Lecture Notes, Lectures 1-9 - Course Leader: Professor Amon Chizema PDF

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IBM lecture notesLecture 1 - IntroductionMultinational enterprise (MNE) – A firm that engages in FDI FDI – Investing in, controlling, and managing value-added activities in other countriesGDP per capita > $20,000 approx 1 billion people (Developed world) GDP per capita $2,000 - $20,000 ap...

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IBM lecture notes

Lecture 1 - Introduction Multinational enterprise (MNE) – A firm that engages in FDI FDI – Investing in, controlling, and managing value-added activities in other countries GDP per capita > $20,000 approx 1 billion people (Developed world) GDP per capita $2,000 - $20,000 approx 1bn people GDP per capita < $ 2,000 approx 5 bilion people Institution – based view: Formal and informal rules of the game Institutions refer to the structures that define the rules of the game, the rules that govern competition in various countries. Formal institutions include laws and regulations. An example would be a particular country’s laws controlling the nature and extent of foreign investment. Informal institutions, which include cultures, ethics, and norms, are informal rules of the game that are not established by laws or regulations but are nonetheless important in shaping the success or failure of firms around the globe. An example of informal institutions would be a particular society’s cultural attitudes towards entrepreneurship. There is a major drawback to the institution-based view suggest that a firm’s success or failure depends entirely by the environment. The resource-based view answers this drawback by focusing on a firm’s internal resources and capabilities. This view suggests that successful firms possess certain unique, firm-specific resources and capabilities that are not shared by its competitors in the same environments. In global business, foreign firms face an inherent disadvantage because of their non-native status (liability of foreignness), which may come about for a number of reasons, such as differences in regulation, culture, and norms. The primary means of overcoming this liability is a firm’s resources and capabilities, which cannot only offset the liability of foreignness, but also can provide the firm significant competitive advantage. Key lessons since the recession: Risk management/ Scenario planning Semi Globalisation: Suggests that barriers to market integration at borders are high, but not high enough to completely insulate countries from each other. The developing world are losing out now to emerging economies, particularly the BRICS [Refer to fortune 500 figures] What compels firms to become more global?

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To leverage their core competencies Acquire resources and supplies Seek new markets and become more competitive Imitating others Changes to the political environment (Environmental reason) Technological changes

Advantages of globalisation - Increased international trade lowers prices for goods and services - Globalisation stimulates economic growth, raises the income of consumers and helps create jobs Negative aspects of globalisation - Moving production to countries where labour and environmental regulations don’t exist, or are not enforced - The loss of national sovereignty (The shifting of economic and political power to supranational organisations like the WTO, UN, EU) - Inequality increases. - Increased competition, the killing of some national industries (E.G UK losing it’s textile industry to China and other Asian tigers).

Lecture 2 – Formal institutions

Institutional framework = Formal and informal institutions governing individual and firm behaviour. Formal institutions Regulatory Pillar: Coercive power of Government: Formal institutions… Laws, Regulations and rules. Informal institutions Normative pillar – how the values, beliefs, and actions of other relevant players influence the behaviour of focal individuals or firms. Cognitive pillar - internalized values and beliefs that guide individual and firm behavior. The point of institutions? Key role is to reduce uncertainty by constraining the range of acceptable actions…... Political risks exist where weak institutions make up an economy. Political systems: Refers to the rules of the game on how a country is governed politically - Democracy: Political system in which citizens elects representatives to govern the country on their behalf. Supports global business by preserving individuals right to freedom of expression and organisation. - Totalitarianism: System of central control (Communist, right wing, Theocratic and ethnic totalitarianism) Totalitarianism entails higher political risk due to wars, riots, protests, which can all affect firms. Political risk is a guide for MNE’s where to avoid investing. Legal systems Civil Law – Derived from Roman law and strengthened by Napoleon’s France. It uses comprehensive statutes and codes as a primary means to form legal judgments. Relative to common law, civil law has less flexibility, because judges only have the power to apply the law. Common Law – English in origin; shaped by precedents and traditions, as well as judicial interpretation. Relative to civil law, common law has more flexibility, because judges have to

resolve specific disputes based on their interpretation of the law, and such interpretation may give new meaning to the law, which will in turn shape future cases. Theocratic Law – Based on religious teachings. Islamic law is the only surviving example of a theocratic legal system that is formally practiced by any governments. Property rights In developed economies, every parcel of land, every building, and every trademark is represented in a property document that entitles the owner to derive income and benefits from it. Within such a system, tangible property makes other, less tangible economic activities possible. For example, property can be used as collateral for credit, which represents the single most important source of funds for new businesses in the US. IPR Patents: legal rights awarded by government authorities to inventors of new products or processes. Copyrights: exclusive legal rights of authors and publishers to publish and disseminate their work. Trademarks: exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products from others.

Economic systems Market / Mixed / Command economies State Owned Businesses Pros -

Developed in response to failure of private firms during Great Depression

Cons -

Lack of good corporate governance accountability Lack of concern for economic efficiency

Private own businesses Pros - Performance incentives for workers Cons - Risky business practises lead to financial crisis and recession

Institutional transitions Political or economic uncertainty can be potentially devastating to firms because uncertainty surrounding economic transactions can lead to transaction costs, the costs of doing business. Transaction costs also rise from opportunism, the act of seeking self-interest with guile. Institutions spell out the rules of the game, mitigating violations and keeping transaction costs minimal.

Lecture 3 – Informal institutions

Socially transmitted information, part of heritage from generations (Cultures, Ethics and Norms) Ethnocentrism: A self- centered mentality held by a group of people who perceive their own culture, ethics, and norms as natural, rational and morally right. (Can be good to have this approach domestically, but in foreign lands the firm will struggle with adaption.) Culture  Sub Culture (There is an over assumption that we can distinguish collective characteristics of cultures.) Components: Culture, Religion, Language (Culture and Religion have a strong co-relation) Context approach: Background against which interaction takes place. What it suggests is that some things are better said through body language of interaction. Low context interactions, are often efficient, and deals get made objectively and very quickly. 5 dimensions Individualist vs collectivist 

Individualist believes the individual is most important, ties between people are relatively loose. They stress independence over dependence. Reward individual achievement, and values the uniqueness of the individual.

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The Collectivist: The views, needs and goals of the group most important (Japan classic example). Ties between individuals are very close, obligations to the group is the norm. Can be characterized to the stakeholder model.

Uncertainty avoidance 

High uncertainty avoidance: Avoid ambiguity / Strict codes of behaviour / resist change…. Example is nations that employ ‘civil law’ it is very set in stone.

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Low uncertainty avoidance: Accept the ambiguity and lack of structure, more open to change and creative thinking …. Classic example is the adoption of common law.

Power distance - (The extent to which people view inequality as normal) 

High power Distance: Power is viewed as a scarce resource. Destroying seniority aspects of power distance could cause mass disturbances.

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Low power Distance: Minimal power differences, seniority can be achieved through merit.

Masculinity – Femininity

(Reference between gender and sex role differentiation and appropriate behaviour) 

Masculinity: Distinct roles/ men are assertive, ambitious, competitive. Women are viewed as supportive and nurturing.

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Femininity: Fewer rigid gender roles, greater equality and interpersonal relationship

Long term- Short Term Orientation  

Long-term orientation: view that perseverance and savings are necessary for a better tomorrow (CHINA) “Eye on the prize” mentality Short term Orientation: Immediate gratification – UAE (Tourism and oil industry) … Exploit the idea “Make money, spend money”. Less willing to ‘sacrifice’

Sensitivity to cultural differences does not guarantee success but can at least help avoid blunders. Ethics There are 3 views on firms’ ethical motivations:   

Negative view: Suggests that firms simply jump onto the ethics bandwagon under social pressure to appear to appear more legitimate without necessarily becoming better. Positive view: maintains that some (Not all) may be self-motivated to do it right regardless of social pressure. Instrumental view: Believes that good ethics may simply be a useful instrument to help make money

Managing ethics overseas: Core principles  

Respect for human dignity and basic rights Respect for local traditions and institutional context

Strategic responses to ethical challenges

Acquiring cultural intelligence -

Be prepared

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Slow down Establish trust Understand the importance of language Resect cultural differences Understand that no culture is inherently superior in all aspects

Lecture 4: Foreign Entry Market Mode Proactive Motivations

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Profit advantage Unique products (Take advantage of capabilities) Tech advantages Tax benefits / Economies of Scale

Reactive Motivations - Competitive pressures (Reacting to certain events happening within the domestic markets) - Overproduction / excess capacity - Declining domestic sales / saturated domestic market - Proximity to customers, get closer to key customers Direct exporting: A sells directly to B’ Indirect exporting: A sells to B/ B’ who sells C’ (Company B = trade intermediary) Cooperative exporting: Companies A, B, C sell exports cooperatively to D’ - Helps risk minimisation/ Kills market inefficiencies Licensing - Method of foreign operation; firm in one country (Licensor) agrees to permit a company in another country (Licensee) to use manufacturing, processing, trademark, know-how or some other skill provided by the licensor. The licensor will receive royalties in return.

Advantages of licensing - Good way to start in foreign ops - Help sidestep barriers to investment - Capital is not tied up in foreign ops - No danger of nationalization/ expropriation of assets - Local manufacturer can secure government contracts

Disadvantages - Limited form of participation (Will be limited to specific products/ Processes/ trademarks) - Partner develops know-how as the knowledge diffuses into the local economy - Licensee may not fully exploit the entry market, leaving chance for competitors - Lack of control of licensee operations - Requires extensive research Advantages of franchising - Alternative to building ‘chain stores’ to distribute goods. - The franchisee has a greater incentive than a direct employee because they have a direct stake in the business - Limited financial commitment (Non-equity mode of entry) - longer term commitment than licensing. Disadvantages of franchising - No manufacturing, so no location economies and experience curve - Risk to worldwide reputation if something goes wrong Joint ventures (JV’s) • An enterprise in which two or more investors share ownership and control over property rights and operation. Any form of association which implies collaboration for more than a transitory period is a joint venture. Joint ventures are a form of FDI (JV is a universal term but under this context we refer to a domestic firm engaging with a foreign local firm) Advantages - Sharing of risk - Local firm understands the national environment (Tacit knowledge) - Advantageous when one understands the formal and informal institutions of the country - Joint financial strength - May be the only means of entry in some countries Disadvantages • Different organizational cultures may be difficult to reconcile (Daimler-Chrysler 1998) • Partners may have different views on expected benefits Horizontal FDI: When a firm takes the same activity at the same value-chain stage from its home country and duplicates it in a host country. Vertical FDI: When a firm moves upstream or downstream in different value-chain stages in a host country through FDI. Why do FDI?

Ownership advantages – Possession and leveraging of certain valuable, rare, hard-to-imitate, organizationally embedded resources. (Control rights) - FDI reduces dissemination risks - Tighter control over operations - Facilitates the transfer of tacit knowledge through ‘learning by doing’ Location advantages – Features unique to a place that provide advantage to a firm. (Can can arise from agglomeration – the clustering of economic activities in certain locations.) - Benefit from knowledge spillover - Industry demand for skilled workers - Industry demand that facilitates a pool of specialized supplier and buyers in a region - Liability of foreignness refers to the additional costs that firms operating outside their home countries experience above those incurred by local firms. - When one firm enters a foreign country through FDI, competitors are likely to increase FDI in order to acquire or neutralize location advantages Internalization advantages – Replacement of cross-border markets with one firm locating and operating in two or more countries. - Replaces external market relationship with single organization spanning both countries

Political views regarding FDI Radical view – hostile; treats FDI as an instrument of imperialism. Free market view – suggests that FDI will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods or services. Pragmatic nationalism – considers both the pros and cons of FDI and approves it only when benefits outweigh the costs.

Lecture 5 – Alliances and acquisitions

Two stage decision model

VRIO framework Value: Do firm resources and capabilities add value Rarity: How rare are resources and capabilities Imitability: Resources provide competitive advantage only if they are rare and inimitable. Organisational: The resources must be well organised Strategic alliances: Voluntary agreements of cooperation between firms involving exchange, sharing or co-developing products, technologies, or services.

Contractual alliances: Associations between firms that are based on contract, with no sharing of ownership. Equity-based alliances: Based on ownership or financial interest between firms. Cross border M&A: 3% are mergers , 97% Acquisitions . Both Institutions and the Resource based view influence M&A Alliances must create value

Advantages Reduce, costs, risks, uncertainties Access complimentary assets and learning opportunities Possibility to use alliances as real options

Disadvantages Choosing wrong partners Potential partner opportunism Risk of helping nurture competitors

Rarity: Relational (collaborative) capabilities, the ability to manage inter-firm relationships, may be rare. Organization: Some successful alliances are organized in a way that is difficult to replicate. -

Nearly 70% acquisitions fail, only consistent winners are shareholders For the acquisition to add value the organisations involved must supply rarity Rare capability is finding firms that excel in post acquisition integration Is the acquisition a strategic or organisational fit?

Key factors for performance Equity: Greater equity stake may mean firm is more committed, likely to result in higher performance. Learning and experience: Experience often used as a proxy Nationality: Dissimilarities in national culture may create strains in alliances. Relational capabilities: Alliance performance may fundamentally boil down to soft, hard-tomeasure relational capabilities.

Cultural distance: If the cultural distance is shorter, generally have fewer problems. Why makes acquisitions? (1) Synergistic motives (2) Hubristic motives (3) Managerial motives. How to succeed?

Lecture 6 – Strategy and organization in the international firm Two pressures for MNE’s

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Cost reduction: Calls for global integration Local Responsiveness: Calls for local adaptation

Integration – Responsiveness framework

Home replication strategy: Duplicates home-based competencies in foreign countries. - Works when most customers are domestic - Lacks local responsiveness - Maintains central control - Can easily fail … example IKEA in Japan 1970’s - Walmart entering Brazil 1995 (Sold American football’s… Not popular) Localization strategy: Focuses on a number of countries/regions, each one regarded as a standalone market. - Multi-domestic approach where internal institutions prove to be a critical factor - High costs due to duplication of efforts in multiple countries - Firms that specialize in such industries as processed food, consumer products, fashion, retailing, and publishing usually cater to specific conditions in each country where they do business. - In such industries, the firm must adapt its offerings to suit the language, culture, laws, income level, and other specific characteristics of each country.

Global standardization strategy: Development and distribution of standardized products worldwide. - Firms that specialize in such industries as aerospace, cars, computers, chemicals, and industrial equipment, typically cater to customers on a global scale. For example, Toyota markets similar cars worldwide. - Appeals to several markets …. More worried about the product rather than the market.

Transnational strategy: Endeavors to be both cost effective and locally responsive - Think global act local (HSBC) - Flexible approach: standardize where feasible, and adapt to local demands where appropriate - Global learning and diffusion of innovations. - Organizationally complex, difficult to implement. Ikea strives for a transnational strategy, 90% of their product line is identical across two dozen countries. The overall standardized marketing plan is created at their HQ in Sweden, but is implemented with local adjustments.

Organisational strategies International division: Used when firms expand abroad, often engaging in home replication strategy. (Starbucks) Geographic area structure: Organizes MNE according to geographic areas. Most appropriate for localization strategy (Avon) - Strong local responsiveness, but that also encourages fragmentation of MNE. - Usually geographically split continentally Global product division structure: Supports global stand...