Global Business (Chap 3)

1
Global Business (Chap 3)

• Dept of Technology Management for Innovation
  (TMI), Graduate School of Engineering
• Professor Kazuyuki Motohashi
• ?????? ???????????
• ????
• http//www.mo.t.u-tokyo.ac.jp

2
Administrative Distances

• Difference in currency
• Tariff and non-tariff barriers (such as safety
  regulation) but this distance decreases over
  time (WTO, regional integration by FTA)
• Local government FDI policy (restrictions and
  incentives)
• Political disputes, conflicts

3
What is WTO?

• World Trade Organization(HQ Geneve, UN
  organization, 151 countries, established in 1995,
  former GATT)
• WTO principles
• MFN(Most Favorable Nation) ?????Exception for
  regional integration (FTA, EPA)
• NT(National Treatment) ?????
• WTO rules
• Tariffs in goods and servicesITA(Information
  Technology Agreement)
• Trade Related Investment Measures(TRIMS)
• Trade Related Intellectual Property Rights(TRIPS)
• Government procurement, safety regulation,
  anti-dumping, safe guard rules etc.

4
Tariffs revision schedule (Chinas accession to
WTO)
5
Deregulation schedule for retail and wholesalse
sector in China
6
Regional integrations with ASEAN
7
FTAs (EPAs) in Asia
8
Why role of government?

• Administrative distances are greater for
  developing economies. (WTO, FTAs but)
• Institutional fragileness in government agencies
  limited human resource capacities, fragile legal
  institutions and discretions of local government
  officers.
• Risk management perspectives understanding local
  government incentives (sometimes government
  officer individual level) and relationship
  building is important.

9
India vs China public organization
China India
Political Organization Chinese Communist Party (virtually one party control) Multiple parties competition NDA (National Democratic Alliance) such as INC (Congress) vs UPA (United Progressive Alliance) such as BJP
National Congress National Peoples Congress (???) Two house system (Upper house and Lower house)
Administrative organization Centralized Local (state) independency
Officers Bureaucrats (CCP member) IAS system
Governance mechanism ?? (ruled by human) ?? (ruled by law)
Discretion Small in central, but large in local Small by legal system, but large for executions
Risk associated with policy change Large and unpredictable (such as Shanghai industrial park case) Large but predictable (such changes are based on democratic process
10
Institutional Voids
Developed world
Product Market Financial Market Labor Market Macro Condition
China Relatively well retail sector, competitive Murky firm info., under-developed banking Potentially good, but small amount of manager supply Institutional voids are covered by state control, but info. controlled
India Protected and fragmented retail, disastrous PI Relatively well developed Strong labor unions and actions Government policy is politicized, open info exchange
No institutions (Chaotic world)
(Khanna and Palepu, 2010)
11
Strategy questions from IV view

• Again, replicate (aggregation), adapt(adaptation)
  or exploitation (arbitrage)?
• Examples of exploitation METRO cash and carry,
  Blue River Capital (IV in financial market)
• Compete alone or collaborate?
• Working together with local partner? This will be
  discussed later in my course
• Accept or attempt to change market context?
• Filling IV by yourself? Influence on local
  government? (Toyota supply chain system in
  Guangzhou)
• Enter, wait or exit?
• Investment (exit) decision making with risk
  analysis

12
Risk factor identification

• Risk Uncertainty which might be under control
• Types of global business risks
• PEST(Politics, Economics, Society, Technology)
• Global business beyond PEST, risks inherited in
  institutional voids
• Management decision under uncertainty -gt Project
  evaluation (NPV, Monte Carlo simulation, VaR,
  real option approach etc.)
• Major caveats for Japanese firms too many risks
  -gt dont invest (discount factor may be too
  high).

13
Major risks associated with China business

• Increasing production cost particularly labor
  costs, worker protection policy and labor
  activist movements.
• Technology leakage Weak IPR enforcement, high
  labor turnover
• Lack of transparency with government policy,
  various regulations discretionary power of
  (local) government, sudden change of policies

14
Decision under uncertainty

• Risk factor identification
• Setting variance of risk factor (risk scoring)
• Modeling risk project and simulation
• Investment decision for new project (or exist
  from existing project) NPV, real option
  valuation (waiting options)
• Risk management for existing project determing
  major risks which should be treated
• Independent project making or company wide
  strategic move?

15
How to mitigate institutional risk?

• Case of Shanhai Jiading industrial park Japanese
  firms was forced to be out
• Case of Tatas factory case pull out from West
  Bengal
• Two qeustions
• What could have been done in advance?
• How to treat this?