Session 6 to 11

Taking the Decision on Entering a New Market

Session 6

Trading Global Industries Industries --aerospace --automobiles --military hardware --oil --diamond mining --semiconductors --agriculture --consumer electronics

Domestic Multidomestic Industries Industries --railroads --laundries/dry cleaning --retail banking --hairdressing --hotels --milk --consulting

Inte

rnat

ion

al T

rad

e

Foreign Direct Investment

LO

W

LOW

HIG

H

HIGH

Patterns of Internationalisation

Internationalisation is the process through which a firm expands its business outside the national (domestic) market. Eventually, international firms may develop into:

Multinational corporations (MNC): a firm that carries out its value chains in more than one country. It is generally headquartered in one home country while it also operates in one or more host countries.

Trans-national corporations (TNC): a MNC that does not identify itself with any specific nation, but acquires truly international (i.e., not country-dependent) features and high local responsiveness.

International Strategy Framework

Internationalstrategy

Internationalisationdrivers

Sources of competitive advantage

Marketselection

Mode of entry

Drivers of Internationalisation

• Differences in cost across countries• Potential for economies of scale/scope• Potential for learning• Transportation costs

MarketDrivers

Competitive Drivers

GovernmentDrivers

CostDrivers

• Existence of trade barriers• Similarity of technical standards• Similarity of regulations• Differences in taxes

• Similarity of customer needs & tastes• Existence of global customers• Similarity of distribution channels• Transferability of marketing know-how

• Globalization of competitors• Industry concentration• Differences in industry concentration across countries• Feasibility of protecting intangibles

Forces favoring global integration/

local responsiveness

Adapted from: G. S. Yip, “Global Strategy… in a World of Nations?” Sloan Management Review 31(1) (Fall 1989), pp. 29-41.

EconomicValue

Margin

VolumeCompetitive AdvantageCost driversDifferentiation

drivers

IndustryAttractiveness/

Bargaining Power+

Uncertainty/ Risk

Dynamics (Learning)

G

DECREASING COSTS

ECONOMIES OF SCALE,UTILIZATION…

DIFFERENTIATING

GENERATING KNOWLEDGE AND OTHER RESOURCES

NORMALIZING RISK

INTENSIFYING COMPETITION

ADDING VOLUME

SourcesofValue (ADDING)

Source: Pankaj Ghemawat, What are the real gains from a successful Doha Round? WTO Workshop, November 2010

Levers of Value and Adding Value

World Market

Locations Economies

Economies of Scale

Economies of Scope

To seek lower production factor costs

To expand sales and production volume

To exploit proprietary assets

Principal Motives for International Expansion

Motives for Internationalization

Proactive• Profit and growth goals• Managerial urge• Technology competence• Foreign market

opportunities• Economies of scale• Tax benefits

Reactive• Competitive pressures• Domestic market• Overproduction• Unsolicited foreign orders• Extend sales of seasonal

products• Proximity to international

customers

BUSINESS STRATEGY DIAMOND

Staging

Differentiators

Economic logic

Vehicles

Arenas

• What will be our speed and sequence of moves?– Speed of expansion?– Sequence of initiatives

Staging

• How will returns be obtained?– Lowest costs through scale

advantages?– Lowest costs through scope and

replication advantages– Premium prices due to unmatchable

service?– Premium prices due to proprietary

product features?

Economic logic

• How will we get there?– Internal development?– Joint ventures?– Licensing/franchising?– Experimentation?– Acquisitions?

Vehicles

• How will we win?– Image?– Customization?– Price?– Styling?– Product reliability?– Speed to market?

Differentiators

• Where will we be active? (and with how much emphasis?)– Which product categories?– Which channels?– Which market segments?– Which geographic areas?– Which core technologies– Which value-creation

strategies?

Arenas

INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND

Economiclogic

Arenas

VehiclesStaging

Differentiators

Arenas

• Which geographic areas will we enter?

• Which channels will we use in those areas?

• Which international market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments?

Vehicles

• How does being international make our products more attractive to our customers?

Differentiators

• How does our international strategy lower our costs, raise the prices we can charge, or create synergies between our business?

Economic logic

• When will we go international?

• How quickly will we expand into international markets?

• In what sequence will we implement our entry tactics?

Staging

Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Commitment

• Timing: When is a good time to enter?– Potential gain from

waiting– Cost of delay

• Scale of entry– Small scale: Establish a

foothold to learn– Large scale: Acquire first

mover advantage

• Speed of expansion: How fast to grow?– Value of learning – Preemption of competitors– Constraints of internal

resources

• Mode– Some modes have more

flexibility embedded– Some modes reduce resource

requirements

Timing of entry: First MoverAdvantages

• Preempt rivals; establish strong brand name; capture demand

• Build sales volume; ride down experience curve ahead of competitors; cost advantage

• Create switching costs for that tie customers to 1st mover’s products

• Establish social ties ahead of following foreign competitors– important in high-context

cultures

Disadvantages; pioneering costs

• Time spent to learn dos-don’ts; competitors can learn from 1st mover

• If 1st mover introducing a new industry, it builds infrastructure

• 1st mover “trains” customers for followers

• Break through host country’s adjustment to “foreignness” issues– Regulations may change as a

result of 1st mover’s entry

Choosing the Mode of Entry• Decision Criteria for Mode of Entry:

– Market Size and Growth– Risk– Government Regulations– Competitive Environment/Cultural Distance– Local Infrastructure

• Classification of Markets:– Platform Countries (Singapore & Hong Kong)– Emerging Countries (Vietnam & the Philippines)– Growth Countries (China & India)– Maturing and established countries (examples: South Korea, Taiwan &

Japan)• Company Objectives– Need for Control– Internal Resources, Assets and Capabilities– Flexibility

Method for Prescreening Market Opportunities

THE CAGE DISTANCE FRAMEWORK Attributes creating distance

Industries or products affected by distance

Cultural distance Administrative distance Geography distance Economic distance

Different languages

Different ethnicities; lack of connective ethnic or social networks

Different religions

Different social norms, values, beliefs

Hofstede’s Culture Study

Products have high linguistic content (TV)

Products affect cultural or national identity of consumers (foods)

Product features vary in terms of size (cars), standards (electrical appliances), or packaging

Products carry country-specific quality associations (wines)

Absence of colonial ties

Absence of shared monetary or political association

Political hostility

Government policies

Institutional weakness

Regulatory interactions

Government involvement is highin industries that are• Producers of staple goods

(electricity)• Producers of other

“entitlements” (drugs)• Large employers (framing)• Large suppliers to

government (mass transportation)

• National champions (aerospace)

• Vital to national security (telecom)

• Exploiters of natural resources (oil, mining)

• Subject to high sunk costs (infrastructure)

Physical remoteness

Lack of a common border

Lack of sea or river access

Size of country

Weak transportation or communication links

Differences in climates

Products have a low value-of-weight or bulk ratio (cement)

Products are fragile or perishable (glass, fruit)

Communications and connectivity are important (financial services)

Local supervision and operational requirements are high (many services)

Differences in consumer incomes

Differences in costs andquality of

• Natural resources• Financial resources• Human resources• Infrastructure• Intermediate inputs• Information or knowledge

Nature of demand varies with income level (cars)

Economies of standardization or scale are important (mobile phones)

Labor and other factor cost differences are salient (garments)

Distribution or business systems are different (insurance)

Companies need to be responsive and agile (home appliances )

Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

Factors affecting decision

EXPORTING

INTERNATIONAL CONTRACTING

INVESTMENT

Joint VentureGreenfieldBrownfield (M&A)

LicensingFranchisingContract manufacturing Management contractTurnkey projects

Indirect exportDirect export

Internet EntryB2BB2C

With the channels of International

Express

Different Modes of Entry

Implications of Internationalizationfor Industry Analysis

INDUSTRY STRUCTURE

• Lower entry barriers around national markets

• Increased industry rivalry --- lower seller concentration

--- greater diversity of competitors

• Increased buyer power: wider choice for dealers & consumers

COMPETITION

• Increased intensity of competition

PROFITABILITY

• Other things remaining equal, internationalization tends to reduce an industry’s margins & rate of return on capital

Barriers hindering the process of internationalization

General market risks• Comparative market risks• Competition from other firms• Differences in product usage • Language and cultural differences• Difficulties in finding the right

distributor• Differences in product specifications• Complexity of shipping servicesCommercial risks

• Exchange rate fluctuations• Failure of export customers to pay due

to contract disputes, bankruptcy, refusal to accept product, or fraud

• Delays and/or damage in the export shipment and distribution process

• Difficulties in obtaining export financing

Political risks• Foreign government restrictions • National export policy• Foreign exchange controls imposed by host

governments• Lack of governmental assistance in

overcoming export barriers• Lack of tax incentives• High value of domestic currency relative to

export markets• High foreign tariffs on imported products• Confusing foreign import regulations and

procedures• Complexity of trade documentation• Enforcement of national legal codes

regulating exports• Civil strife, revolution, and wars disrupting

foreign markets

Risk-management strategies

Avoid exporting to high-risk markets

Diversify overseas markets

Insure risks when possible

Structure export business so that buyer bears most risk

Exit Strategies• Reasons for Exit:

– Sustained losses– Volatility– Premature entry– Ethical reasons– Intense competition– Resource reallocation

• Risks of Exit:– Fixed costs of exit– Disposition of assets– Signal to other markets– Long-term opportunities

• Guidelines:– Contemplate and assess

all options to salvage the foreign business

– Incremental exit– Migrate customers

Evaluating different modes of Entry

Session 7

Entry strategies into foreign markets include:

• Merely exporting a firm’s products into a foreign market, possibly with the support of trade brokers

• Licensing a firm’s production and marketing process, or asking for royalties to be paid for the use of firm’s assets and resources

• Franchising a firm’s business

• Directly undertaking production and selling in a foreign country• a) through a ‘multinational approach’ by adapting to local

markets• b) through a ‘global approach’ by mass-marketing the same

product

• Strategic alliances and joint ventures with foreign firms

Different Modes of Entry

Risk

Control

Export Based Modes

•Direct Exporting•Indirect Exporting

Contract Based Modes•Licensing•Franchising•Contract Manufacturing•Turnkey Operations•Management Contracts

Equity - Based Modes

•International JVs•Wholly owned subsidiaries

oBrownfieldoGreenfield

Trade-off between Risk and Control

Host CountryHome Country

Forms of FDI: Ownership

MNE

New Entity

Local Firm

Joint Venture

Full Acquisition (i.e., 100%)

Green Field100% Owned

Partial Acquisition (e.g., 50%)

Ownership = s%

Ownership = (1 - s)%

Complementarity of ResourcesMNE’s

Resources• Innovative

capabilities• Advanced

technology and know-how

• Industry-specific marketing expertise

• Global Best Practices

Local Firm’s Resources

• Imitating capabilities

• Older technology and know-how

• Country-specific marketing expertise

• Country specific organization skills

Value Chain ComponentValue Chain Component

• R&D

• Production

• Marketing & Sales

• Organization structure and systems

Joint Venture Company

Licensing

Acquisition

Joint Venturing

Local Firm

New Subsidiary Company

“Green Field” Entry

HOME COUNTRY HOST COUNTRY

ExportMNE

Common Market Entry Modes

CHOICE OF ENTRY MODES Choice of entry

mode

Non-equity modes

Equity (FDI) modes

Greenfieldinvestments

Minority JVsDirect exportsLicensing/franchising

Acquisition50/50 JVsIndirect exports Turnkey projects

OthersMajority JVsOthers Contracted R&D

Wholly ownedsubsidiaries

Alliances and joint ventures (JVs)

Exports Contractual agreements

Comarketing Strategic alliances (within dotted areas)Strategic alliances (within dotted areas)

Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545


Export of Goods

MNE

Revenues

Customers

Going it Alone: Export

Going it Alone: ExportAdvantages

• Low initial investment• Reach customers quickly• Complete control over

production• Benefit of learning for

future expansion

Disadvantages• Potential costs of trade

barriers– Transportation cost– Tariffs and quotas

• Foregoes potential location economies

• Difficult to respond to customer needs well

When Is Export Appropriate?•Low trade barriers•Home location has cost advantage•Customization not crucial

When Is Export Appropriate?•Low trade barriers•Home location has cost advantage•Customization not crucial

Export Modes

R&D

R&D

R&D

R&D

R&D

Production

Production

Production

Production

Production

Marketing

Marketing

A B

Export buying agent

C

Indirect export

Direct export

Cooperative export

R&D Production

Note: A1, A2, A3, A are n=manufactures of products /services B: is an independent intermediary/(agent) C: is the customer

A1

A2

A3

A

Marketing

Agent, distributor

Export marketing group (with a local agent of B

C

CB

B

A Rider B

B’s international sales organization

PiggybackC

Home country or third Country

Sales and service

Sales and service

Sales and service

Sales and service

Foreign Target Market

Border

Local Firm

Licensing of TechnologyHOME COUNTRY HOST COUNTRY

MNE

Fees and Royalties

Licensing Agreement

Licensing AgreementAdvantages

• Low initial investment • Avoids trade barriers• Potential for utilizing

location economies• Access to local knowledge• Easier to respond to

customer needs

Disadvantages• Lack of control over operations• Difficulty in transferring tacit

knowledge– Negotiation of a transfer price– Monitoring transfer outcome

• Potential for creating a competitor

When is Licensing Appropriate?•Well codified knowledge•Strong property rights regime•Location advantage

When is Licensing Appropriate?•Well codified knowledge•Strong property rights regime•Location advantage

Local FirmInvestment


MNE

Profit

Foreign Acquisition

Foreign AcquisitionAdvantages

• Access to target’s local knowledge

• Control over foreign operations

• Control over own technology

Disadvantages• Uncertainty about target’s

value• Difficulty in “absorbing”

acquired assets • Infeasible if local market for

corporate control is underdeveloped

When is Acquisition Appropriate?•Developed market for corporate control•Acquirer has high “absorptive” capacity•High synergy

When is Acquisition Appropriate?•Developed market for corporate control•Acquirer has high “absorptive” capacity•High synergy

New Subsidiary Company

Investment


MNEProfit

Going it Alone: “Green Field” Entry

Going it Alone: “Green Field” EntryAdvantages

• Normally feasible• Avoids risk of

overpayment• Avoids problem of

integration • Still retains full control

Disadvantages• Slower startup• Requires knowledge of

foreign management• High risk and high

commitment

When is “Green Field” Entry Appropriate?•Lack of proper acquisition target•In-house local expertise•Embedded competitive advantage

When is “Green Field” Entry Appropriate?•Lack of proper acquisition target•In-house local expertise•Embedded competitive advantage

Management Fees

Local Firm

Technological Inputs


Profit

MNE

Wholly-Owned Subsidiary

Managerial Service

Management Contract

Management ContractAdvantages

• Access to local management skills

• Avoids buying unwanted assets

• Retains strategic control

Disadvantages• Potential incentive problem• Potential adverse selection

problem – How do you know the

competencies of the manager?

When is a Management Contract Appropriate?•Manager has a reputation to protect

HotelsConsulting companies

•Performance-based contract provides no perverse incentives

When is a Management Contract Appropriate?•Manager has a reputation to protect

HotelsConsulting companies

•Performance-based contract provides no perverse incentives

Joint Venture Company

Inputs

MNE Local Firm


Inputs

Share of Profit

Share of Profit

Joint Venture

Joint VentureAdvantages

• Access to partner’s local knowledge

• Reduction of concern about overpayment

• Both parties have some performance incentives

• Significant control over operation

Disadvantages• Potential loss of proprietary

knowledge• Potential conflicts between

partners• Neither partner has full

performance incentive• Neither partner has full

control

When is a Joint Venture Appropriate?•Both partners contribute hard-to-measure inputs•Large expected mutual gains in the long-run•Trade secrets can be walled off

When is a Joint Venture Appropriate?•Both partners contribute hard-to-measure inputs•Large expected mutual gains in the long-run•Trade secrets can be walled off

Exporting Contractual Agreement

Joint Venture

Acquisition Greenfield Investment

Risk Low Low Moderate High High

Return Low Low Moderate High High

Control Moderate Low Moderate High High

Integration Negligible Negligible Low Moderate High

Source: V. Kumar and V. Subramaniam, “A Contingency Framework for the Mode of Entry Decision,” Journal of World Business, vol. 32 (1), 1997, pp. 53-72.

Framework for Mode of Entry Decision

Criteria Weight Exporting

Contractual Agreement

(Licensing or Franchising or Management Contract or

Turnkey)

Joint Venture Acquisition Greenfield

Investment

Risk

Return

Control

Knowledge

Investment

Ease of Implementation

Integration

Overall Score 1

Evaluating the Alternate Modes of Entry Decision

Advantages and Disadvantages of Different Modes of Entry

Managing International Partners and Licenses

Session 9

Stages of Strategic Alliance

• Initial Euphoria• Honeymoon period• Dawning realization• Aftershock• Damage control

Conceptual model of alliance development

• Alliance conceptualization• Alliance pursuance• Alliance confirmation• Alliance implementation/continuity

Steps in SA Implementation

• Contractual negotiations– Ownership– Credit terms– Ordering decisions– Performance measures

• Develop or integrate information systems• Develop effective forecasting techniques• Develop a tactical decision support tool to assist in

coordinating inventory management and transportation policies

Assessing the International Partnership

• Right country?• Right partnering?• Right partner?• Right structure?• Right leadership?

Alliance Partner Strategic Resources & Capabilities

Strategic Deficiencies

Desired Strategic Outcome

Partner 1

Partner 2

Criteria for AssessingCriteria Questions Ye

sNo Don’t Know

Test the Strategic Logic

Do you really need a partner?

Does your partner?

Will adequate returns be likely?

Is a Alliance the best option for both?

Partnership and Fit

Do congruent performance measures exist?

Will you get access to your partner’s skills?

Will you be compatible/comfortable?

Can you arrange an engagement period?

Shape and Design Is the Partnership’s scope of activity clear?

Its ownership structure?

Dispute resolution mechanisms?

Governance structure?

Doing the Deal Is there adequate capitalization?

Have exit arrangements been agreed to?

Is there commitment?

Making the Partnership Work

Will the partnership receive ongoing attention from parents?

Can cultural differences be managed?

Is there flexibility?

Is there commitment?

Is there sound leadership?Source: Paul W. Beamish, “Engaging in Cross-Border Collaboration: Managing Across Corporate Boundaries,” Chapter 6 in C. Bartlett and P. Beamish (eds.), Transnational Management: Text, Readings, and Cases in Cross-Border Management, 6/E, Irwin McGraw Hill, Burr Ridge, Illinois, 2010.

Partner Choice – 5 Cs or 6 Cs• Competence (rather than convenience) — Two weak do not make

one strong. Does the partner have what is needed to deliver results in this market?

• Complementarity (Resources) — Does the partner fill in the gaps well? (If we are similar, then one of us is not needed.)

• Congruence (Goals) — Do our goals mesh well with those of the partner?

• Compatibility — Do we have similar cultures, values and worldviews?

• Chemistry — Can I work with my partner? Sometimes the most strategic fit may not be the best personal fit. If executives dislike each other, then it is impossible to create value through partnership.

• How about “C” for “Competitor”? Can you partner with a potential future competitor?

Requirements for Effective Strategic Alliance

• Advanced information systems• Top management commitment

– Information must be shared– Power and responsibility within an organization might

change (for example, contact with customers switches from sales and marketing to logistics)

• Mutual trust– Information sharing– Management of the entire supply chain– Initial loss of revenues

Success Factors• Selection:

– evaluate which upstream & downstream members should be included in the supply chain to create a highly competitive & efficient supply network

– should be based on company’s goals, objectives & values system.– partners should have competencies in collaboration & those who already

have a proven ability to work in a collaborative environment.• Intention:

– Both partners should acknowledge their mutual dependence & their willingness to work for the survival & prosperity of the relationship.

• Trust: – Existence of trust in a relationship reduces perception of risk associated with

opportunistic behavior as this generates greater profits & serve customers better

• Communication: – allows partners to understand alliance goals, roles, responsibilities & helps

with the sharing & dissemination of individual experiences• Conflict Resolution:

– Firms should be motivated to engage in joint problem solving

Success Factors cont’d

• Developing a focused winning strategy for the alliance:– Based on distinctive competencies and competitive advantages of the partners

in the selected target market (s).– To ensure there will not be a goal divergence or conflict between alliance

partners.– To be able to manage the company cultural challenges that may arise between

the alliance partners.• Partners should be in vulnerable strategic positions:

– (i.e., in need of resources) or when they are in strong social positions (i.e., possess valuable resources to share). seeking complementary or similar resources for transferring or pooling.

• Progressive learning & value capturing: – Learning involves significant transfer of tacit, specialized & complex knowledge.

Learning requires close collaboration of both firms to overcome transfer challenges as knowledge, values, culture and organizational forms.

• Respect and protect the brand of each partner.• Determine and align decision rights:

– To define what decisions are important to the alliance, which partner should make them and how the decisions will be made and monitored.

• Exit Strategy:– Agree upon an exit strategy for the alliance. It Is important to have agreement in

advance on how the alliance will be concluded if and when it may fail and/or when it has fulfilled its mission and achieved its goals and objectives

Mistakes Leading to Failure

• Alliance business is viewed internally by one partner.

• One of the partners is too dependant on the other’s capabilities.

• Problems and dilemmas of mistrust.• Cultural & language barriers. • Collaboration in competitively sensitive areas

can be difficult.• A clash of egos might occur.

Static conceptual model of strategic alliance failure causes

Source: SHENG-YUE, H. and XU, R. “Analyses of strategic alliance failure: a dynamic model” in International Conference on Management Science and Engineering - ISTP, 2005, Harbin Institute of Technology, Russia, 2005.

Example of Alliance Failures• Daimler AG bought a 37 percent stake in Mitsubishi Motors Corp. in

2000 and 2001. The holding was unwound in 2005 after two years of sales declines at the Japanese carmaker. Revenue plunged after Mitsubishi Motors admitted to hiding defects, pushing it to a record 215.4 billion yen loss in the year ended March 2004.

• Volkswagen and Suzuki Motor Corp agreed their tie-up in December 2009, pledging to cooperate on technology such as hybrid and electric cars and on expanding in emerging economies such as India. Suzuki filed for international arbitration in November 2011 after VW repeatedly refused to sell back a 19.9 percent stake in the Japanese carmaker that it acquired in January 2010 for 1.7 billion euros ($2.3 billion) as part of a cooperation tie-up.

• In November 2008, NTT Docomo invested $2.2 billion in Tata Teleservices, at ₹117 a share for a 26.5% stake in the latter. On 25 April 2014, NTT Docomo had announced that they would sell all of their shares in Tata DoCoMo and exit the Indian telecom industry as they had incurred a total loss of $1.3 billion.

Dealing with Competition

Session 10

The Environment & DecisionsComplex

Simple

Static

Organic Extreme

Mechanistic Extreme

Dynamic

Source: Turton, R. (1991), Behaviour in a Business Context, London, Chapman Hall.

7-S Framework

Strategy

• Ways to achieve competitive advantage.

• Examples.– Low-cost strategy through economic production

or delivery– Product differentiation through distinct features

or innovative sales.

Structure

• Ways in which task and people are specialized and divided, and authority is distributed.

• Four main structures– Functional Structure– Divisional Structure– Matrix Structure– Network Structure

Systems• Formal processes and procedures to manage the

organization.

• Examples:– Performance Measurements– Reward Systems– Planning– Budgeting– Resource Allocation– Information System– Distribution System

Staffing

• People, their background and competencies.

• Organization’s approach to recruitment, selection, socialization, training and employee development.

Skills

• Distinctive competencies in the organization.

• Can be of People, Management Practices, Systems and/or Technologies.

Style

• Leadership style of top management and overall operating style of organization.

• Impacts norms followed by people, how they work and interact with each other and customers.

Shared Values

• Core values shared in the organization and serve as guiding principles of what is important.

• Helps focus attention and provides a broader sense of purpose.

Using the 7-S Model• Each S is consistent with and reinforces the other

S’s.• Recognize the full range of elements that need to

be changed and focus on the ones that will have the greatest effects.

• All seven variables are interconnected- to make progress in one, adjustments need to be made in others also.

• No natural starting point for a change – it is decided by diagnosis of the alignment of the organization.

Managing Human Resources

Session 11

Dominance of the Largest Transnational Corporations

Three Top 10 Rankings

How Transnational is a Corporation?

• Corporations vary in range of international dimensions– Ratio of domestic to foreign operations– The number of foreign countries entered– The size of foreign direct investment– The geographic span of operations– The extent of global integration in the production

chain– The extent of national diversity among

shareholders, employees, managers, and directors

How Transnational is a Corporation?

• Transnationality index (TNI): The average of three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment

Calculating the Transnationality Index (TNI) for General Electric and Philips Electronics

The General Field of HR• Major Functions and Activities

– Human resource planning– Staffing

• Recruitment• Selection• Placement

– Performance management– Training and development– Compensation (remuneration) and benefits– Industrial relations– Administration

International Mergers and Acquisitions

Global Competition

Importance of Global Human

Resources Management

Foreign Human

Resources

Market Access

Opportunities

Increasing Importance of Global Human Resources Understanding

Key Issues in International HRM1. Worldwide Human Resources

Planning– Recruiting and Selection– Expatriate orientation and training– Repatriation– Performance appraisal

2. Compensation– Dealing with inflation and

unexpected changes in exchange rates

– Providing sufficient pay to keep individuals

– Should company pay hardship allowance?

– Dissatisfaction with cost of living allowances

3. Housing (Complex problems at home and overseas)

4. Benefits Planning– Developing equity among employees– Several plans necessary for different

categories of personnel

5. Taxation (Proliferation of new laws)

6. Communication of HR Policies and Programs Worldwide– Treat communication as a continuous

process– Face-to-Face contact frequently– Make policy manuals brief and simple– Be sensitive to needs of receiver– Send regular written explanations of

policy changes– Periodic rotation of overseas HR

managers desirable– Security

What does IHRM add into the Traditional Framework of HRM?

• Types of employees– Within and cross-cultural workforce diversity– Coordination– Communication

• Human resource activities– Procurement– Allocation– Utilization of human resources

• Nation/country categories where firms expand and operate– Host country– Parent country– Third country

Differences between Domestic HRM and IHRM

• More HR activities• The need for a broader perspective• More involvement in employees’ personal

lives• Changes in emphasis as the workforce mix

of expatriates and locals varies• Risk exposure• Broader external influences

More HR Activities

International• taxation• relocation and orientation• expatriate administrative services• host government relations• language translation services

The Need for a Broader Perspective

• administering programs that are equitable for more than one group.

More Involvement in Employee’s Personal Lives

Ensure expatriates understand• housing arrangements• healthcare• compensation (cost-of-living allowances,

premiums, taxes)• visa requirements• schooling

Risk Exposure

• expatriate failure• direct costs• indirect costs• militant activities• emergency evacuation

Broader External Influences

• government• economy• labour standards and costs• taxation• health and safety• laws, compliance regulations, codes of

conduct

International Business Strategies

• Multilocal– Decentralized– Collection of independently operating organizations

• Export Market– Parent company maintains centralized control

• Global approach– Hybrid combination of multilocal and export

Domestic vs. International HR

• Basic function and objective remains the same: procurement, allocation, and utilization of people.

• Primary difference between IHR and domestic HR lies in the complexity of operating in different countries with different cultures and laws.

• Degree of complexity depends on:– Extent of cultural diversity– Approach taken to multinational entry– Top management attitudes (parochialism)

Questions for HR professionals• Do we have a strategy for becoming an international firm?• What type of managers will we need to be successful?• How can I find out about the way that HRM is conducted in

other countries (laws, trade unions, labor market).• What will be the impact of cultural norms on our HR

policies.• How will we choose whether to send expatriates or use

local employees.• How do we move people to different locations• How do we manage transfer of knowledge across borders

International HR Strategies

• Ethnocentric– Centralized HR– Managed by Parent Country Nationals (PCNs) – Pay based on local market for employees; home country

for PCNs– Training aimed at KSAs to perform the job

• Polycentric– Decentralized HR– Managed by Home Country Nationals (HCNs) – Pay based on local market– Training given added importance

International HR Strategies

• Geocentric– Global workforce deployed throughout the world– Positions filled by most qualified regardless of

nationality: HCNs, PCNs, or TCNs,– Compensation based on value-added– Training and development emphasized

• Regiocentric

Whirlpool’s Globalization • Where to go among alternative markets?

– $23/hr in the U.S. including the benefits– $3/hr in Mexico – $1/hr in China– $32/hr in Germany

• Mode of entry?– Acquisition of the major domestic appliances unit of Phillips

N.V. for more than $1 billion in 1991• Whirlpool’s total employees today:

– 23,000 in the U.S.– 45,000 overseas

Types of international work• Expatriates

– An employee sent by his/her company in one country to work in a different country.

• Global team project– Bringing together employees from different locations

to complete a specific team project.

• Short-term assignments– Sending employees on assignments, such as a three-month assignment,

to a foreign location.

• Virtual assignment. – Assignments requiring employees in different locations

to use information technology to communicate on job projects and tasks.

What is an expatriate?

• An employee who is working and temporarily residing in a foreign country– Some firms prefer to use the term “international

assignees”– Expatriates are PCNs from the parent country

operations, TCNs transferred to either HQ or another subsidiary, and HCNs transferred into the parent country

• Global flow of human resources

A Model of IHRM

Source: Adapted from P.V. Morgan, ‘International human resource management: Fact or fiction?’, Personnel Administrator, 31(9), 1986, p.44.

Types of employees in an MNE

• Parent-country nationals (PCNs)

– Employees who were born and live in a parent country.A parent (or home) country: the country in which a

company’s corporate headquarters is located.

• Host-country nationals (HCNs)

– Employees born and raised in a host country.Host country: a country in which the MNE seeks to locate or

has already located a facility.

• Third-country nationals (TCNs)

– Employees born in a country other than a parent or host country.

International Assignments Create Expatriates

Advantages of Different Sourcesfor Overseas Managers

Host Country Home Country

Third Country

•Less cost•Preference of host country government•Knowledge of environment•Language facility

•Talent available within company•Greater control•Company experience•Mobility•Experience provided to corporate executives

•Broad experience•International outlook•Multi-lingualism

Parent-country Nationals

Advantages Control and co-ordination

by HQ is maintained. Promising managers get

international experience. PCNs may be the best

people for the job. Assurance that the

subsidiary will comply with company objectives policies etc.

Disadvantages HCNs promotion

opportunities are limited. Adaptation to host

country may take a long time.

PCNs may impose an inappropriate HQ style.

Compensation differences between PCNs and HCNs may cause problems.

Host-country NationalsAdvantages• No problems with language

and culture. • Reduced hiring costs. • No work permits required. • Continuity of management

improves since HCNs stay longer in positions.

• Govt. policy may force hiring of HCNs.

• Promotional opportunities not limited - so higher morale among HCNs.

Disadvantages• HQ may have less control

over operations. • HCNs may still have limited

career opportunities outside the subsidiary.

• Hiring HCNs limits opportunities for PCNs to gain overseas experience.

• Hiring HCNs may encourage a federation of disintegrated national units rather than one integrated global unit.

Third-country NationalsAdvantages• Salary and compensation

may be lower than for PCNs.

• May be more familiar with host country than the PCNs.

Disadvantages• Transfers must consider

national animosities.• Host government may

resent TCNs as much as PCNs.

• TCNs may not comply with HQ style of management.

• TCNs may not want to return after assignment.

Why Do International Managers Fail?

• Does it change the essence of HR?• Culture Shock• Cultural arrogance (Parochialism)

• Cultural Insensitivity• The Key success factor?

– Cultural adaptability

CULTURAL ENVIRONMENT• Language• Communication styles

– Nonverbal– Direct vs. Indirect– Greeting: physical and verbal

• Space– Structural & interpersonal

• Time orientation– Punctuality– Monochronic vs. Polychronic

• Religion• Respect/formality• Consensus seeking

Composition of the Cultural Environment of International Business

Religionsacred objectsphilosophicalsystemsbeliefs & normsprayertaboosholidaysrituals

Technology and Material Culturetransportationenergy systemstools & objectscommunicationsurbanizationscienceinvention

Values and AttitudesToward:timeachievementworkwealthchangescientific methodrisk-takingEducationformal educationvocational trainingprimary educationsecondary educationhigher educationliteracy levelhuman resources planningSocial Organizationkinship social institutionsauthority structuresinterest groups social mobilitysocial stratificationstatus systems

Languagespokenwritten languageofficial languagelinguistic pluralismlanguage hierarchyinternational languagesmass media

Lawcommon lawcode lawforeign lawhome country lawantitrust policyinternational lawregulation

Politicsnationalismsovereigntyimperialismpowernational interestsideologiespolitical risk

HOFSTEDE’S DIMENSIONS

• Individualism vs. Collectivism• Power Distance• Uncertainty Avoidance• Masculinity vs. femininity• Long-term orientation

Major Reasons for Expatriate Failures in Foreign Environment

• Inability of the manager’s spouse to adjust to a different cultural environment.

• The manager’s inability to adapt to a different physical or cultural environment. Other family-related problems.

• The manager’s personality or emotional immaturity.• The manager’s inability to cope with the

responsibilities posed by the overseas work.• The manager’s lack of technical competence.• The manager’s lack of motivation to work overseas.

• empathy • flexibility • patience • openness • reliability • confidence • emotional stability • communication skills • tolerance for differences • humor • resourcefulness • sensitivity • teaching skills

ability to handle alcoholcuriositypositive regard for othersacceptability of assignmentdesire to be abroadnon ethnocentrismhigh motivationcourtesyadaptabilitytolerance for ambiguitylanguage skillsinterest in host culture

Traits expected from an International Expatriate

International Compensation

• If compensation is high then problems may be encountered on return to head office.

• If compensation is not adequate then there may be no incentive to go for the international assignment given the hardships that are usually involved in doing so.

International Compensation

Expatriation PremiumCost of Living Allowance Swamp Pay AllowanceShelter AllowanceEducational AllowanceHome Leave

Repatriation

• Virtually all repatriated personnel experienced some personal difficulty in reintegrating on return home. The main complaints were loss of status loss of autonomy lack of recognition of the value of the experience and lack of career direction.

Repatriation: Reverse Culture-shock

JOB RELATED FACTORS• “Out of sight out of mind”• International experience

devalued• Loss of status and pay relatively

peaking• Changes in the HQ

SOCIAL FACTORS• Expat assignment - different type

of social interaction (going from a very close expat community to where everyone is very busy with their own lives)

• Problems of spouse returning to the workforce

• Lack of peer support for teenagers

Flowchart of the Selection-Decision Process

Start the Selection Process

Can the position be filled by a local national?

Identify degree of interaction required with local community – using a 7- or 9- point scale, ranging from low to high, indicate the degree of interaction with local community required

for successful performance on the job.

Select local national and subject him/her to training basically aimed at improving technical

and managerial skills.

Emphasis* on tasks variables.

Second but by no means unimportant question is to ask whether the individual is willing to

serve abroad.

Is candidate willing?

Probably not suitable for position

Emphasis* on task variables

Identify degree of similarity / dissimilarity between cultures –

using a 7- or 9-point scale, ranging from similar to highly

diverse, indicate the magnitude of differences between the two

cultures,

Emphasis* on “relational abilities” factor.

“Family situation” factor must also be taken into consideration.

Start orientation (most rigorous)

Start orientation(moderate to high rigor)

Start orientation(moderate to high rigor)

Probably not suitable for position

YES

NO

YES

YES

NO

NO

HIGH

LOW

HIGHLY DIVERSE

VERY SIMILAR

Preparing for an International AssignmentStudy the following subjects:• Social and business etiquette.• History and folklore.• Current affairs, including relations between the country and the United

States.• The culture’s values and priorities.• Geography, especially the cities.• Sources of pride: artists, musicians, novelists, sports, great achievements of

the culture, including things to see and do.• Religion and the role of religion in daily life.• Political structure and current players.• Practical matters such as currency, transportation, time zones, hours of

business.• The language.

Recruitment

• Government Regulations• Work Permits Universally Required• Recruitment of Locals Varies• Guest Workers• Role of Church, Family, Politics

Selection• Merit Versus Best Family• Family Ties• Social Standing• Origin• Industrialized versus Less Developed

Training Issues

• Local Resources• Less Technical Capabilities• Apprenticeship Strengths in Europe• Management Development (US Leader)• Language (English Need)

Compensation

• Host Country Employees– Production Standard or Time or Combination– Benefits (often higher than U.S.)– Profit Sharing (may be Required)

• Managers– Narrowing of Salary Gap with USA

Expatriate Compensation

• Base Pay• Differentials• Incentives• Company Assistance• Cost: 3-4 times USA Rate

Compensation of Expatriate ManagersTo be effective, a compensation

program must:1. Provide an incentive to leave the united states.2. Maintain an American standard of living.3. Facilitate reentry into the united states.4. Provide for the education of children.5. Maintain relationships with family, friends, and business

associates.

Compensation Elements of an Expatriate

• Programs used by most MNCs have four elements:• Base pay – equal to pay of domestic counterparts in comparably

evaluated jobs.• Differentials – to offset the higher costs of overseas goods, services, and

housing.• Incentives – to compensate the person for separation from family, friends,

and domestic support systems.• Company assistance programs – to cover added costs such as moving and

storage costs, automobile, and education expenses.

The Price of an ExpatriateAn employer’s typical first-year expenses of sending a U.S.

executive abroad.Direct Compensation Costs

Base Salary 100%

Foreign-service premium 15%

Goods and services differential 20%

Housing costs 20-40%

Transfer Costs

Relocation allowance 5%

Air fare 2%

Moving household goods 25%

Other Costs

Company Car 15%

Schooling (two children) 20%

Annual home leave (four people) 5%

Personal income tax abroad 50%

Total = Salary plus 187-207%

Session 6 to 11

Documents

Transcript of Session 6 to 11