Basics of International Management OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING NORMAL UNIVERSITY...

Basics of International Management

OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURGBEIJING NORMAL UNIVERSITY

Prof. Dr. Birgitta Wolff, Marjaana Rehu, M.A.Otto-von-Guericke-University, Germany

2

International Management

Beijing 2002Prof. Dr. Birgitta Wolff

Marjaana Rehu, M.A.

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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Marjaana Rehu, M.A.

The Theory of Absolute AdvantageAdam Smith [1776]

The Theory of Comparative AdvantageDavid Ricardo [1819]

The Theory of Factor ProportionsEli Heckscher and Bertil Ohlin

The Competitive Advantage of NationsMichael Porter

1. Globalization of Economic Activities

(Czinkota/Ronkainen/Moffett (2000), International Business. Update 2000, Fort Worth et al., p. 156.)

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Marjaana Rehu, M.A.

1. Globalization of Economic Activities1.1 Motives for Firms to go International

What motivates companies to expand their operations internationally?

Proactive Motives[firm-initiated strategic change]

Reactive Motives[firms response and adoption to changes

imposed by outside environment]

Profit advantage Competitive pressures

Unique products Overproduction

Technological advantage Declining domestic sales

Exclusive information (Ongoing!) Excess capacity

Managerial commitment Saturated domestic markets

Tax benefit Proximity to customers and ports

Economies of scale

(according to Czinkota et al. [2000], p. 368)

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Marjaana Rehu, M.A.

1. Globalization of Economic Activities1.2 Drivers of Globalization

What drives Globalization?

A Technological Triggers

B Institutional Triggers

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Marjaana Rehu, M.A.

1. Globalization of Economic Activities1.2.2 Drivers of Globalization: Institutional Change

Hill, C. W. L. (2000): International Business, 3thd ed., Boston et al.

ad A. Technological Triggers

Transport

goods raw material humans

Information and

Communication

Technology

information know-how monitoring control

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Marjaana Rehu, M.A.

1. Globalization of Economic Activities1.2.2 Drivers of Globalization: Institutional Change

Hill, C. W. L. (2000): International Business, 3thd ed., Boston et al.

ad B. Institutional Triggers

Legal changes

e. g. declining trade and investment barriers - less protectionism (tariffs, subsidies, regulations or quotas), because of WTO, ETC - less capital restrictions

Political changes

revolutions, new governments, wars ...

Consumer tastes

changing preferences and tastes; growing acceptance of standardized - consumer electronic goods, - automobiles, - computers, - calculators

growing „individualization“

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Marjaana Rehu, M.A.


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.]

Institutional Framework

Contractual Governance

Individual

BehavioralAttributes

ShiftParameters Strategic

EndogenousPreferences

„Framework effects“

„The same“ management tools might induce different effects in different environments.

Behavioral expectations can vary much more when crossing framework borders.

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Marjaana Rehu, M.A.


[cf. Klein, P. G. (2000), The New Institutional Economics, p. 3, http://encyclo.findlaw.com/0530book.pdf, pp. 458 ff.;cf. Wolff, B. (1999): Anreizkompatible Reorganisation von Unternehmen, Stuttgart, p. 197 ff.]

„refers to the background constraints,

or ‚rules of the game‘“

InstitutionalEnvironment

formal, explicitrules

informal, oftenimplicit rules

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.

2.1 Explicit Institutional Environment

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Marjaana Rehu, M.A.


Impact of different frameworks on expectations about another player‘s behavior

2.2 Implicit Institutional Environment

1. Realize:g1 f1

Expectations about Partner‘s Behavior

Asymmetric Information on Partner‘s

• Environment• Preferences/Capabilities

Known Differences(‚Ignorance‘)

Unknown Differences(‚Ignorant Ignorance‘)

Create Awareness(Learning)

Exact Definition of Problem2. Identify: = ?

1. Realize:g1 f1








1. Realize:







Exact Definition of Problem








gx=your decision in x

fx=your decision in x

g1(g0) f1(g0)

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Marjaana Rehu, M.A.


Reducing risks resulting from diverging expectations


Cost/Benefit Comparisonof feasible alternatives

Solution

3. Be Inventive:find cost effective

feasible „tools“

4. Pay Attention to:bargaining positions

(outside options);who bears the cost?

5. Choose: least expensive

solution.

Finding alternative Solutions, e.g.• reduce informational asymmetry (learn partner‘s parameters)• find functionally equivalent mechanisms, e.g. translators• ...



Solution






solution.




Solution






solution.



Solution



Solution






solution.



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Marjaana Rehu, M.A.


InstitutionalEnvironment

formal, explicitrules

informal, oftenimplicit rules

solves problems ofcoordination and

motivation by altering the payoff structure in each

game

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.

dominant principle


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Marjaana Rehu, M.A.

2. Institutional Environment of International Business2.3 Institutional Frameworks in a Globalized World

EU

ASEAN

WTO, World Bank, IMF, UNCTAD, OECD, DAC,BIS, EFTA, EBRD, G10, G7, Paris Club, Group 77, ...

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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Marjaana Rehu, M.A.


Terminology: Difference between uncertainty and risk

[* 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.]

Uncertainty:*- caused by many factors, with unpredictable outcomes,- immeasurable,- no possibility to assign probabilities

Risk:*- measurable (often financial) effect of uncertainty,- high levels of uncertainty increase risk,- possibility to calculate probabilities

„the possibility of suffering harmor loss, or a course involving un-certain danger or hazard“**

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Marjaana Rehu, M.A.

3. Business Risks from a New Institutional Economics Perspective3.1 Endogenous Risks

Possible sources of risks by levels



Individual




Source ofendogenous risks

Source ofexogenous risks


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Marjaana Rehu, M.A.


3.1.2 Adverse Selection 3.1.3 Moral Hazard 3.1.4 Hold-Up

Reason for riskAsymmetrical

information statusAsymmetrical information

statusOne-sided specific

investment

Reason for the asymmetrical

information status

Lack of information regarding quality of good

or service

Action cannot be monitored and/or result cannot be

evaluated

(Information status is not the problem)

Time of occurrence in relation to

signing of contractEx ante Ex post Ex post

Theoretical con-tractual approach

to solving problem

Selection mechanisms (or reduce information

asymmetry)

Incentive systems (or reduce information

asymmetry: ‘Monitoring’)

Vertical integration or implementation of

mutual dependencies

(or avoid specific investments)

Examples Signaling via certificates Screening via contract menus or tests

Bonus payments Job design and decentralization Team formation Co-ownership Manipulating ‘outside options’ (or establish accounting system)

Unified resource ownership Exchanging ‘hostages’ by providing some form of security (or use alternative technology, or redefine task)

Roots of risks: Asymmetric information and specific investment

[cf. e.g. Wolff (1995), Contractual Problems in Market Relations, in: Bernitz/Hallström (eds.), Principles ..., Stockholm.]

3.1 Endogenous Risks

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Marjaana Rehu, M.A.


Recap: Possible sources of risks by levels



Individual




Source ofendogenous risks



3.2 Exogenous Risks

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Marjaana Rehu, M.A.

3. Business Risks from a New Institutional Economics Perspective3.2 Exogenous Risks

Types ofexogenous risks in

international Business

PoliticalRisk

CulturalRisk

EconomicRisk

ImplicitExplicit

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Marjaana Rehu, M.A.


What shapes an multinational corporation?

corporationas a nexus of

contracts

Firm

Political Groups

Govern-ments

Suppliers

CompetitorsTrade

Associ-ations

Employers

Unions

Customer Advocate Groups

OwnersFinancial

CommunityActivist Groups

Customers

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Marjaana Rehu, M.A.


Multinational corporation

4.1. What exactly is a 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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Marjaana Rehu, M.A.


Property rights allocation as a determinant of governance structure

Type of firm

Static dynamic

Allocation of property rights Transferability of rightsControl Profit Liability Sale

Enterprise with single ownership

Entrepreneur EntrepreneurEntrepreneur(even private

assets)Entrepreneur unlimited

Corporation without workers‘ codetermination

Management Shareholders Shareholders Shareholders unlimited

Corporation with statutory co-determination

Management/Employees

Shareholders/Employees

Shareholders Shareholders unlimited

Worker-managed firm

Workers/Management

Workers non-transferable

State-owned firmPoliticians/

Management„State“ „State“ „State“

limited(law)

Public Administration

Politicians/Public

Servants„State“

non-transferable (law)

[cf. Picot, A./Wolff, B. (1994), Institutional economics of public firms and administrations, in: JITE, Vol. 150, No. 1 (March), p. 218.]

4.1. What exactly is a Multinational Corporation?

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Marjaana Rehu, M.A.


4.2 Creating Competitive Advantage

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?

Orientationtowards markets

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

Orientationtowards resources

- evaluation of environmental opportunities and threats: PORTER‘s five competitive forces- evaluation of the country‘s competitiveness

- resource-based view- core competencies

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Marjaana Rehu, M.A.

4. Multinational Corporations4.2.1Porter‘s Five-Forces-Model

MultinationalCorporationSuppliers Buyers

Substitutes

PotentialEntrants

Bargaining powerof buyers

Threat of substituteproducts or services

Bargaining powerof suppliers

Threat of newentrants

explicit and implicitinstitutional framework

endogenous andexogenous risks

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

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Marjaana Rehu, M.A.

4. Multinational Corporations4.2.2 Role of Home Countries for Competitive Advantage: Porter‘s »Diamond«

firms gain competitiveadvantage where their home

base allows and supports the most rapid accumulation

of specialized assets and skills

Homecountry

Firm Strategy,Structure and

Rivalry

Related andSupportingIndustries

DemandConditions

FactorConditions

Chance

Govern-ment

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Marjaana Rehu, M.A.


Market entry

Location? Mode of control?

involves twointerdependent decisions

Where:Choosing the right location

How:Choosing the right form

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Marjaana Rehu, M.A.

Where: Choosing the right location

location as a variable affecting global competitiveness of firms because of location bound assets

Choice of Location

Firm specific variables Framework variables

Resource SeekingMarket Seeking

Efficiency SeekingStrategic Asset Seeking

Country risk analysis Exogenous risks


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Marjaana Rehu, M.A.

A

B

C

D

E

Co

un

try Customers

Manufacturing Customer ServiceR&D SalesPurchasing Manufacturing Customer ServiceR&D SalesPurchasing

Suppliers

Support Level Support Level

1. 2. 2. 1. 2. 1.

Legend: Weak Medium Strong

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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Marjaana Rehu, M.A.


5.2 Alternative Modes of Foreign Entry

Alternative Modes of Foreign Market Entry

Internal strategies: Using your own assets1. Exporting2. Licensing3. Franchising4. Joint Ventures5. Sales Office6. Production Plant7. Full Scale Subsidiaries8. Turnkey contracts

External strategies: Combining your and your partners‘ assetsCorporate NetworksStrategic Alliances ( „International Management II“)

Reference: Hill (2000)

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Marjaana Rehu, M.A.


1. Export:Domestic production and administrative control,

Example: Selling Miele washing machines in Russia A: Miele Corp; B: local appliance store

T0 T1T2 T3

A+B strike a deal(contract)

A pro-duces

B sells abroad

B collects the profit and pays A (fixed amount)

Moral HazardAdverseSelection

Time


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Marjaana Rehu, M.A.


2. Licensing:A 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

Time T0 T1T2 T3

A +B strike a deal

A delivers product concept

B pro-duces and sells

B collects the profit and pays A (fixed amount for the license)



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Marjaana Rehu, M.A.


3. Franchising:Involves 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

T0 T1T2 T3

A +B strike a deal

A delivers business concept

B pro-duces and sells

B collects the profit and pays A (fixed amount for the franchise)


Time


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Marjaana Rehu, M.A.


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

T0 T1T2 T3

A+B strike a deal

A+B invest

A+B pro-duce and sell

A+B share the profit

Moral Hazard

Hold-Up (A: risk; esp. if B is player and arbitrator/rule maker at the same time) Adverse

Selection


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Marjaana Rehu, M.A.


T0 T1T2

A invests abroad

A produces at home, transports to foreign sales office, and sells

A collects profits and transfers them ‚home‘

Country hold-up (A maybe not allowed to export profits)

5. Sales Office

Example: DaimlerChysler opens a car shop in Egypt A: DC


Country Hold-Up

(may not be allowed to

retrieve inv.)

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Marjaana Rehu, M.A.


6. Production Plant

Example: DaimlerChysler opens a car factory in South Africa A: DC

T0 T1T2

A invests abroad

A produces and sells

A collects profits and transfers them `home`

Country Hold-Up


retrieve inv.)

Country hold-up (maybe not allowed to export profits)


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Marjaana Rehu, M.A.


7. Full-Scale Subsidiary:The firm owns 100 percent of the stock; two possible ways: setting up a new operation or acquiring an established firm.

T0 T1T2

A creates A‘

A‘ producesand sells

A‘ collects profits and transfers them to A (not internal)

Country Hold-Up (maybe not allowed to export profits)


Country Hold-Up


retrieve inv.)

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Marjaana Rehu, M.A.


8. Turnkey Contract:The 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

T0 T1T2 T3

A +B strike a deal

A delivers completetechnology

B learns B collects the profit and pays A (fixed amount for the project)

Adverse Selection Moral HazardHold Up


T4

End of project, B produces and sells

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Marjaana Rehu, M.A.


Exporting Ability to realize location and experience curve economies

High transport costs

Trade barriers

Problems with local marketing agents

Franchising Low development costs and risks

Lack of control over quality

Inability to engage in global strategic coordination

Licensing Low development costs and risks

Lack of control over quality

Inability to realize location and experience curve economies

Inability to engage in global strategic coordination

Turnkey contracts Ability to earn returns from process technology skills in countries where FDI is restricted

Creating efficient competitors

Lack of long-term market presence

Entry Mode Advantage Disadvantage

[Hill (2000), p. 443.]


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Marjaana Rehu, M.A.


5.2 Alternative Modes of Foreign Entry: Opportunities and Risks

Property rights allocation in expansion strategies

100

Domestic [%]

Foreign [%]0 100

1. Export

2. Licensing

3. Franchising

4. Joint Venture & Strategic Alliances

5. Sales Office

6. Production Plant

7. Full Scale Subsidiary

8. Turnkey Contract

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Marjaana Rehu, M.A.

Nu

mb

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Many

NoneSales Office

Prod. Plant

Subsidiary

Consortium

Joint Venture

Licensing

Franchising

Strategic Alliance

Export

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Equity(more ownership)

Sharing Nonequity(less ownership)

Tight control Medium control Little control


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Marjaana Rehu, M.A.

Corporate Alliance

Example: Subway System in Singapore

T0 T1 T2 T3

A+B make a deal to cooperate

in project

A+B negotiate PA and PB

A+B collect and and divide

PA and PB

A+B deliver their contri-

butions at cost CA and CB

Time

T0 T1 T2 T3

A+B make a deal to cooperate

in project (e.g. 50:50)

A+B negotiate

P

Price P due: A+B collect and share (½ each)

A+B deliver their contributions (½ C each)

Joint Venture

Time


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Marjaana Rehu, M.A.

Benefits of Corporate Collaborations

Shared Risks

Shared Knowledgeand Expertise

Synergy & Competitive Advantage

Easier Market Entry

modified from: Griffin, R. W./Pustay, M. W. (1999): International Business. A Managerial Perspective, 2 nd ed., p. 453.

6.1 Potential Benefits of Collaborative Ventures6. External Growth Strategies

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Marjaana Rehu, M.A.

Type Advantages Disadvantages

Wholly Owned

Sub-sidiary(WOS)

Protection of technology/ know-how Right to decide about all further steps in global strategy Ability to realize location and experience curve economies No moral hazard problem with partner

High costs and risks of setting up over- seas operations Country-specific hold-up problem (Restrictions on money transfer e.g. profits/investment by the host country) Adverse selection problem

Joint Venture(shared owner-ship)

Access to local partner`s know-how In some countries: only politically feasible solution to enter a market Less capital required (shared between partners) Shared business risk Less country-specific hold-up risk than in WOS

Lack of control over technology/know- how Potential imcompatibility of partners Diluted incentives to invest Adverse selection, moral hazard, and hold-up problem

Strategic Alliance

Shared costs/risks of R&D (products/processes) Joint complementary skills and assets that neither partner could (at lower cost) develop on her own Greater chance to establish technological industry standards Undiluted incentives to invest Less country-specific hold-up risk than in WOS Less moral hazard risk than in JV

Loss of autonomy Potential incompatibility of partners Adverse selection, and hold-up problem

6.2 Advantages and Disadvantages of Corporate Collaborations6. External Growth Strategies

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Marjaana Rehu, M.A.

6.3 Potential Pitfalls of Corporate Collaborations

Challenges

Incompati-bility of Partners

Access toInformation

Distribu-tion of

Earnings

Loss ofAutonomy*

Incompati-bility of Partners

AdverseSelection

MoralHazard

MoralHazard

Hold-Up ‚NormalUncertainty‘

Signaling,Screening

PropertyRights

Allocation

PropertyRights

Allocation

‚Hostages‘,Integration

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„Textbook Problem“:

Economic Problem:


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Marjaana Rehu, M.A.


Corporate Governance

Individual Characteristics

A Business Economist‘s Field of Interest

Strategic


Behavioral Attributes

ShiftParameters

Sou

rce:

Wil

liam

son

(199

4), p

. 326


How do institutional frameworks influence work relations and, thus, HRM-practices?

explicit implicit

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Marjaana Rehu, M.A.

Industrial relations factors Relationships between

worker, union, and employer (e.g. codetermination and

participation in Germany or USA)

7.1 How Intercountry Differences Affect HRM

Cultural factorsDiffering cultures require different HR practices among a firm’s subsidiaries,

e.g. implementation of different incentive plans. ( Hofstede)

Economic factorsE.g.: Productivity and efficiency in SOEs in

contrast to firms competing in a market (e.g. full employment

at the expense of efficiency)

Labor cost factors

Worldwide diffe-rences in hourly compensation costs, hours

worked per week, severance pays,

vacation time, etc.

Intercountry Differences Affect HRM

Source: Dessler, G. (2000), Human Resource Management, 8th ed., Upper Saddle River (Prentice-Hall), pp. 614 ff.

Culture(implicit

framework)

Law(explicit

framework)


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Marjaana Rehu, M.A.

Ethnocentric-orientedfirms

Key management positions are filled by parent-country nationals

Reasons:

• Lack of qualified local senior managers• Maintain unified corporate culture and tighter control• Transfer of firm’s 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.

7.2 International Staffing Policy

International staffing policies

Source: Dessler, G. (2000), pp. 623 f.


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Marjaana Rehu, M.A.

I.

? / ?(Compromise)

II.

? / ?(A gives in to B)

IV.

? / ?(B gives in to A)

III.

? / ?(None gives in)

Player A

Player B

Agreement

Agreement

Non-Agreement

Non-Agreement

Negotiation will be beneficial, if both players can win by reaching field I.

8. Cross-Cultural Business Negotiations8.1 The Structure of Bargaining

• Two players: Player A, Player B

• Options in the negotiation process: “Agreement” or “Non-Agreement”

• No PD!

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Marjaana Rehu, M.A.

The Negotiation Process – What should be considered?

• Defined by next best option („outside option“): What is at stake?

• Most likely different for each partner

• Can be manipulated

Reasons for Non-Agreement

Bargaining Power

Coordination: Ambiguity and/or uncertainty of payoffs

(one-sided or bilateral information deficits, „irrationality“)

Remedies:

• Adequate communication • Better predictions• Prognostic tools

Motivation: Non-agreement payoff is

best for me

Remedies: „Transfers“ within bargaining space (i.e. space defined by players‘ outside options)


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Marjaana Rehu, M.A.

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?)

The Bargaining Process – What should be considered?

I.

10 / 10

II.

6 / 12

IV.

13 / 5

III.

2 / 12

Player A

Player B

Agreement

Agreement

Non-Agreement

Non-Agreement


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Marjaana Rehu, M.A.

Should the players enter negotiations?

I.

10 / 10

II.

6 / 12

IV.

13 / 5

III.

2 / 12

Player A

Player B

Agreement

Agreement

Non-Agreement

Non-Agreement

Answer:

• Yes, they should enter negotiations, because the agreement is socially desirable.

20 18

18 14


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Marjaana Rehu, M.A.


I.

10 / 10

II.

6 / 12

IV.

13 / 5

III.

2 / 12Player A

Player B

Agreement

Agreement

Non-Agreement

Non-Agreement

Bargaining Power: Defined by next best option („outside option“): What is at stake?

A‘s Perspective:

Result: B chooses ‚Non-Agreement‘ (12) Player A gets (2)

Options for player B: Agreement (10) or Non-Agreement (12)

Result: B chooses ‚Non-Agreement‘ (12) Player A gets (6)

a) A‘s choice: Agreement

b) A‘s choice: Non-Agreement

Options for player B: Agreement (5) or Non-Agreement (12)


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Marjaana Rehu, M.A.


I.

10 / 10

II.

6 / 12

IV.

13 / 5

III.

2 / 12Player A

Player B

Agreement

Agreement

Non-Agreement

Non-Agreement

B‘s Perspective:

a) B‘s choice: Agreement

b) B‘s choice: Non-Agreement

B‘s choice of ‚Agreement‘ is dominated by ‚Non-Agreement‘ 12 > 10 or 5 Result: Player A‘s choice of ‚Non-Agreement‘ (13) is not feasible.

Options for player A: Agreement (6) or Non-Agreement (2) Result: Player A chooses ‚Agreement‘ (6) Player B gets (12)


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Marjaana Rehu, M.A.


I. 10 / 10

II.6 / 12

IV.13 / 5

III.2 / 12

Player A

Player B

Agreement

Agreement

Non-Agreement

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 > 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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Marjaana Rehu, M.A.

What could be done to motivate both partners to agree?

Which transfer is required to reach an agreement?

What is the transfer space?

Agreement Non-Agreement

Agreement

I. 7 / 13

II.6 / 12

Non-Agreement

IV.13 / 5

III.2 / 12P

laye

r A

Player B

• A is better off: gains 7 instead of 6

Results: Choice of ‚Agreement‘

• At least 2 should be transferred!

( 20) ( 18)

( 14)( 18)

• B is better off: gains 13 instead of 12

• Agreement is socially desirable ()

I. 10 / 10

II.6 / 12

IV.13 / 5

III.2 / 12P

laye

r A

Player B

Agreement

Agreement

Non-Agreement

Non-Agreementt = 3

• 20: 20 – 18 = 2• B: 10 – 6 = 4• A: 10 – 12 = -2


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Marjaana Rehu, M.A.

1) Pre-Bargaining

Source: Lebow, R. N. (1996): The Art of Bargaining, Baltimore & London (J. Hopkins Univ. Press), pp. 4/5.

• What is the problem? What is the nature of the problem? Can I resolve it in isolation, or does it require (or allow) me to address other problems as well?

• What are my interests? What do I have at stake on and off the table in this negotiation? Which interests are essential?

• What are my bargaining goals? What do I want out of the negotiations? What am I prepared to settle for?

• Is bargaining feasible?

What are the interests and goals of the other side? Is there likely to be enough overlap with mine to warrant bargaining?

8. Cross-Cultural Business Negotiations8.2 Three Phases of the Bargaining Process

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Marjaana Rehu, M.A.

2) Bargaining

• Select a Bargaining Strategy

Given the nature of the bargaining situation, which strategy is most appropriate? Should I use it alone or in tandem with another strategy?

• Increase your Leverage

What resources and advantages do I have? What can I do to increase my advantages, diminish the other side‘s advantages, or convince the other side of my advantages?

• Frame a Proposal What kind of offer or counteroffer do I want to make? How is it conditioned by my bargaining strategy?

• Explain and Justify your Demands

Why are my demands legitimate and reasonable?

Do I want an agreement in principle or an agreement in detail? Have I reached a written agreement on all details that are important to me?

• Pin Down Important Details


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Marjaana Rehu, M.A.

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?

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


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Marjaana Rehu, M.A.

Source: Fisher, R./Ury, W. (1991): Getting to Yes. Negotiating Agreement Without Giving In, 2nd edition, New York etc. (Penguin Books).

1. The Problem: Do not bargain over positions.

2. The Method: • Separate the peoplepeople from the problem

• Focus on interestsinterests, not positions

• Invent optionsoptions for mutual gain

• Insist on using objective criteriacriteria

3. What if they are more powerful?

Develop your BATNA (Best Alternative To a Negotiated Agreement)

8. Cross-Cultural Business Negotiations8.3 The “Harvard”-Concept of Negotiating

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Marjaana Rehu, M.A.

Source: Ury, W. (1991): Getting past No. Negotiating Your Way From Confrontation to Cooperation, New York

etc. (Bantam Books).

1) Preparation:

1. Interests: yours and theirs

2. Options: yours and theirs

3. Standards: identify „fair“ procedure (e.g. referring to market price)

4. Alternatives: BATNA (Best Alternative to a Negotiated Agreement)

5. Proposals: should be better than other side‘s BATNA

6. Rehearse: talk it over with someone else


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Marjaana Rehu, M.A.

2) Negotiating

Barriers to Cooperation

1. Your reaction

2. Their reaction

3. Their position

4. Their dissatisfaction

5. Their power

Corresponding Strategy

1. Don’t react: Go to the balcony

2. Don’t argue: Step to their side

3. Don’t reject: Reframe

4. Don’t push: Build them a golden bridge

5. Don’t escalate: Use power to educate


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Marjaana Rehu, M.A.

Specifics of Cross-Cultural Business Negotiations

Sou

rce:

Hen

don/

Hen

don/

Her

big

(199

6), p

p. 1

5-76

, 231

-242

.

… of the nature and characteristics of the role of government in (more or less) centrally planned economies

… of the relatively low status assigned to business-persons in many countries

… and attention to training executives in the art of negotiations

Insufficient recognition…

… 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 strength of competitors

… of the difference between approval at one level and implementation of such approval at other levels of the government

… of the role of host government in the negotiation process

… of the economic and political criteria in the decision-making process


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Marjaana Rehu, M.A.

• 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

8. Cross-Cultural Business Negotiations8.3 Dimensions of Cultures

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Marjaana Rehu, M.A.

Specifics of Cross-Cultural Business Negotiations (cont.)

Source: Hendon/Hendon/Herbig (1996), pp. 15-76, 231-242.

Common mistakes made when

negotiating overseasFailure to place yourself in the other

person’s shoes

Insufficient allocation/attention of time for

negotiations

Insufficient understanding of the role of personal

relations and personalities in the decision-making process

Insufficient knowledge of the host country –

including history, culture, government, status of

business, image of foreigners

Insufficient attention to saving face of the

opponent

Insufficientattention to planning

for changing negotiation strengths

Interference by headquarters

Insufficient planning for internal commu-

nication and decisions

Insufficient understanding

of different waysof thinking

8. Cross-Cultural Business Negotiations

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Marjaana Rehu, M.A.


You – as representatives of your culture – will negotiate an annual labor contract with the firm’s management (Personnel Managers)

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!)

The Negotiation

Problem:

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Marjaana Rehu, M.A.

Schedule team meetings:

1. Define your own bargaining position by setting your goals according to your community‘s culture

2. 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.

3. Remember: If your negotiations do not end in an agreement top management is likely to sell the business and you all might get dismissed.

Team meeting: Preparation of the negotiation

• Prepare the readings (Instructions) carefully!

• Handout: Abadabinese‘; Feefifofians‘, or Personnel managers‘ score sheet


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Marjaana Rehu, M.A.

The Negotiation:

You - as representatives of your culture - will negotiate an annual labor contract with the firm’s management.

“Postbargaining”: Discussion of Results

Have some slides ready to present and explain your strategy!


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Marjaana Rehu, M.A.

Thanks for your attention and good luck in your future

careers!

Basics of International Management OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING NORMAL UNIVERSITY...

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