories of international trade are important to an individual business firm primarily because they can help the firm decide where to locate its various production activities.
- Firms involved in international trade exert a strong influence on government policy toward trade. By lobbying government bodies, firms can help promote free trade or trade restrictions.
- Explain the following terms i) Tariff ii) Subsidies and Countervailing Duties iii) Quotas iv) Voluntary Export Restraint v) Local Content Requirement. Why do advanced countries insist on elimination of subsidies.
- I) Tariff
A tariff is a tax on imports or exports (an international trade tariff), or (2) a list of prices for such things as rail service, bus routes, and electrical usage (electrical tariff, etc.). The meaning in (1) is now the more common meaning. The meaning in (2) is historically earlier. The meaning in (1) developed from a tabular list of tax rates for different import goods.
Governments typically use one of the following justifications for implementing tariffs:
- To protect domestic jobs. If consumers buy less-expensive foreign goods, workers who produce that good domestically might lose their jobs.
- To protect infant industries. If a country wants to develop its own industry producing a particular well, it will use tariffs to make it more expensive for consumers to purchase the foreign version of that good. The hope is that they will buy the domestic version instead and help that industry grow.
- To retaliate against a trading partner. If one country doesn’t play by the trade rules both countries previously agreed on, the country that feels jilted might impose tariffs on its partner’s goods as a punishment. The higher price caused by the tariff should cause purchases to fall.
- To protect consumers. If a government thinks a foreign good might be harmful, it might implement a tariff to discourage consumers from buying
Tariffs within technology strategies
When tariffs are an integral element of a country´s technology strategy, the tariffs can be highly effective in helping to increase and maintain the country´s economic health. As an integral part of the technology strategy, tariffs are effective in supporting the technology strategy´s function of enabling the country to outmaneuver the competition in the acquisition and utilization of technology in order to produce products and provide services that excel at satisfying the customer needs for a competitive advantage in domestic and foreign markets.
- II) Subsidies and Countervailing Measures
The WTO’s “Agreement on Subsidies and Countervailing Measures,” which is contained in the General Agreement on Tariffs and Trade (GATT) 1994, defines when and how export subsidies can be used and regulates the measures that nations can take to offset the effect of such subsidies. These measures include the affected nation using the WTO’s dispute settlement procedure to seek withdrawal of the subsidy, or imposing countervailing duties on subsidized imports that are hurting domestic producers.
The definition of “subsidy” in this regard is quite broad. It includes any financial contribution made by a government or government agency, including a direct transfer of funds (such as grants, loans and infusion of equity), potential direct transfer of funds (for example, loan guarantees), fiscal incentives such as tax credits, and any form of income or price support.
Tariffs levied on imported goods to offset subsidies made to producers of these goods in the exporting country. Countervailing duties (CVD) are meant to level the playing field between domestic producers of a product and foreign producers of the same product who can afford to sell it at a lower price because of the subsidy they receive from their government. If left unchecked, such subsidized imports can have a severe effect on domestic industry, forcing factory closures and causing huge job losses. As export subsidies are considered to be an unfair trade practice, the World Trade Organization (WTO) – which deals with the global rules of trade between nations – has detailed procedures in place to establish the circumstances under which countervailing duties can be imposed by an importing nation
A government-imposed trade restriction that limits the number, or in certain cases the value, of goods and services that can be imported or exported during a particular time period. Quotas are used in international trade to help regulate the volume of trade between countries. They are sometimes imposed on specific goods and services to reduce imports, thereby increasing domestic production. In theory, this helps protect domestic production by restricting foreign competition.
Quotas are different than tariffs (or customs), which places a tax on imports or exports in and out of a country. Both quotas and tariffs are protective measures imposed by governments to try to control trade between countries. The U.S. Customs and Border Protection Agency, a federal law enforcement agency of the U.S. Department of Homeland Security, is in charge of regulating international trade, collecting customs and enforcing U.S. trade regulations. Smuggling - the illegal transfer of goods into a country - is a negative side effect of quotas and tariffs
- IV) Voluntary export restraints
A voluntary export restraint (VER) or voluntary export restriction is a government imposed limit on the quantity of goods that can be exported out of another country during a specified period of time.
Typically VERs arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. VERs are then offered by the exporter to appease the importing country and to deter the other party from imposing even more explicit (and less flexible) trade barriers
Also, VERs are typically implemented on a bilateral basis, that is, on exports from one exporter to one importing country.
VERs have been used since the 1930s at least, and have been applied to products ranging from textiles and footwear to steel, machine tools and automobiles. They became a popular form of protection during the 1980s, perhaps in part because they did not violate countries´ agreements under the GATT.
As a result of the Uruguay round of the General Agreement on Tariffs and Trade (GATT), completed in 1994, World Trade Organization (WTO) members agreed not to implement any new VERs and to phase out any existing VERs over a four-year period. Exceptions can be granted for one sector in each importing country.
Some examples of VERs occurred with auto exports from Japan in the early 1980s and with textile exports in the 1950s and 1960s.
1981 Automobile VER
When the automobile industry in the United States was threatened by the popularity of cheaper more fuel efficient Japanese cars, a 1981 voluntary restraint agreement limited the Japanese to exporting 1.68 million cars to the U.S. annually as stipulated by U.S Government. This quota was originally meant to expire after three years, in April 1984. However, with a growing trade deficit vis-à-vis Japan and under pressure from domestic manufacturers, the US government saw fit to extend the quotas for an additional year. The cap was raised to 1.85 million cars for this additional year, then to 2.3 million for 1985. The voluntary restraint was only finally removed in 1994
The Japanese automobile industry responded by establishing assembly plants or "transplants" in the United States (primarily in the Southern U.S. states where right-to-work laws exist as opposed to the Rust Belt states with established labor unions) to produce mass market vehicles. They also began exporting bigger, more expensive cars (soon under their newly formed luxury brands like Acura, Lexus, and Infiniti) in order to make more money from a limited number.
- V) Local Content Requirement
Local content requirement is a popular government policy in developing countries to regulate foreign direct investment. We establish a model with heterogeneous multinational firms and show that (a) the LCR policy affects the firms´ modes of entry to a new market, with FDI being more likely to be adopted for a lower LCR; and (b) when facing the same LCR, a less efficient firm is more likely to adopt the FDI mode than a more efficient firm. Furthermore, we investigate the design of optimal LCR policy. Two types of FDI benefit are considered, and two types of LCR policy are compared.
Advanced countries insist on elimination of subsidies
World Trade Organization (WTO) member countries met in Geneva where the developed countries agreed to cut back and eventually eliminate an estimated $350 billion of their farm and export subsidies. The accord was hammered out by five WTO members including India and Brazil and submitted to the WTO’s plenary session where it was finally ratified on July 31, 2004. The Fifth Ministerial Conference of the World Trade Organization held in Cancun in September 2003 collapsed from inside as internal squabbles and irreconcilable philosophical differences developed between the developed countries and the developing countries. The WTO, which started with noble objectives of raising the global standards of living through international trade agreements and cooperation among the WTO member countries, appeared to be teetering on the verge of a complete collapse. Over the past decade, through five ministerial conferences, the WTO member countries gradually got polarized into two main blocks, the “have’s” and the “have not’s”, the developed countries and the still developing countries respectively. One of the important items of contention was the issue of reduction and elimination of the huge farm subsidies in the European Union (EU) and the United States (US). At the 2003 WTO conference in Cancun, 21 of the developing countries formed a group, known as G-21 initiated under the leadership of Brazil and India, and insisted on discussions for elimination of the farm subsidies of the EU-US combine. The EU and US governments give billions of dollars’ worth of agricultural and export subsidies annually to their farmers that allow them to have a competitive advantage in international markets in effect preventing agricultural producers in developing countries from having access to global markets. The EU delegates insisted that the four Singapore issues must be dealt with first before including any discussions on the issues of farm subsidies on the agenda. The G-21 overnight swelled into G-70. The developing countries refused to be pushed into a corner and have proved that they are now a force to reckon with. The WTO Cancun conference came to a dramatic end without any agreement, leaving the negotiations in a deadlock. At the historic July 2004 WTO negotiations in Geneva, an accord has been reached under which the developed countries agreed to reduce and eventually eliminate their export and farm subsidies. The developing countries also agreed to lower their tariffs on imports from EU-US and other developed countries. The accord is expected to pave the way for the resumption of the WTO Doha Round of multilateral negotiations to liberalize world trade.
- What is culture? What are the different components of culture? How study of cross cultural management is relevant in today’s globalize world.
Culture is the characteristics of a particular group of people, defined by everything from language, religion, cuisine, social habits, music and arts. Today, in the United States as in other countries populated largely by immigrants, the culture is influenced by the many groups of people that now make up the country.
Components of Culture
Components of Culture - are simply parts (ingredients, items, pieces, features) that make up a culture. These components look different in each culture.
There are different way to break down the components of culture - below is one way.
- food - edible source of energy
- clothing - protective covering for the body
- defense - tools and strategies used to protect people from threats
- shelter - structure used to protect people and their belongings
- Education - the way people in a culture learn what they need to know in order to be successful in their culture
- Transportation - the way a culture gets people and goods from one place to another
- Communication - the way a culture shares ideas and messages
- Economy - the way people in a culture get what they need and want
- Technology - manmade tools that make life easier
- Social Structure - who is considered important in a culture and who isn´t
- Beliefs and Traditions - the ideas a culture believes in and the way they celebrate those beliefs
- Rules and Regulations - the rules that maintain order in a culture and the structure that maintains those rules
- Arts & Recreation - the way a culture spends its spare time and expresses itself creatively
Study of cross cultural management is relevant in today’s globalize world
Managers in today’s multicultural global business community frequently encounter cultural differences, which can interfere with the successful completion of projects. This paper describes the most well-known and accepted theories of cultural differences and illustrates them with examples from international project management. Two leading studies of cross-cultural management have been conducted by Geert Hofstede and Fons Trompenaars. Both approaches propose a set of cultural dimensions along which dominant value systems can be ordered. These value systems affect human thinking, feeling, and acting, and the behavior of organizations and institutions in predictable ways. The two sets of dimensions reflect basic problems that any society has to cope with but for which solutions differ. They are similar in some respects and different in others. The dimensions can be grouped into several categories:
1) Relations between people. Two main cultural differences have been identified. Hofstede distinguishes between individualism and collectivism. Trompenaars breaks down this distinction into two dimensions: universalism versus particularism and individualism versus communitarianism.
2) Motivational orientation. Societies choose ways to cope with the inherent uncertainty of living. In this category Hofstede identifies three dimensions: masculinity versus femininity, amount of uncertainty avoidance, and power distance.
3) Attitudes toward time. Hofstede distinguishes between a long-term versus a short-term orientation. Trompenaars identifies two dimensions: sequential versus synchronic and inner versus outer time.
Two additional categories called socio-cultural dimensions were proposed by Aycan et. al.: paternalism and fatalism. In a paternalistic relationship, the role of the superior is to provide guidance, protection, nurturing and care to the subordinate, and the role of the subordinate, in return, is to be loyal and deferential to the superior. Fatalism is the belief that it is not possible to fully control the outcomes of one’s actions and, therefore, trying too hard to achieve something and making long-term plans are not worthwhile exercises.
In what follows we provide a brief description of the most relevant dimensions and consider some cultural problems that might arise when managing an international project.
Power distance is the extent to which the less powerful members of organizations and institutions accept and expect that power is distributed unequally. The basic problem involved is the degree of human inequality that underlies the functioning of each particular society. In Hofstede’s research, power distance is measured in a Power Distance Index (PDI). The values and attitudes found at the national level contrast “low-PDI countries” with “high-PDI countries”, with some countries placed in between. High PDI countries include Malaysia and Mexico. Low PDI countries include Austria and Denmark.
Uncertainty avoidance refers to the extent to which a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. Unstructured situations are novel, unknown, surprising, and different from usual. The basic problem involved is the degree to which a society tries to control the uncontrollable. The countries from Hofstede’s study were each given a score on Uncertainty Avoidance Index (UAI). UAI was derived from country mean scores on questions dealing with rule orientation, employment stability, and stress. Hofstede’s research has found UAI values for 50 countries and three regions. The countries rank from Greece, Portugal, and Guatemala (highest UAI) to Singapore, Jamaica, and Denmark (lowest UAI).
Individualism, versus its opposite, collectivism, is the degree to which individuals are supposed to look after themselves or remain integrated into groups, usually around the family. Positioning itself between these poles is a very basic problem all societies face. A concise definition is: “Individualism stands for a society in which the ties between individuals are loose: Everyone is expected to look after him/herself and her/his immediate family only. Collectivism stands for a society in which people from birth onward are integrated into strong, cohesive in-groups, which throughout people’s lifetime continue to protect them in exchange for unquestioning loyalty” . National differences in Individualism are calculated in an Individualism Index (IDV). The highest IDV scores were found in the United States, Australia, and Great Britain. The lowest IDV scores were found in Guatemala, Ecuador, and Panama.
Masculinity versus its opposite, femininity, refers to the distribution of emotional roles between the genders, which is another fundamental problem for any society. This distinction opposes “tough” masculine and “tender” feminine societies. The duality of the sexes is a fundamental fact with which different societies cope in different ways. Surveys on the importance of work goals show that almost universally women attach more importance to social goals such as relationships, helping others, and the physical environment, and men attach more importance to ego goals such as careers and money. However, Hofstede’s data revealed that the importance respondents attached to such “feminine” versus “masculine” work varied across countries as well as across occupations. Masculinity stands for a society in which gender roles are clearly distinct. Men are supposed to be assertive, tough, and focused on material success. Women are supposed to be more modest, tender, and concerned with the quality of life. Femininity stands for a society in which gender roles overlap. Both men and women are supposed to be modest, tender, and concerned with the quality of life. Because the respondents were mostly men, Hofstede suggested calling this dimension the Masculinity Index (MAS). The list of countries in order of MAS (high gender roles distinction at work) shows Japan at the top. German-speaking countries (Austria, Switzerland, and Germany) scored high; so did the Caribbean Latin American countries Venezuela, Mexico, and Colombia, and Italy. The Anglo countries (Ireland, Great Britain, South Africa, the United States, Australia, New Zealand, and Canada) all scored above average. Asian countries, other than Japan, were in the middle. The feminine side (low gender roles distinction at work) includes other Latin countries (France, Spain, Salvador, etc.). At the extreme “feminine” pole were the Nordic countries including Sweden, Norway, and the Netherlands. Low MAS countries are characterized by cooperation at work and a good relationship with the boss, belief in group decisions, promotion by merit, lower job stress, and preference for smaller companies. High MAS countries are characterized by challenge and recognition in jobs, belief in individual decisions, higher job stress, and preference for large corporations.
Long-term versus short-term orientation refers to the extent to which a culture programs its members to accept delayed gratification of their material, social, and emotional needs. Hofstede’s research shows country scores on a Long-term Orientation Index (LTO) for 23 countries. East Asian countries (China, Hong Kong, Taiwan, Japan, and South Korea) scored highest. Western countries were on the low side, and some developing countries (Zimbabwe, Philippines, Nigeria, and Pakistan) scored lowest. So this dimension does not oppose East and West; it divides the world along new lines. Business people in long-term oriented cultures are accustomed to working toward building strong positions in their markets and do not expect immediate results. Managers (often family members) are allowed time and resources to make their own contributions. In short-term oriented cultures the “bottom line” (the results of the past month, quarter, or year) is a major concern; control systems are focused on it and managers are constantly judged by it. This state of affairs is supported by arguments that are assumed to be rational, but the cultural distinction reminds us of the fact that this entire rationality rests on cultural – that is, pre-rational – choices.
Hofstede’s research, which used questionnaires provided to the worldwide employees of IBM, did not include some regions, and countries of Central and Eastern Europe. However, Hofstede hypothesized that Russian managers would be characterized by high power distance, high uncertainty avoidance, medium-range individualism, and low masculinity (low gender roles distinction at work). Bollinger tested Hofstede’s hypothesis in its studies of Russian managers in 1994, and found support for these predictions. More recent studies utilized Hofstede’s dimensional model as a paradigm for new countries. For instance, Elenkov in his comparative study found that US managers are more individualistic than their Russian counterparts and the managerial culture in the United States is also characterized by lower power distance and uncertainty avoidance than the Russian managerial culture. Regarding paternalism and fatalism, Aycan et al. found Russian managers to have high scores on both of these dimensions.
From these results, implications for the applicability of project management methods are elaborated.
- Critically evaluate the various alternatives available to an organization to enter the foreign market. Give example for each one of them.
Various alternatives available to an organization to enter the foreign market
Foreign Market Entry Modes
The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms:
- Joint Venture
- Direct Investment
Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.
Exporting commonly requires coordination among four players:
- Transport provider
Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance.
Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.
There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.
Such alliances often are favorable when:
- the partners´ strategic goals converge while their competitive goals diverge;
- the partners´ size, market power, and resources are small compared to the industry leaders; and
- Partners´ are able to learn from one another while limiting access to their own proprietary skills.
The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions.
Potential problems include:
- conflict over asymmetric new investments
- mistrust over proprietary knowledge
- performance ambiguity - how to split the pie
- lack of parent firm support
- cultural clashes
- if, how, and when to terminate the relationship
Joint ventures have conflicting pressures to cooperate and compete:
- Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.
- The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.
- The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.
Foreign Direct Investment
Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise.
Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.
The Case of Euro Disney
Different modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project. Walt Disney Co. faced the challenge of building a theme park in Europe. Disney´s mode of entry in Japan had been licensing. However, the firm chose direct investment in its European theme park, owning 49% with the remaining 51% held publicly.
Besides the mode of entry, another important element in Disney´s decision was exactly where in Europe to locate. There are many factors in the site selection decision, and a company carefully must define and evaluate the criteria for choosing a location. The problems with the EuroDisney project illustrate that even if a company has been successful in the past, as Disney had been with its California, Florida, and Tokyo theme parks, future success is not guaranteed, especially when moving into a different country and culture. The appropriate adjustments for national differences always should be made.
Comparison of Market Entry Options
The following table provides a summary of the possible modes of foreign market entry:
Comparison of Foreign Market Entry Modes
Conditions Favoring this Mode
Limited sales potential in target country; little product adaptation required
Distribution channels close to plants
High target country production costs
Liberal import policies
High political risk
Minimizes risk and investment.
Speed of entry
Maximizes scale; uses existing facilities.
Trade barriers & tariffs add to costs.
Limits access to local information
Company viewed as an outsider
Import and investment barriers
Legal protection possible in target environment.
Low sales potential in target country.
Large cultural distance
Licensee lacks ability to become a competitor.
Minimizes risk and investment.
Speed of entry
Able to circumvent trade barriers
Lack of control over use of assets.
Licensee may become competitor.
License period is limited
Large cultural distance
Assets cannot be fairly priced
High sales potential
Some political risk
Government restrictions on foreign ownership
Local company can provide skills, resources, distribution network, brand name, etc.
Overcomes ownership restrictions and cultural distance
Combines resources of 2 companies.
Potential for learning
Viewed as insider
Less investment required
Difficult to manage
Dilution of control
Greater risk than exporting a & licensing
Partner may become a competitor.
Small cultural distance
Assets cannot be fairly priced
High sales potential
Low political risk
Greater knowledge of local market
Can better apply specialized skills
Minimizes knowledge spillover
Can be viewed as an insider
Higher risk than other modes
Requires more resources and commitment
May be difficult to manage the local resources.
- What is globalization? What are the main drivers of the globalization phenomenon? Do your think technology plays an important role in promoting International trade?
Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology. This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world.
‘The central challenge we face today is to ensure that globalization becomes a positive force for all the world’s people, instead of leaving billions of them behind in squalor’ (Annan 2000, p.6). This statement both emphasizes the requirements of the globalization process insistently and demonstrates the complexity referring to the lack in equity both between people and states. But who is responsible for justice these days in our ever changing world? This is one aspect to be considered in the course of this assignment.
The purpose of this essay is to critically assess the main drivers of the globalization process. Therefore, the term globalization will be defined briefly and the main drivers will be stated. The author will then focus on one main driver and will explain shortly his choice. Within the main part the major governance institutions will be introduced shortly before the chosen driver will be evaluated critically. Finally the essay will end with a concise conclusion.
The term ‘Globalization’
Globalization is an ongoing process, which dates back many years in history and occupies the hu- race every day. It could be pragmatically seen as a process of ‘growing together’ of different markets to one global market. But this would comprehend only a part of the reality. Nevertheless, there is in fact no standard definition of the term globalization. It differs between various points of view. According to Clarke and Dela Rama (2006, p.XV) globalization ‘manages to encompass both a sense of explosively expanded opportunities, and massively deepening insecurities, simultaneously integrating and fragmenting the world’. They centralize the scope of this phenomenon with its extremes. However, based on the influence on the interaction between countries and on both the national and international society, globalization can be described as a tremendous complex entity. It is the consequence of the flow and exchange of services, goods, capital, labor and technology across international borders, even without geographical limits. (Chatterji and Gangopadhyay 2005; Dicken 2011; IMF Staff 2008).
Main drivers of the globalization process
Globalization is structurally advanced by certain driving forces, the so-called main drivers. Basically researchers differ in the amount of drivers such as Chatterji and Gangopadhyay (2005, p.1) refer to ‘seven key aspects’, whereas Johnson and Turner (2010) relate to five drivers. It will be oriented on their five main drivers in this at hand essay. These encompass accurately the wide spread of globally linked issues, which have an impact of the world’s constitution. Johnson and Turner (2010) state as follows:
- First driver is ‘The Changing Economic Paradigm - from Demand Management to Neo- liberalism’ (p.21)
- Second driver is ‘The Spread of International Governance and Regulation’ (p.23)
- Third driver is the ‘Finance and Capital Spread’ (p.24)
- Fourth driver is ‘The Diffusion of Information and Communications Technology’ (p.25)
- Fifth driver is the ‘Social and Cultural Convergence’ (p.26)
In order to conduct a precise critically assessment within the main part, it needs to be exposed what the most important driver is and why. According to Colander (2005) the aspect of strong development in technology has a great influence on the evolution of international economy. This is in some way relativized by the argumentation of Frankel (2000), who suggested technology as being a field to drive costs for particular areas such as communication and transportation constantly lower. However, Dicken (2011) pointed out that there is no single driver to be highlighted, even not the technological development. It is rather an interaction of many, in this case of all five. Hence, it can be argued that the diffusion of information and communications technology is an important aspect to be considered within the process of globalization, but it is not the main driver to focus on. It rather strengthens the interdependences between different national economies or multinational operating companies. Thus, it simplifies operations significantly and makes it much more efficient. Although focusing on technology barely, the other drivers are essential as well. But they are all rather implications within the globalization’s progress such as for capital, social and cultural issues. However, the spread of international governance and regulation can be considered as being the main driver. This is maintained by Brühl and Rittberger (2001). International relationships between both domestic markets and their protagonists, not only referring to economy but also to several other areas, need to be regulated. Basically limits should be defined. Hence, this governance issue can be seen as a scope or framework, in which globalization takes place. It is an instrument, which has influenced significantly the past development of globalization and will have a major impact on this phenomenon in future as well. Consequently the international governance is the central term to examine. Therefore the scope includes global issues as well.
Role of technology in promoting international trade
Technology is reshaping the international trading landscape, and the changes are real and quantifiable. This is sharpening the role international trade can play in promoting sustainable development.
The European Union is determined that international trade should contribute to promoting sustainable development. The goal is a priority under the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations.
Recent research from Lund University not only supports these initiatives, but points to how the goals can be achieved.
The concept of sustainability is normally defined as consisting of three interlinked elements or pillars: economic growth, social development and environmental protection. Our analysis, which echoes that of Vézina and Melin, suggests that trade, when enabled by the internet and technology services, promotes the economic pillar in an unparalleled way by opening up world markets to small exporters, thereby facilitating the growth of multinational SMEs.
This very conclusion should inform our definition of the economic pillar and how policies are shaped. In particular, creating opportunities for SMEs becomes a key part of creating economic growth in the context of sustainable development, and internet and digital services are effective tools to that end.
But this should also influence how we think about the social and environmental pillars, and how negative impacts in one pillar might be offset by positive impacts in another. In short, as the OECD has
Long argued, sustainable development can be achieved only by measures aimed at maximizing the total value of all three pillars, while not losing focus on progressing each one of them.
Based on a refined economic pillar–one in which small business participation in global trade is supported and part is formed by the use of digital services–the following four measures would maximize total value and thereby promote sustainable development.
First, trade policies are needed for a new age. Today, this means policies adapted to the merging of technology and trade and to the involvement of SMEs in global economic activity.
Examples of such policies include improving and harmonizing customs procedures by raising minimum thresholds, promoting regulatory standards that support digital payments, structuring a global consumer rights system, and promoting the principles of interconnection and openness as the core of the internet.
Inclusive growth would be a key likely outcome. Free trade has been criticized by some for not succeeding in reducing poverty or bringing about a higher standard of living for all. The Lund research does not find that technology-enabled trade has yet radically improved the situation, but interestingly it highlights the enhancement of specialized workforce skills. With the right support and tenacity, especially from supportive government job policies and even wage guidance, these skills can open up opportunities for meaningful and future-oriented careers for millions of workers. That would mean sustained poverty reduction and raised living standards.
Second, governments should work together to simplify and streamline transportation, while making it as “green” and efficient as possible. They can do this, for instance, by promoting international standardization of box sizes, label formats, and tracking data terminology. Full digitalization of customs processes would cut time delays at customs, thus reducing lags in the logistics systems and advancing economic and environmental aspects of modern international trade. Moreover, with the use of real-time data and optimization tools in customs processes, infrastructure across the globe based on information and communications technology can play an even more important role in reducing the environmental impacts from transport and delivery. Such a development will need international policy support. Here, the OECD could play an influential role, alongside the likes of the UN’s Universal Postal Union, in facilitating transnational regulatory co-operation in the area of postal and delivery services.
Third, policymakers should give online retailers a helping nudge. SMEs can be drivers of change due to their agility in taking on new business models and adapting to changes in operating environments. However, they are often limited by financial, time, and expertise constraints. Supportive structures, ranging from digital services to private-public networks, could help overcome these problems–for instance, by educating sellers and consumers on product sourcing and production. Good examples of using transparency to encourage curiosity, bolster confidence and set industry standards are Patagonia’s Footprint Chronicles of its supply chain and Honest By’s breakdown of the materials that make up each product.
There is an important policy angle to transparency of trade flows: rules of origin need to reflect the patterns of small global exporters, and be made less burdensome administratively so that small and micro-sized firms will be able to rely on them. Also, the information these rules, including non-preferential ones, elicit could be combined with big data analytics to create benefits for consumers as well as contribute to more transparent and efficient trade flows.
A fourth policy strategy is to take steps to make the backbone itself greener. As SMEs take greater advantage of the technology’s commercial possibilities, the energy intensity of trade will rise. Data centers powered by environmentally friendlier energy sources are expanding.
The trouble is, cleaner forms of energy are often more expensive than fossil fuels, resulting in higher operating costs for environmentally conscious firms. Governments could as one measure help with clean-energy policies to tilt incentives away from harmful fuels while making renewable energy more affordable.
Q1. Why do accounting systems of different countries differ? What are its implications on company engaged in international business.
Accounting systems of different countries differ because accounting is shaped by the environment in which it operates. Each country´s accounting system has evolved in response to the local demands for accounting information. Because of globalization of capital markets, the lack of comparability has become a problem as transnational financing and transnational investments have grown rapidly in recent decades. Due to the lack of comparability, a firm may have to explain to investors why its financial position looks very different on financial reports that are based on different accounting practices.
Five factors seem to influence the type of accounting system in a country. These are 1) the relationship between business and the providers of capital, 2) political and economic ties with other countries, 3) levels of inflation, 4) the level of a country´s development, and 5) the prevailing culture of a country. These differences are important because they affect the way financial reports are created and interpreted, ad make comparisons across borders difficult.
Implications on company engaged in international business
Financial executives have always needed to be aware of potential accounting changes. Now, the accelerated scope and pace of proposed changes toward convergence of accounting standards globally has increased the importance of understanding not only the technical details, but also a broad spectrum of implementation requirements and business and technology implications of what could be an unprecedented amount of accounting change.
Today’s dynamic regulatory environment, coupled with a sharper focus on accounting, will result in an increasing amount of change and demand for accompanying guidance in the areas of accounting, reporting and auditing.
For example, despite the fact that the recently published final SEC staff report on the International Financial Reporting Standards (IFRS) roadmap does not contain any recommendations for incorporation of IFRS for U.S. registrants and the timing of the U.S. Securities and Exchange Commission (SEC) action is unclear, the Financial Accounting Standards Board (FASB) is continuing to move forward with accounting convergence. This delay in U.S. adoption of IFRS for domestic SEC registrants does not mean that the rate or pace of accounting change will subside.
In fact, it is likely that the pace of accounting change will accelerate over the next few years as FASB and the International Accounting Standards Board (IASB) jointly finalize many of the convergence standards they have been working on. For example, FASB and IASB expect to finalize the new revenue recognition standard in the next six months, as well as continue to work together on several other standards. These include leasing, financial instruments and insurance contracts — all of which could have a significant impact on current accounting and reporting requirements under U.S. generally accepted accounting principles (U.S. GAAP).
In addition to accounting convergence, some companies may need to revise their business models to adapt to changes in technology and the accounting requirements. As a result, a variety of constituents, including investors, regulators, customers and suppliers, may also be impacted by changes in company business models.
A variety of terms describe companies involved in international business. The most frequently used term is multinational enterprise (MNE), which refers to companies that have a worldwide view of production, the sourcing of raw materials and components, and final markets. There is no consensus as to how much of a company’s sales, assets, earnings, and employees must be abroad for the firm to be considered an MNE, but anything less than 10 percent of these indicators would probably disqualify a company from the elite group of MNEs. More than 10 percent implies that the companies are operating in at least two countries, and most MNEs have significant geographical spread. The lack of a global vision is another indicator that a company is not yet an MNE. Another indicator of multinational involvement is the degree of international experience of key executives. In Chapter 12, we will discuss how MNEs adopt different strategies to operate internationally, including transnational, global, and multi domestic strategies. However, we will continue to use the term MNE to refer to companies that are operating in many different countries, regardless of the specific strategic approach they use to sell products and source production.
Q2. What are the main responsibility of the Human Resource Manager in a MNC? What are the different kind of staffing policies in an global organization. What are the main advantages and disadvantages of Ethnocentric, Polycentric and Geocentric approaches to staffing policy
Main responsibility of the Human Resource Manager in a MNC
HRM is a strategic function concerned with recruitment, training and development, performance appraisal, communication and labor relations. HR policies guide the various functions of HRM. The need for a particular type of HRM is determined by the need for standardization or adaptation.
Managing human resources in an international context is more complex than in a domestic set up because of the many differences between headquarters and the subsidiaries. The HR policies of certain companies seem to discriminate on the basis of religion, race, caste, sex or nationality. Companies like Ford and Volvo, however, strive to maintain equality in work and pay.