Basics of International Management

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Basics of International Management
OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING
NORMAL UNIVERSITY
Prof. Dr. Birgitta Wolff, Marjaana Rehu,
M.A. Otto-von-Guericke-University, Germany
2
Outlook

• 1. Globalization of Economic Activities
• 2. Institutional Environment of International
  Business
• 3. Business Risks from a New Institutional
  Economics Perspective
• 4. Multinational Corporations
• 5. Entering Foreign Markets Choosing the
  Organizational Form
• 6. External Growth Strategies
• 7. International HR Management
• 8. Cross-Cultural Business Negotiations
• 9. Project The Ruritanian Electronics
  Negotiation

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The Theory of Absolute Advantage Adam Smith 1776
The Theory of Comparative Advantage David Ricardo
1819
The Theory of Factor Proportions Eli Heckscher
and Bertil Ohlin
The Competitive Advantage of Nations Michael
Porter
(Czinkota/Ronkainen/Moffett (2000), International
Business. Update 2000, Fort Worth et al., p. 156.)
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1.1 Motives for Firms to go International
1. Globalization of Economic Activities

(according to Czinkota et al. 2000, p. 368)
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1.2 Drivers of Globalization
1. Globalization of Economic Activities

What drives Globalization?
A Technological Triggers B Institutional Triggers
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1.2.2 Drivers of Globalization Institutional
Change
1. Globalization of Economic Activities

Hill, C. W. L. (2000) International Business,
3thd ed., Boston et al.
7
1.2.2 Drivers of Globalization Institutional
Change
1. Globalization of Economic Activities

Hill, C. W. L. (2000) International Business,
3thd ed., Boston et al.
8
2. Institutional Environment of International
Business

Three layers of analysis
Cf. Williamson (1996), The institutions and
governance of economic development and reform,
in Williamson, O. E. (1996), The mechanisms of
governance, New York, p. 326.
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2.1 Explicit Institutional Environment
2. Institutional Environment of International
Business

e.g.constitutions,laws
e.g.social conventions,norms
The institutional environment forms the framework
in which human actiontakes place. It defines
property rights and how they can be transferred.
cf. Klein, P. G. (2000), The New Institutional
Economics, p. 3, http//encyclo.findlaw.com/0530bo
ok.pdf, pp. 458 ff.cf. Wolff, B. (1999)
Anreizkompatible Reorganisation von Unternehmen,
Stuttgart, p. 197 ff.
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2.2 Implicit Institutional Environment
2. Institutional Environment of International
Business

Impact of different frameworks on expectations
about another players behavior
gxyour decision in x fxyour decision in x
1. Realize
1. Realize
g1(g0)
f1(g0)
¹
¹
g
f
1
1
2. Identify
D
?
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2.2 Implicit Institutional Environment
2. Institutional Environment of International
Business

Reducing risks resulting from diverging
expectations
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2.2 Implicit Institutional Environment
2. Institutional Environment of International
Business
InstitutionalEnvironment
formal, explicitrules
informal, oftenimplicit rules
dominant principle
solves problems ofcoordination and motivation by
altering the payoff structure in eachgame
solves problems of coordination and motivation by
repeating the game (social rewards and sanctions)
Formal rules and informal rules are not
necessarily substitutes, but complements.They
influence each other.
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2.3 Institutional Frameworks in a
Globalized World
2. Institutional Environment of International
Business
A common roof for world trade?
cf. e.g. Tayeb, M. (2000), International
Business. Theories, Policies and Practices,
Harlow et al. p. 69 ff.
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3. Business Risks from a New Institutional
Economics Perspective

Terminology Difference between uncertainty and
risk

• Uncertainty- caused by many factors, with
  unpredictable outcomes,
• immeasurable,- no possibility to assign proba-
  bilities

Risk - measurable (often financial) effect of
uncertainty,- high levels of uncertainty in-
crease risk,- possibility to calculate
probabilities
the possibility of suffering harmor loss, or a
course involving un-certain danger or hazard
cf. Tayeb, M. (2000), International Business.
Theories, Policies and Practices, Harlow et al.
p. 344 f. Eitemann et al. (2001),
Multinational Business Finance, 5th ed., p. 470.
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3.1 Endogenous Risks
3. Business Risks from a New Institutional
Economics Perspective
Possible sources of risks by levels
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3.1 Endogenous Risks
3. Business Risks from a New Institutional
Economics Perspective
Roots of risks Asymmetric information and
specific investment

cf. e.g. Wolff (1995), Contractual Problems in
Market Relations, in Bernitz/Hallström (eds.),
Principles ..., Stockholm.
17
3.2 Exogenous Risks
3. Business Risks from a New Institutional
Economics Perspective
Recap Possible sources of risks by levels

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3.2 Exogenous Risks
3. Business Risks from a New Institutional
Economics Perspective
Explicit
Implicit
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4. Multinational Corporations
What shapes an multinational corporation?

? corporationas a nexus ofcontracts
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4.1. What exactly is a Multinational Corporation?
4. Multinational Corporations
Multinational corporation

? enterprises that own or control production or
service facilities outside the country in
which they are based (United Nations in Czinkota
et al. 395)

• quantitative criteria
• must have operations in at least two
• countries (sometimes subsidiaries in
• even 6 or more countries are required)
• proportion of overall revenue generated
  abroad 25-30 percent is most often cited
• involvement in foreign markets should be
  substantial enough to make a difference in
  decision making or
• the owners of the corporation must be of
• several nationalities

• qualitative criteria
• management must consider the firm as
  multinational and must act accordingly (view
  their domestic operations as part of worldwide
  operations)
• ...

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4.1. What exactly is a Multinational Corporation?
4. Multinational Corporations
Property rights allocation as a determinant of
governance structure

cf. Picot, A./Wolff, B. (1994), Institutional
economics of public firms and administrations,
in JITE, Vol. 150, No. 1 (March), p. 218.
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4.2 Creating Competitive Advantage
4. Multinational Corporations
What is a competitive advantage?

• something that is extremely important to the
  customer
• refers to the fact that some companies perform
  better than other ones even though they act in
  the same environment

Creation of competitive advantages?

• creation and securing of sustainable success of
  an company/corporation

Orientationtowards markets
Orientationtowards resources

• evaluation of environmental opportunities and
  threats PORTERs five competitive forces
• evaluation of the countrys competitiveness

• resource-based view
• core competencies

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4.2.1Porters Five-Forces-Model
4. Multinational Corporations

• cf. Porter, Michael E. (1998a) The Competitive
  Advantage of Nations, Hampshire, London. p. 4
• Porter, M. E. (1998b) Competitive Strategy.
  Techniques for Analysing Industries and
  Competitors, New York. p,. 4ff

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4.2.2 Role of Home Countries for Competitive
Advantage Porters Diamond
4. Multinational Corporations
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5. Entering Foreign Markets Choosing the
Organizational Form

WhereChoosing the right location
HowChoosing the right form
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5. Entering Foreign Markets Choosing the
Organizational Form
Where Choosing the right location

? location as a variable affecting global
competitiveness of firms because of location
bound assets
Resource SeekingMarket Seeking Efficiency
Seeking Strategic Asset Seeking
Country risk analysis ? Exogenous risks
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5. Entering Foreign Markets Choosing the
Organizational Form
Disintegration of the Value Chain
Cf. Wiegand, R./Picot, A./Reichwald, R. (1997)
Information, Organization and Management,
Chichester et al, p. 363.
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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form
Alternative Modes of Foreign Market
Entry Internal strategies Using your own
assets 1. Exporting 2. Licensing 3.
Franchising 4. Joint Ventures 5. Sales Office 6.
Production Plant 7. Full Scale Subsidiaries 8.
Turnkey contracts External strategies Combining
your and your partners assets Corporate
Networks Strategic Alliances (? International
Management II) Reference Hill (2000)
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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form

1. ExportDomestic production and administrative
control, Example Selling Miele washing
machines in Russia A Miele Corp B local
appliance store
Time
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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form
2. LicensingA licensor grants the rights to
intangible property to another entity (the
licensee) for a specified period the licensor
receives a fee. Example Selling cell phone
technoloy to a Chinese Mobil Phone Company
A Motorola Corp. B Chinese partner

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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form
3. FranchisingInvolves longer-term commitments
than licensing is basically a specialized form
of licensing in which the franchiser not only
sells intangible property to the franchisee,
but also insists that the franchiser agree to
abide by strict rules as to how it does
business. Example Selling McDonalds Franchise
to a German entrepreneur A
McDonalds Corp. B German partner
Time
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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form
4. Joint VentureEntails establishing a firm that
is jointly owned by two or more otherwise
independent firms (most typical is 50/50
venture) Example Starting brick factory in
China A Austrian Corp. B
German partner
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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form

5. Sales Office Example DaimlerChysler opens a
car shop in Egypt A DC
Country Hold-Up (may not be allowed to retrieve
inv.)
Country hold-up (A maybe not allowed to export
profits)
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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form
6. Production Plant Example DaimlerChysler opens
a car factory in South Africa A
DC
Country Hold-Up (may not be allowed to retrieve
inv.)
Country hold-up (maybe not allowed to export
profits)
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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form
7. Full-Scale SubsidiaryThe firm owns 100
percent of the stock two possible ways setting
up a new operation or acquiring an established
firm.
Country Hold-Up (may not be allowed to retrieve
inv.)
Country Hold-Up (maybe not allowed to export
profits)
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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form
8. Turnkey ContractThe contractor agrees to
handle every detail of the project for a foreign
client including the training of operating
personnel. Example Selling a power plant to
Chinese Energy Corporation A
Siemens Corp. B Chinese partner
Adverse Selection
Moral Hazard
Hold Up
T0
T2
T3
T4
T1
A B strike a deal
A delivers completetechnology
B learns
B collects the profit and pays A (fixed amount
for the project)
End of project, B produces and sells
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5.2 Alternative Modes of Foreign Entry
5. Entering Foreign Markets Choosing the
Organizational Form
Hill (2000), p. 443.
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5.2 Alternative Modes of Foreign Entry
Opportunities and Risks
5. Entering Foreign Markets Choosing the
Organizational Form

Property rights allocation in expansion strategies
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6. External Growth Strategies
Many
Franchising
Licensing
Consortium
Number of Partners
Strategic Alliance
Joint Venture
Modified from Daniels, J. D./Radebaugh, L. H.
(2000) International Business Environments and
Operations, 9th ed., p. 497.
Sales Office
None
Prod. Plant
Export
Subsidiary
OWNERSHIP CONTINUUM
Equity (more ownership)
Nonequity (less ownership)
Sharing
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6. External Growth Strategies
Joint Venture
T0
T2
T3
Time
T1
AB make a deal to cooperate in project (e.g.
5050)
AB negotiate P
Price P due AB collect and share ?(½ ? each)
AB deliver their contributions (½ C each)
Corporate Alliance
T0
T2
T3
T1
Time
AB make a deal to cooperate in project
AB negotiate PA and PB
AB collect and and divide PA and PB
AB deliver their contri-butions at cost CA and CB
Example Subway System in Singapore
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6.1 Potential Benefits of Collaborative Ventures
6. External Growth Strategies
Benefits of Corporate Collaborations
Shared Risks
Shared Knowledge and Expertise
Synergy Competitive Advantage
Easier Market Entry
modified from Griffin, R. W./Pustay, M. W.
(1999) International Business. A Managerial
Perspective, 2nd ed., p. 453.
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6.2 Advantages and Disadvantages of
Corporate Collaborations
6. External Growth Strategies
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6.3 Potential Pitfalls of Corporate Collaborations
6. External Growth Strategies
Challenges
Textbook Problem
Incompati- bility of Partners
Access to Information
Distribu- tion of Earnings
Loss of Autonomy
Incompati- bility of Partners
(modified from Griffin, R. W./Pustay, M. W.
(1999) International Business. A Managerial
Perspective, 2nd ed., p. 469.) Further Ref.
www.cio.com/archive/enterprise/101599_ic_content.h
tml
Adverse Selection
Moral Hazard
Moral Hazard
Hold-Up
Normal Uncertainty
Economic Problem
Better Forecasting, Sufficient Flexibility
Signaling, Screening
Property Rights Allocation
Property Rights Allocation
Hostages, Integration
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7. International HR Management
How do institutional frameworks influence work
relations and, thus, HRM-practices?
Institutional Framework
ShiftParameters
Strategic
A Business Economists Field of Interest
Corporate Governance
EndogenousPreferences
Behavioral Attributes
Source Williamson (1994), p. 326
Individual Characteristics
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7.1 How Intercountry Differences Affect HRM
7. International HR Management
Cultural factors Differing cultures require
different HR practices among a firms
subsidiaries, e.g. implementation of different
incentive plans. (? Hofstede)
Culture (implicit framework)
Labor cost factors Worldwide diffe-rences in
hourly compensation costs, hours worked per week,
severance pays, vacation time, etc.
Economic factors E.g. Productivity and
efficiency in SOEs in contrast to firms competing
in a market (e.g. full employment at the expense
of efficiency)
Intercountry Differences Affect HRM
Law (explicit framework)
Industrial relations factors Relationships
between worker, union, and employer (e.g.
codetermination and participation in Germany or
USA)
Source Dessler, G. (2000), Human Resource
Management, 8th ed., Upper Saddle River
(Prentice-Hall), pp. 614 ff.
46
7.2 International Staffing Policy
7. International HR Management
International staffing policies

• Ethnocentric-oriented
• firms
• Key management positions are filled by
  parent-country nationals
• Reasons
• Lack of qualified local senior managers
• Maintain unified corpo- rate culture and
  tighter control
• Transfer of firms core competencies
• Example
• Dutch national financial controllers at Royal
  Dutch Shell worldwide

• Polycentric-orientedfirms
• Host-country nationals in foreign subsidiaries
  headquarter with parent-country nationals.
• Reasons
• Reduction of cultural mis- understandings
  locally in comparison to expatriates
• Usually less expensive
• Example
• Volkswagen AG

• Geocentric-orientedfirms
• Best suited person, regard-less of nationality,
  is transferred to any appropriate open position
• Reasons
• Most efficient use of HR resources of the
  firm
• Building stronger and consistent culture
• Building of team spirit and bonds between
  team members
• Example
• General Electric Corp.

Source Dessler, G. (2000), pp. 623 f.
47
8.1 The Structure of Bargaining
8. Cross-Cultural Business Negotiations

• Two players Player A, Player B
• Options in the negotiation process Agreement
  or Non-Agreement
• No PD!

Player B
Agreement
Non-Agreement
Agreement
Player A
Non-Agreement
? Negotiation will be beneficial, if both players
can win by reaching field I.
48
8.1 The Structure of Bargaining
8. Cross-Cultural Business Negotiations
The Negotiation Process What should be
considered?
Bargaining Power

• Defined by next best option (outside option)
  What is at stake?
• Most likely different for each partner
• Can be manipulated

Reasons for Non-Agreement
Motivation Non-agreement payoff is best for
me ? Remedies Transfers within bargaining
space (i.e. space defined by players outside
options)

• Coordination
• Ambiguity and/or uncertainty of payoffs
  (one-sided or bilateral information deficits,
  irrationality)
• ?
• Remedies
• Adequate communication
• Better predictions
• Prognostic tools

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8.1 The Structure of Bargaining
8. Cross-Cultural Business Negotiations
The Bargaining Process What should be
considered?
Player B
Agreement
Non-Agreement
Agreement
Player A
Non-Agreement

• Should the players enter negotiations?
• What are the players outside options?
  (Bargaining Power)
• Which transfer is required to reach an
  agreement? (What is the transfer space?)

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8.1 The Structure of Bargaining
8. Cross-Cultural Business Negotiations

• Should the players enter negotiations?

Player B
Agreement
Non-Agreement
Agreement
Player A
Non-Agreement
51
8.1 The Structure of Bargaining
8. Cross-Cultural Business Negotiations

• What are the players outside options?
  (Bargaining Power)

Player B
Agreement
Non-Agreement
Agreement
Non-Agreement
Player A
? Bargaining Power Defined by next best option
(outside option) What is at stake?
As Perspective
a) As choice Agreement
Options for player B Agreement (10) or
Non-Agreement (12)
? Result B chooses Non-Agreement (12) ? Player
A gets (6)
b) As choice Non-Agreement
Options for player B Agreement (5) or
Non-Agreement (12)
? Result B chooses Non-Agreement (12) ? Player
A gets (2)
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8.1 The Structure of Bargaining
8. Cross-Cultural Business Negotiations

• What are the players outside options?
  (Bargaining Power)

Player B
Agreement
Non-Agreement
Agreement
Non-Agreement
Player A
Bs Perspective
a) Bs choice Agreement
Bs choice of Agreement is dominated by
Non-Agreement ? 12 gt 10 or 5
? Result Player As choice of Non-Agreement
(13) is not feasible.
b) Bs choice Non-Agreement
Options for player A Agreement (6) or
Non-Agreement (2)
? Result Player A chooses Agreement (6) ?
Player B gets (12)
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8.1 The Structure of Bargaining
8. Cross-Cultural Business Negotiations

• What are the players outside options?
  (Bargaining Power)

Player B
Non-Agreement
Agreement
Agreement
Player A
Non-Agreement
Conclusion

• Player B will never agree, because he/she gains
  12 whatever the other partner will do.
• Field III is dominated by field II ? A should
  agree (6 gt 2)
• The payoff 13 for A will never be reached ? not
  binding/no feasible outside option for A best
  feasible outside option for A 2
• Feasible outside option for B in this game
  Payoff 12

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8.1 The Structure of Bargaining
8. Cross-Cultural Business Negotiations

• What could be done to motivate both partners to
  agree?

Player B

• Which transfer is required to reach an
  agreement?

Non-Agreement
Agreement
t 3

• At least 2 should be transferred!

Agreement
Player A

• What is the transfer space?

Non-Agreement

• ? 20 20 18 2
• B 10 6 4
• A 10 12 -2

Player B
Results Choice of Agreement

• A is better off gains 7 instead of 6

Player A

• B is better off gains 13 instead of 12

• Agreement is socially desirable (?)

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8.2 Three Phases of the Bargaining Process
8. Cross-Cultural Business Negotiations
1) Pre-Bargaining
Source Lebow, R. N. (1996) The Art of
Bargaining, Baltimore London (J. Hopkins Univ.
Press), pp. 4/5.
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8.2 Three Phases of the Bargaining Process
8. Cross-Cultural Business Negotiations
2) Bargaining
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8.2 Three Phases of the Bargaining Process
8. Cross-Cultural Business Negotiations
3) Postbargaining

• Ratify the Agreement

• Does my agreement need ratification?
• What kind of terms will I need to gain
  ratification?
• Is there anything else I can do to increase the
  chances of ratification?

• Implement the Agreement

• Is my agreement self-executing?
• If not, what requirements does it have?
• Have I secured those requirements in my
  agreement, in so far as it is possible to
  do so?

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8.3 The Harvard-Concept of Negotiating
8. Cross-Cultural Business Negotiations
1. The Problem
? Do not bargain over positions.
2. The Method

• Separate the people from the problem
• Focus on interests, not positions
• Invent options for mutual gain
• Insist on using objective criteria

3. What if they are more powerful?
? Develop your BATNA (Best Alternative To a
Negotiated Agreement)
Source Fisher, R./Ury, W. (1991) Getting to
Yes. Negotiating Agreement Without Giving In, 2nd
edition, New York etc. (Penguin Books).
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8.3 The Harvard-Concept of Negotiating
8. Cross-Cultural Business Negotiations
1) Preparation

• Interests yours and theirs
• Options yours and theirs
• Standards identify fair procedure (e.g.
  referring to market price)
• Alternatives BATNA (Best Alternative to a
  Negotiated Agreement)
• Proposals should be better than other sides
  BATNA
• Rehearse talk it over with someone else

Source Ury, W. (1991) Getting past No.
Negotiating Your Way From Confrontation to
Cooperation, New York etc. (Bantam Books).
60
8.3 The Harvard-Concept of Negotiating
8. Cross-Cultural Business Negotiations
2) Negotiating

• Barriers to Cooperation
• Your reaction
• Their reaction
• Their position
• Their dissatisfaction
• Their power

• Corresponding Strategy
• Dont react Go to the balcony
• Dont argue Step to their side
• Dont reject Reframe
• Dont push Build them a golden bridge
• Dont escalate Use power to educate

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8.3 The Harvard-Concept of Negotiating
8. Cross-Cultural Business Negotiations
Specifics of Cross-Cultural Business Negotiations
Insufficient recognition
of the role of host government in the
negotiation process
of the nature and characteristics of the role
of government in (more or less) centrally
planned economies
of the difference between approval at one
level and implementation of such approval
at other levels of the government
of the relatively low status assigned to
business-persons in many countries
Source Hendon/Hendon/Herbig (1996), pp. 15-76,
231-242.
of the role of the negotiator in accommodating
the conflicting interests of his group with
those of opposing groups
of the loci of decision-making authority
of the economic and political criteria in the
decision-making process
of the strength of competitors
and attention to training executives in the art
of negotiations
62
8.3 Dimensions of Cultures
8. Cross-Cultural Business Negotiations

• Hofstede (1980) defines four dimensions of
  culture
• Individualism vs. collectivism
• Masculinity vs. femininity
• High uncertainty avoidance vs. low uncertainty
  avoidance
• High power distance vs. low power distance
• Examples
• Germans high uncertainty avoidance, small power
  distance, high individualism, masculine
• Americans weak uncertainty avoidance, small
  power distance, high individualism, masculine

63
8. Cross-Cultural Business Negotiations
Specifics of Cross-Cultural Business Negotiations
(cont.)
Insufficient attention to saving face of the
opponent
Insufficient understanding of the role of
personal relations and personalities in the
decision-making process
Insufficient planning for internal
commu-nication and decisions
Interference by headquarters
Common mistakes made when negotiating overseas
Insufficient allocation/attention of time for
negotiations
Failure to place yourself in the other persons
shoes
Insufficient knowledge of the host country
including history, culture, government, status of
business, image of foreigners
Insufficient understanding of different waysof
thinking
Insufficientattention to planning for changing
negotiation strengths
Source Hendon/Hendon/Herbig (1996), pp. 15-76,
231-242.
64
9. Project The Ruritanian Electronics
Negotiation
Background
Ruritanian Electronics (A multicultural Computer
manufacturer in the Republic of Ruritania)
Management ? Ruritanian
Workforce
50 Feefifofians
50 Abadabenise

• Management has to negotiate a new annual labor
  contract with (the two parts of) the
  workforce
• Personnel managers, Feefifofians, and
  Abadabenise have different aims and culture
  profiles
• Each party has something to win or loose (See
  instructions in the reading pack!)

Problem
The Negotiation
You as representatives of your culture will
negotiate an annual labor contract with the
firms management (Personnel Managers)
65
9. Project The Ruritanian Electronics
Negotiation

• Team meeting Preparation of the negotiation
• Prepare the readings (Instructions) carefully!
• Handout Abadabinese Feefifofians, or
  Personnel managers score sheet

• Schedule team meetings
• Define your own bargaining position by setting
  your goals according to your communitys culture
• Plan how you want to conduct the negotiation
  process. You will not be able to define your own
  strategy without anticipating your opponents
  goals and strategies.
• Remember If your negotiations do not end in an
  agreement top management is likely to sell the
  business and you all might get dismissed.

66
9. Project The Ruritanian Electronics
Negotiation
The Negotiation ? You - as representatives of
your culture - will negotiate an annual
labor contract with the firms management.
Postbargaining Discussion of Results ? Have
some slides ready to present and explain your
strategy!
67

• Thanks for your attention and good luck in your
  future careers!