globalization 30 4

8/8/2019 Globalization 30 4

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mmary

Powered By Globalization Team

Globalizationis the

engine

of culturalchange



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ummary

International firms shouldmake a concerted effort to

identify ideas and behaviors

in host countries and foreigncultures that can be usefullyapplied across the whole of

their organizations.



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Presentation ObjectivesPresentation Objectives

To identify problems in evaluating the activities of MNEs.

To evaluate the major economic impacts of MNEs on home and

host countries.To establish the foundations for responsible behavior.

To discuss some key issues of globalization and society—ethicsand bribery, the environment, pharmaceuticals, and labor issues.




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To examine corporate responses to globalization.

To clarify why companies may need to use modes other than

exporting to operate effectively in international business.To comprehend why and how companies make foreign directinvestments.

To understand the major motives that guide managers whenchoosing a collaborative arrangement for inter-national business.




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To define the major types of collaborative arrangements.

To describe what companies should consider when entering intoarrangements with other companies.

To grasp what makes collaborative arrangements succeed or fail.

To see how companies can manage diverse collaborative

arrangements.




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GlobalizationGlobalization

The ongoing social, economic,and political process that deepens andbroadens the relationships and inter-

dependencies amongst nations—their people,their firms, their organizations, and their

governments•Is the process of growing interdependence among countries.•Different things to different people.•The deepening relationship & broadening interdependence among people from

different parts of the world & especially among different countries .




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“Look, You can actually see Bill Gates Office fromhere

“Look, You can actually see Bill Gates Office fromhere



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IMPORTANT CONCEPTSIMPORTANT CONCEPTS

Globalization Coined by Theodore Levitt

“as if the entire world (or major regions of it) were a single entity;[such an organization] sells the same things in the same wayeverywhere”

Multinational enterprise [MNE]: a firm that takes a global approach to itsforeign markets and production and owns business operations in morethan one country.FDI (Foreign Direct Investment): Occurs when a firm invests resources inbusiness activities outside the home country.Strategic alliance : a collaborative arrangement of critical importance toone or more of the alliance partners




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IMPORTANT CONCEPTSIMPORTANT CONCEPTS

•Foreign business denotes the operations of a company outside its homeor domestic market; many refer to this as business conducted within aforeign country. This term sometimes is used interchangeably withinternational business by some writers.•A multidomestic company (MDC) is an organization with multicountryaffiliates, each of which formulates its own business strategy based onperceived market differences.•A global company (GC) is an organization that attempts to standardizeand integrate operations worldwide in most or all functional areas.

•An international company (IC) is a global or multidomestic company.




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Another HP on VenusAnother HP on Venus



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EGYPT & GlobalizationEGYPT & Globalization

The A.T Kearney/ Foreign policy Globalization Index ranks 62 countriesacross four dimensions:

•Economic (international trade & investment).•Technological (internet connectivity).•Personal contact (international travel & tourism, internationaltraffic, & personal transfers of funds internationally).•Political (participation in international organizations &

government monetary transfers).




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Globalization Rankings: The KOF Index of Globalization and the A.T Kearney/Foreign Policy

Globalization Index



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EGYPT & GlobalizationEGYPT & Globalization

•In recent years, Ireland, Singapore, Switzerland & the Netherlands haveranked as the most globalize countries while Indonesia, Egypt, India &Iran have been the least globalize……….WHY?

•Sometimes a country may rank high on one dimension of globalizationbut low on another. For example, the 2004 report ranked the U.S. first ontechnology, but only 56 on economic.

Article: E-commerce and globalization: an exploratory studyof Egypt, Ibrahim Elbeltagi, Plymouth Business School,Cookworthy Building, Drake Circus, Plymouth, UK




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WHYWHY??

• Developed countries that have been offering e-commercehave shown impressive improvement in their respectiveeconomies however Middle East in general, and Arabcountries in particular, still lag behind in e-business.

• The particularity of local culture, politics and ICTinfrastructure are playing an important role in adopting andusage of global systems. For example, local usage of Geographical Information Systems in India is affected by

cultural attitudes to maps and cartography. Using maps isnot seen as important in a country where it is usuallyeasier to ask someone for directions.




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WHYWHY??

• Cultures could affect the way different people use theinternet.

• The study showed that there is a great potential for e-

commerce in Egypt in particular and Arab world ingeneral.

• However, there are many challenges, where people areused to paying cash for what they buy, the credit or debitcard as an instrument for buying things is not readilyacceptable by public Egyptians.

Powered By Globalization TeamPowered By Globalization Team



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Debit cardsDebit cards




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WHYWHY??

• The cultural differences that some US companies in Egypt like MicroSoft and ORACLE are experiencing include a combination of language and habits of people.

• The differences as well include values and infrastructure, whichincludes payment system, logistic system, laws, and taxation to name

some elements. In the USA, people are more likely to pay online usinga credit card. Seventy per cent of Americans who shopped onlinehave used a credit card.

• In Egypt, people are used to paying cash for what they want, and sothe most common method that Egyptians use for ordering thingsonline is paying cash when the product is received. Most of theshopping sites established their branch offices in the big cities of Egypt.




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WHYWHY??

• Part of the reason for this is that Egypt does not have real credit cardssystem that reach out to the general public of the Egyptians either because the commercial banks offer these kinds of services to elitecustomers or due to the high level of illiteracy among Egyptians (morethan 30 per cent according to informal reports). Egypt as well doesnot have effective centralized settlement system and the inherentattitude of the Egyptians people is to pay cash for what they buy.

• The Egyptians are also reluctant to get involved in the internet

banking to any great extent if it is available at all (where most of Egyptian banks still in the process of introducing this service) andeven the uptake of the service for the banks that offer this service is inall means does not match the investments and the expectations.




21 Internet users in Egypt, MCIT Report, 2005



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Lead to




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ConclusionConclusion

• Based on this it could be concluded that the e-commerce in Arabcountries in general and Egypt in particular depends on unique traitsof the society, values, culture, language and may be religion.

• Therefore, though e-commerce has some merit in targeting global

customers, it should consider cultural differences when adopting andapplying global marketing strategy. • Eventually, proper cultural transformation in international marketing

will be necessary, even in the Internet age.


b h



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Man about to enter a maze with an arrow saying SmartVillage' with the world at its center

Smart village



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SMART VILLAGE

"is a symbol of what Egypt can be"




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LocationLocationAlcatelvodafoneCanonOracleMicrosoftcitrixHP




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LocationLocation1-Board Of Directors Offices2-Meeting Room3-Control Room4-Human Resources Department




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Choosing a Mode of EntryChoosing a Mode of Entry

Foreign DirectInvestment

Exporting

InternationalLicensing

InternationalFranchisingSpecialized

Modes

Decision Factors:Ownership advantagesLocation advantages

Internalization advantagesOther factors

Need for controlResource availabilityGlobal strategy




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FDIFDI

• Foreign Direct Investment and Exporting – FDI - Direct investment in equipment,

structures, and organizations in a foreign

country• level sufficient to obtain significant

management control (The following Table)


FDI I di d M l i i l C



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FDI Indicators and Multinational CompanyStatistics (billions of dollars and percentages)



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Foreign Direct InvestmentForeign Direct Investment

Advantages• High profit potential• Maintain control over

operations

• Acquire knowledge of local market

• Avoid tariffs andNTBs

Disadvantages• High financial and

managerialinvestments

• Higher exposure topolitical risk

• Vulnerability torestrictions on foreigninvestment

• Greater managerialcomplexity




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Foreign Direct InvestmentForeign Direct Investment

• Building new facilities (the Greenfield strategy)• Buying existing assets in a foreign country (acquisition

strategy)

• Participating in a joint venture




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Alternative Types of Foreign OperationsAlternative Types of Foreign Operations

• Foreign-owned operations (FDI) may be established either as start-ups (Greenfield ventures) or via acquisition .

• Foreign-owned operations (FDI) may take the form of wholly-owned subsidiaries or joint ventures .

• No equity (collaborative ) types of foreign operations includelicensing and other contractual forms of business ventures.

The resource-based view of the firm holds that eachcompany has a unique combination of competencies and can maximize its performance by concentrating on thoseactivities that best fit its competencies.




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Foreign Direct Investment: Control ObjectivesForeign Direct Investment: Control Objectives

Companies generally want controlling interests in their foreignoperations for three reasons:• Internalization objectives

[It’s more profitable to control operations internally (transaction costtheory); it’s strategically preferable to control operations internally.]

• Appropriability objectives

[Foreign investment is favored as a way to prevent potentialcompetitors from gaining access to proprietary information(intellectual property and managerial know-how).]

• Globalization objectives [Foreign investment provides the freedom to pursue global or transnational objectives by optimizing corporate strategies.]




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Foreign Direct Investment: Comparative AdvantagesForeign Direct Investment: Comparative Advantages

• there are two ways companies can invest in a foreign country. Theycan either acquire an interest in an existing operation or constructnew facilities, the latter known as a Greenfield investment.

• Acquisitions and start-ups offer largely opposite benefits to a firm.• The advantages of an acquisition may include:

– existing facilities, an existing labor force, and knowledgeablelocal management – existing goodwill and brand identification – an immediate cash flow – access to local financing

– the avoidance of excess capacity




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Foreign Direct Investment: Comparative AdvantagesForeign Direct Investment: Comparative Advantages

• The advantages of a start-up, i.e., a Greenfieldventure, may include: – the existence of first-mover advantages due

to a lack of viable competitors and availableacquisitions

– the opportunity to establish new (moreefficient) facilities, to escape punitive labor contracts, to hire and train fresh labor forces,and to implement compatible managerialstyles and practices, i.e., the avoidance of carry-over problems

– The existence of government incentives

– the availability of development capital – the creation of additional capacity




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Greenfield StrategyGreenfield Strategy

• Firms using a Greenfield strategy can select the site that bestmeets its needs and construct modern, up-to-date facilities. Localcommunities often offer economic development incentives toattract such facilities because they will create new jobs; theseincentives lower the firm's costs. The firm also starts with a cleanslate. Managers do not have to deal with existing debts, nurse

outmoded equipment, or struggle to modify ancient work rulesprotected by intransigent labor unions. The firm can acclimateitself to the new national business culture at its own pace, rather than having the instant responsibility of managing a newlyacquired, ongoing business. Research indicates that the greater the cultural differences between the home and host countries,the more likely a firm is to choose to build a new factory rather than purchase an existing firm.




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Greenfield StrategyGreenfield Strategy

• However, successful implementation takes time and patience. Land inthe desired location may be unavailable or very expensive. In buildingthe new factory, the firm must also comply with various local andnational regulations and oversee the factory's construction. It must alsorecruit a local workforce and train it to meet the firm's performancestandards. By constructing a new facility, the firm may be more stronglyperceived as a foreign enterprise.

– Best site – Modern facilities – Economic development incentives – Clean slate




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Joint venture: a direct investment in which two or more partnersshare ownership – Forms of joint ventures include:

• consortiums, i.e., the joining together of several entities tocombine resources and perhaps pursue a major undertaking

• two firms from the same country joining together in a foreign

market• firms from two or more countries establishing an operation ina third country

• a private firm and a local government• a private firm joining a government-owned firm in a third

country


Joint ventureJoint ventureJoint ventureJoint venture



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Alternative Dissolution of Alternative Dissolution of Joint VenturesJoint Ventures



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Ease of doing Business IndexEase of doing Business Index


• Economies are ranked on their ease of doing business,from 1 – 178, with first place being the best.

• A high ranking on the ease of doing business index

means the regulatory environment is conducive to theoperation of business. • This index averages the country's percentile rankings on

10 topics, made up of a variety of indicators, giving equalweight to each topic.



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Ease of doing BusinessEase of doing Business


Criteria Syria Egypt United Arab Emirates

Ease of doing Business 137 126 68

(1) Starting a business 169 55 < 158

(2) Dealing with license 86 < 163 38

(3) Employing workers 126 108 65

(4) Registering property 89 < 101 8

(5) Getting credit 158 115 = 115

(6) Protecting investors 107 83 < 107

(7) Paying Taxes 98 < 150 4

(8) Trading across Boarders 127 26 24(9) Enforcing Contracts 171 145 144

(10) Closing a business 77 125 139



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SyriaSyria


Criteria Doing Business2008 rank

Doing Business2007 rank

Change in rank

Ease of doing Business 137 134 - 3

Starting a business 169 148 - 21

Dealing with license 86 83 - 3

Employing workers 126 98 - 28

Registering property 89 87 - 2Getting credit 158 156 - 2

Protecting investors 107 105 - 2

Paying Taxes 98 97 - 1

Trading across Boarders 127 119 - 8

Enforcing Contracts 171 171 0

Closing a business 77 77 0



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EgyptEgypt


Criteria Doing Business2008 rank

Doing Business2007 rank

Change in rank

Ease of doingBusiness

126 152 + 26

Starting a business 55 126 + 71

Dealing with license 163 165 + 2

Employing workers 108 106 - 2

Registering property 101 147 + 46

Getting credit 115 156 + 41

Protecting investors 83 105 + 22

Paying Taxes 150 152 + 2

Trading across

Boarders

26 86 + 60

Enforcing Contracts 145 146 + 1

Closing a business 125 124 - 1



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United Arab EmiratesUnited Arab Emirates


Criteria Doing Business

2008 rank

Doing Business 2007

rank

Change in rank

Ease of doing Business 68 69 + 1

Starting a business 158 152 - 6

Dealing with license 38 37 - 1

Employing workers 65 65 0

Registering property 8 10 + 2

Getting credit 115 111 - 4

Protecting investors 107 105 - 2

Paying Taxes 4 4 0

Trading across Boarders 24 20 - 4

Enforcing Contracts 144 144 0

Closing a business 139 138 - 1



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New Improvements in Egypt Business Environment New Improvements in Egypt Business Environment


• Cuts in taxes and tariffs.

• Renewing privatization program.

• Restructuring of the banking sector (because thebanking system is undercapitalized and inefficient, withno national way of evaluating risk).



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Some Problems in Egypt Business EnvironmentSome Problems in Egypt Business Environment


• The business climate suffers from high levels of bureaucracy and corruption.

• Government policy has tended to be unpredictable and

non-transparent.

• There is a clear shortage in the human skills.



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SWOT AnalysisSWOT Analysis


Strengths• The geographical location is good for trade, as Egypt

has access to both the Mediterranean and the RedSea (this will attract FDI).

• It will privatize a state-owned bank and an insurancefirm.• The government will sell its shares in all its joint

ventures.



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Weakness:• Corruption is high. • The labour market is relatively inflexible, with Egypt performing

markedly worse than the OECD average, and also inferior to the

regional average on the World Bank’s ‘Hiring and Firing’ workersindex.(OECD: organization for Economic and Corporation Development).

• There is a problem in education system. Although levels of educationare relatively high, there is a considerable mismatch between theskills taught in schools and those required by most employers.



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Opportunities • There is a great world’s development in information and

communications technology.• A free trade zone between all Mediterranean states and

the EU (European Union) is expected to be in place by2008.

• A potential Free Trade Agreement (FTA) will be expectedwith the US. (negotiation started on 2004).



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Threats: • There are several attempts to fighting corruption and

cutting bureaucracy.

• Most countries are offering better opportunities toencourage FDI.



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Egypt Business EnvironmentEgypt Business Environment

• FDI (foreign Direct Investment)• International Trade Agreements• Tariff

• Taxes• Corruption• Bureaucracy



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FOREIGN DIRECT INVESTMENT (FDIFOREIGN DIRECT INVESTMENT (FDI


Business environment Rank TrendUnited Arab EmiratesQatar IsraelBahrainOmanKuwaitEgyptTurkeySaudi ArabiaJordanLebanonIranIraq

80.473.172.068.567.463.762.662.556.755.444.843.442.3

13242629324446486567

100105108

==+======++==

Regional avg. 61.0Not Ranked: Syria

Emerging Market avg. 54.1 Global Market Avg. 58.3



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Table: annual FDI inflowsTable: annual FDI inflows


1999 2000 2001 2002 2003

- FDI Inflows, US $ mn- % of change- FDI as % of GDP- FDI per capita (US $)

1,065-1

1.216.0

1,235161.2

18.2

510-58.7

0.57.4

64726.90.79.2

237-63.4

0.33.3

Source: UNCTAD, BMISource: UNCTAD, BMI



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Foreign Investment PolicyForeign Investment Policy


• Egypt’s FDI performance in the past five years has beenvery weak, attracting just US$300mn in the 2003-2004financial year - down from highs of more than $1bn in themid-1990s.

• However, the new government in 2004, (headed by primeminister Ahmed Nazif) has raised expectation levels amongthe business community that Egypt will soon be backamong the region’s big hitters in terms of attracting inward

investment.



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The ministry has helped to quicken the pace of reform of the business climate in areas such as the following:

-easing FDI entry-simplifying customs procedures

-labour relations and foreign exchange requirements.




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The new government reforms the following:1. It sets up an Investment Ministry, charged with overseeing

investment policy.

2. It promotes the Law 3 (for govern foreign investment).This law allow foreign investors to own up to 100% of anEgyptian-based company.

3. It promotes Law 8 that provides for more than 20

incentives and guarantees the right to repatriate capitaland earnings from Egypt.



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Benefits

Benefits that will return to the Investor

Economic Return




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FDI RegimeFDI Regime


4- There are also guarantees against confiscation and provision tohave the right to own the land, and guarantees equal treatmentregardless of nationality.

5- Ministry of investment sets a “positive list” of areas open toinvestment without the need for approval for the following:

-land reclamation-livestock production-industry and mining

6- Encouraging the foreign ownership in commercial banking andinsurance – resulting in major international banks increasing their

presence in Egypt.7- Easing rules for non-nationals’ employment and residence.



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FDIFDI


• The main destinations for foreign investment are oil andgas, tourism and textiles.

•Leading sources of FDI are the UK, the USA andFrance.



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International Trade AgreementsInternational Trade Agreements


• Egypt is a signatory of the pan-African free trade areaCOMESA and is founder member of the Pan-Arab FreeTrade Area.

• Cairo signed an association agreement with the EU in2001 that will ultimately see the creation of a free tradearea, with tariffs to be dismantled over a 10-15 year period.

• Prime Minister Ahmed Nazif is eager to sign a FreeTrade Agreement (FTA) with the US, which he believes

will boost GDP growth by a few percentage points ayear.



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TariffsTariffs


In September 2004, the government implemented a new tariff structure that include the following:• Cutting the average tariff rate to 9.1%,• Eliminating import surcharges.

• A number of exemptions have been removed• All export taxes eliminated.



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TariffsTariffs


Business Monitor International Ltd

TABLE: TOP EXPORT DESTINATIONS, US$MN1999 2000 2001 2002 2003

United States 436 813 345 1,288 1,108 Italy 353 954 379 959 1,017 United Kingdom 89 589 98 590 658 Germany 109 235 111 236 387 France 134 335 163 276 381

Total exports 3,535 6,301 4,140 6,972 8,259

Top 5, % of total 31.7 46.4 26.5 48.0 43.0Source: IMF, Direction of Trade Statistics.




Tax RegimeTax Regime

• Egypt has radically transformed the tax system, sharplylowering rates of corporate and personal taxation.

• These should prove particularly conducive to increased

investment flows, given the previous uncompetitiveaverage corporate tax rate of 42%.




Tax RegimeTax Regime

Individual tax: • the maximum tax rate is now 20%, down from 40% and the thresholds

for each tax bracket have been raised.

Individuals will pay:

• 10% tax on income between EGP5,000-20,000 a year,• 15% on income between EGP20,000-40,000 a year • 20% on any income above EGP40,000.




BureaucracyBureaucracy

• Egypt compares favourably with its regional peers, butless well against developed states.

• According to World Bank data, it takes 19 separateprocedures to enforce a contract, which takes an averageof 202 days.




BureaucracyBureaucracy

• Conversely, World Bank data states that it takes 13 procedures and43 days to start a business in Egypt, compared to an average of 9and 41 respectively in the Middle East and North Africa and 6 and25 in high-income OECD states.

• At the other end, it can take approximately 4.3 years to close abusiness, compared to an average of 1.8 years in OECD states.



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Foreign Direct Investment in EgyptForeign Direct Investment in Egypt

Re form mea sure s

unde r taken b y the

go vernme n t o f Eg yp t

ha ve pla yed a ke y role

in te rms o f impro ving

the ou tlook for

Eg yp tian, Arab a nd

fore ign in ves tme n t, a s

we ll a s s us ta ining high

le ve ls o f gro w th a nd

emplo ymen t crea tionPowered By Globalization Team





• A positive response to streamlining investmentprocedures has been reflected in the increase inthe number of newly established companies aswell as expansions undertaken by companies

already in operation. • Inflows of foreign direct investment (FDI) have

also significantly increased, particularly starting

FY 2003/04.





• The following sections present a brief overview of the inflows as well as sectoralcomposition of FDI in Egypt over a period

which begins with FY2000/2001 up to thefirst half of FY 2007/08.



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Net FDI inflowsincreased from USD509.4 million in FY

2000/01, to reachUSD 6.1 billion in FY2005/06, USD 11.1

billion in FY 2006/07and USD 7.8 billion

in the first half of FY2007/08






• According to the World Investment Reportpublished in 2007 by the United NationsConference on Trade and Development(UNCTAD), Egypt has emerged as the lead FDI

recipient country in the African continent. • The following Figure reflects the increase in net

FDI inflows during the period 2000/01-first half of

2007/08



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8.5%

Net FDI Inflows 8.5% GDP

Net FDI Inflows / GDP2006/2007


GDPGDP





• Net FDI inflows have stood at 8.5 percent of GDP in FY 2006/07, up from 5.7 percent in FY2005/06. During Q1 and Q2 of FY 2007/08, netFDI inflows as a percent of GDP stood at 2.0and 3.1 respectively



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Sectoral Distribution of FDISectoral Distribution of FDI

• With respect to the distribution of FDI inflows,the petroleum sector absorbed USD 2,923.3million worth of net inflows during the first half of FY 2007/08 (37.6 percent of net inflows)compared to USD 1,164.8 million during the firsthalf of FY 2005/06 (16 percent of net inflows).





•Net FDI inflows in the non-petroleum sectorshave reached USD 4,846.2 million during thefirst half of FY 2006/07, compared to USD6,079.8 million during the first half of FY2005/06.

• The following Table compares net FDI inflows in

the petroleum and non-petroleum sectors during

the period FY 2004/05-first half of FY2007/08.

Sectoral Distribution of Net FDI Inflows



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2004/2005 2005/2006 2006/2007 Q1

2007/2008

Q1

2007/2008

ew establishmentsand expansions

925.6 3,347.8 5,227.2 1,650.6 1,805.0

Sale of assets tonon-residents

390.8 905.7 2,772.2 259.5 1,098.5

Real estate 16.5 25.7 39.0 23.9 8.7

Petroleum sector 2,540.2 1,832.2 3,014.8 1,035.1 1,888.2

et FDI inflows 3,873.1 6,111.4 11,053.2 2,969.1 4,800.4

(USD million)





• During the first half of FY 2007/08 a total of USD3,455.6 million was accounted for by theestablishment of new companies as well asincreases in the issued capital of companiesalready in operation (44.5 percent of netinflows).





•The sale of companies and productive assets (both inthe private and public sectors) to non-residents stood atUSD 1,358 million (17.5 percent of net inflows).

• FDI inflows in the real estate sector have reached USD

32.6 million (0.4 percent of net inflows) during sameperiod.

• FDI in the real estate sector has remained consistently

low at an average of 0.4 percent of net inflows during theperiod 2004/05- first half of 2007/08.



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Large International Firms InvestLarge International Firms Investd h l



90

Overseas, and They Also ExportOverseas, and They Also Export



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Foreign InvestmentForeign Investment

• Annual inflows of FDI – In which countries are investments being made and

where do investments come from the following table:


Direction of Foreign Direct Investment (Annual Flows) for Direction of Foreign Direct Investment (Annual Flows) for Selected Regions and Co ntries 1985 2004 ($ billionsSelected Regions and Countries 1985 2004 ($ billions))



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Selected Regions and Countries, 1985-2004 ($ billionsSelected Regions and Countries, 1985-2004 ($ billions))

Direction of Foreign Direct Investment (Annual Flows) for Direction of Foreign Direct Investment (Annual Flows) for Selected Regions and Countries 1985 2004 ($ billionsSelected Regions and Countries 1985 2004 ($ billions))



93

Selected Regions and Countries, 1985-2004 ($ billionsSelected Regions and Countries, 1985-2004 ($ billions))



94



97



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Evaluating the impact of FDIEvaluating the impact of FDI

• Developing & industrial countries havederegulated their markets , privatized nationalenterprises , liberalized private ownership &

encouraged regional integration.• The effort to create favorable investment

environments has led many countries to replaceobstacles to FDI with incentives for FDI.




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• Developing & industrial countries have deregulatedtheir markets , privatized national enterprises ,liberalized private ownership & encouraged regionalintegration.

• The effort to create favorable investmentenvironments has led many countries to replaceobstacles to FDI with incentives for FDI.

• The growing prevalence of FDI requires a better understanding of the views of home & host countries




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Trade-offs among Constituencies:• To prosper & survive , companies must satisfy:- Shareholders: additional sales, increased productivity.- Employees: safer workplace, higher compensation.

- Customers: high quality products at lower prices.- Society: increased corporate taxes, more support for social services , & trustworthy behavior.

In the long run, the aims of all stakeholders must beadequately met or none will be attained .




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Trade-offs among ConstituenciesTrade-offs among Constituencies

Stakeholders, i.e., the collection of constituencies that an organizationmust satisfy to survive in the long run, include: – shareholders – employees – customers

– suppliers – society

In the long run, the aims of all stakeholders must be adequately met or none will be attained.




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Trade-offs among ConstituenciesTrade-offs among Constituencies

• Management decisions made in one countryhave repercussions elsewhere.

• The effects of an MNE’s activities may besimultaneously positive for one nationalobjective & negative for another.

• FDI may result in a win-win, win-lose or lose-lose situation for both countries involved.




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Cause -effect relationships:• Just because two factors move in relationship to each other

doesn't necessarily mean they are related & interdependent.

• Ex: an increase in overall unemployment in a country & anincrease in FDI doesn't mean that FDI caused unemployment.

• Opponents of FDI try to link the actins of MNEs to problemslike inequitable income distribution , political corruption ,

environmental debasement & societal deprivation




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Cause –effect relationshipsCause –effect relationships

• It is hard to determine whether MNEs’ actions causesocietal conditions.

• Companies are best at serving the interests of shareholders, whereas governments are best equippedto deal with social issues & externalities.




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Evaluating theEvaluating the impact of FDIimpact of FDI

Individual & aggregate effects:• Multinationals (& their affiliates) come in various shapes & sizes

,perform distinctive functions, behave differently & make their individual impact on the environment.

• Some countries have tried to evaluate MNEs & their activities

individually.• Although this process might lead to greater fairness & better control, it

is time consuming & costly.

• Many countries apply the same policies & control mechanisms to allMNEs even though this approach risks throwing out some “good

apples” along with the bad.




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Evaluating theEvaluating the impact of FDIimpact of FDI

Potential contributions of MNEs:

• MNEs can contribute directly to investment, humanresources, technology, trade & the environment thuscontributing to host-country objectives

• The following figure shows the major assets of MNEs thatcan satisfy stakeholders’ objectives.


Resources andPossible Contributions



107

of MNEs



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Economic impact of the MNEEconomic impact of the MNE

• MNEs may affect countries' balance –of -payments ,growth & employment objectives.

• Under different conditions these effects may be positive or negative for the host or home.

• One country’s surplus is another country’s deficit.

• The effect of an individual FDI may be positive or negative.




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• On the import side , the balance –of-payments effect is positive if theFDI results in a substitution for imports & negative if it results in anincrease in imports.

• On the export side , the BOP effect is positive if the FDI results in

generating exports in the host country & negative if it produces onlyfor the local market & stops exports.




111u mmary


• Initial capital flows are positive to the host country but the flows maybe negative over time as the FDI remits dividends or other capitalflows back to the home country.

• The balance of payments effects of FDI are usually:

- Positive for the host country initially & negative for the homecountry.

- Positive for the home country & negative to the host country later.




112u mmary


• Growth & employment effects are not a zero-sum game becauseMNEs may use resources that were unemployed or underemployed.

• Home –country labor claims that jobs are exported through FDI.

• Host countries may gain from FDI through:

- More optimal use of production factors.- The use of unemployed resources.- The upgrading of resources quality.




Wh t i thiWhat is ethics



114u mmary

What is ethicsWhat is ethics

• Ethics refers to accepted principles of rights or wrong that govern theconduct of the person or actions of anorganizations.




115u mmary

What is an ethical strategyWhat is an ethical strategy

• Course of action that does not violate these acceptedprinciples.

• Ethical issues in international business is rooted in thefact that political, legal and economic development vary

significantly . What may seem unethical to one nationmay not be unethical for another.


lE l i



116u mmary

Employment practicesEmployment practices

• When conditions in a host nation are inferior to those in amultinational home nation . The standards of the home nation.

• Establish minimal acceptable standards to safeguards the basicrights and dignity of employees.

• Audit foreign subsidiaries and subcontractors on a regular basis tomake sure standards are met.

• Take corrective action to guard against ethical abuses.




117u mmary

Ethical issuesEthical issues

• Environmental pollution• Corruption• Violation of human rights• Moral obligations




118u mmary

Foundations of Ethical Behavior Foundations of Ethical Behavior

• Many actions elicit universal agreement on what is rightor wrong but other situations are less clear.

• Values differ from country to country & sometimesbetween employees & companies.

• Relativism – ethical truths depend on the groups holdingthem.

• Normativism – there are universal standards of behavior that all cultures should follow.




119u mmary


• Managers need to exhibit ordinary decency-principles of honesty & fairness.

• Managers need to create competitive advantagesthrough ethical behavior & avoid being perceived as

irresponsible.• NGOs are active in prodding companies to comply with

certain standards of ethical behavior.

• Social responsibility requires human judgment ,which issubjective & ambiguous.




120u mmary


• Legal justification for ethical behavior may not besufficient since not everything that is unethical is illegal.

• The law is a good basis for ethical behavior since it

embodies local cultural values.• As countries tackle similar ethical issues , laws will

become more similar.




121u mmary

Ethics & BriberyEthics & Bribery

• Bribery of public officials takes place to obtain government contractsor to get officials to do what they should be doing anyway.

• Bribes are payments or promises to pay cash or anything of value.

• The Foreign corrupt practices act is U.S. legislation that makesbribery illegal, it applies to domestic or foreign operations & tocompany employees as well as their agents overseas.


h b



122u mmary

Ethics & BriberyEthics & Bribery

• International multilateral approaches to combating bribery includethe QECD , international chamber of commerce, & united nations.

• A zero tolerance pact against bribery was signed by companies atthe 2005 world economic forum.

• An effective anti-bribery compliance program for companiesinvolves setting high standards ,communicating them to relevantemployees, educating employees on expected behavior &monitoring compliance.


Acceptability of BriberyAcceptability of Bribery



123u mmary

Acceptability of BriberyAcceptability of Bribery

• Acceptable – Russia – China – Taiwan – South Korea

• Unacceptable – Australia – Sweden – Switzerland – Austria




International Corruption:International Corruption:A Survey of Business PerceptionsA Survey of Business Perceptions



125

A Survey of Business PerceptionsA Survey of Business Perceptions2004 CPI Score:

-relates to perceptions of the degree of corruption as seen by businesspeople, risk analysts, journalists, and the general public

-ranges between 10 (highly clean) and 0 (highly corrupt)

RANK/COUNTRY SCORE RANK/COUNTRY SCORE

1. Finland 9.7 26. Botswana 6.02. New Zealand 9.6 38. South Africa 4.85. Singapore 9.3 46. Brazil 4.0

11. United Kingdom 8.6 54. El Salvador 3.612. Canada 8.5 57. China 3.5

15. Germany 8.2 71. India 2.717. United States 7.6 79. Russia 2.318. Chile 7.5 84. Bolivia 2.021. Japan 7.1 90. Nigeria 1.0

Ethical behavior & environmental issuesEthical behavior & environmental issues



126u mmary


• Companies that extract natural resources generate air or water waste or manufacture products such as autos, thatare polluters need to be concerned with their environmental impact.


E hi l b h i & i l iEthi l b h i & i t l i



127u mmary


• Sustainability involves meeting the needs of the presentwithout compromising the ability of future generations tomeet their own needs, while taking into account what isbest for the people & the environment.

• Global warming results from the release of greenhousegases that trap heat in the atmosphere rather thanallowing it to escape.


Ethi l b h i & i t l iEthi l b h i & i t l i



128u mmary


• The Kyoto protocol was signed in 1997 to requirecountries to cut their greenhouse gas emissions to 5.2 %below 1990 levels between 2008 & 2012.

• Some countries have adopted stricter requirements, &

others such as the U.S., China & India are not part of thecompliance.

• U.S.-based MNEs must comply with the Kyoto protocolin compliance countries where they may haveoperations.


Ethical dilemmas & pharmaceutical salesEthical dilemmas & pharmaceutical sales



129u mmary


• Tiered pricing for pharmaceuticals means thatcompanies charge a market price for products sold inindustrial countries & a discounted price for productssold in developing countries.

• Legal generic products allow countries to purchase drugsat lower costs & comply with drug patents, whereasillegal generic products are fakes that may or may not beof high quality.


Ethi l dil & h ti l lEthi l dil & h ti l l



130u mmary


• Countries with health crises, such as African countriessuffering from AIDS are allowed by TRIPS tomanufacture or import generic drugs.

• India is a major manufacture of generic drugs & is nowmoving to R&D of new drugs.


Ethi l dil & h ti l lEthical dilemmas & pharmaceutical sales



131u mmary


• Governments & private foundations are attempting tosolve the problem of developing country access to drugs& vaccines through an international finance faculty for immunization & /or advance –purchase contracts.


Ethical Dimensions of Labor ConditionsEthical Dimensions of Labor Conditions



132u mmary

Ethical Dimensions of Labor ConditionsEthical Dimensions of Labor Conditions

International labor issues that firms, governments, trade unions, andNGOs must deal with include:- fair wages- child labor - working conditions- working hours- freedom of association

The Ethical Trading Initiative Base Code focusesupon the employment practices of MNEs by getting them to first adopt ethical employment policies and then monitor compliance with their foreign suppliers.


Child Labor IssuesChild Labor Issues



133u mmary

• According to the International Labor Organization:

– more than 250 million children between 5 and 17 are workingworldwide – nearly three-quarters of those children who work are very young

or are working in ways that endanger their health or well-beingbecause of hazards, sexual exploitation, trafficking, and/or debtbondage.

• Those who argue in favor of child labor claim that in many

instances, children are better suited to perform certain tasks thanadults, and that if the children were not employed, they would in factbe worse off.

• While some firms simply avoid operating in countries where childlabor is used, other firms work to establish responsible operatingpolicies in those locales.


Ethical Dimensions of labor conditionsEthical Dimensions of labor conditions



134u mmary


• Major labor issues that MNEs get involved in through FDIor purchasing from independent manufactures indeveloping countries are fair wages, child labor, workingconditions , working hours & freedom of association.

• An estimated 250 million children between 5 & 17 yearsold are working ,but only about 5% of child labor isinvolved in export industries.





135u mmary


• Some companies avoid operating in countries wherechild labor is employed, whereas others try to establishresponsible policies in those same countries.

• MNEs may not be willing to hire local workers who wantto work long hours due to concerns about exploitation.


Ethical Trading Initiative Base CodeEthical Trading Initiative Base Code



136u mmary

Ethical Trading Initiative Base CodeEthical Trading Initiative Base Code

ETI is a British-based organization that focuses on the ethical employmentpractices of MNEs. Members include representatives

from companies and trade union organizations

1. Employment is freely chosen.2. Freedom of association and the right to collective bargaining are

respected.3. Working conditions are safe and hygienic.4. Child labor shall not be used.5. Living wages are paid.6. Working hours are not excessive.7. No discrimination is practiced.

8. Regular employment is provided.9. No harsh or inhuman treatment is allowed.

ETI is a British-based organization that focuses on the ethical employmentpractices of MNEs. Members include representatives

from companies and trade union organizations

1. Employment is freely chosen.2. Freedom of association and the right to collective bargaining are

respected.3. Working conditions are safe and hygienic.4. Child labor shall not be used.5. Living wages are paid.6. Working hours are not excessive.7. No discrimination is practiced.

8. Regular employment is provided.9. No harsh or inhuman treatment is allowed.


Corporate codes of EthicsCorporate codes of Ethics



137u mmary

Corporate codes of EthicsCo po ate codes o t cs

• Companies need to act responsibly, becauseunethical & irresponsible behavior - could result legal sanctions.- Could result in consumer boycotts.- Could lower employee morale.

- Could cost sales because of bad publicity.

* A major component in a company’s strategy for ethical& socially responsible behavior is a code of conduct.


Corporate codes of EthicsCorporate codes of Ethics



138u mmary

Corporate codes of Ethicsp

• Codes of conduct, involve four dimensions:- Set a global policy that must be complied with wherever the

company operates.- Communicate the code to employees, suppliers &

subcontractors.

- Ensure that policies are carried out.- Report results to external stakeholders.


Globalization ChallengesGlobalization Challenges



139u mmary

gg

While FDI is a major source of capital and expertise, it is also a center of controversy regarding its costs and benefits to home and host countries and other stakeholders


ConclusionsConclusions



140u mmary

• Major challenges facingMNEs include theglobalization of the supplychain, human rights,employment practices,environmental protection, andconsistent standards of ethical conduct.

Powered By Globalization Tea m

Globalization debate-ProsGlobalization debate-Pros



141u mmary

Lower pricesfor goods and

services

Wage rates of

unskilled workers inadvanced countriesdeclines

Increase inconsumer

incomeCreates jobs

Countries specialize in

production of goodsand services that areproduced most

efficiently


Globalization debate- ConsGlobalization debate- Cons



142u mmary

Destroysmanufacturing

jobs in wealthy,advancedcountries

Wage rates of

unskilled workers inadvanced countriesdeclines

Companies move

to countries withfewer labor andenvironmentregulations

Loss of sovereignty


Alternative Operating Modes for ForeignAlternative Operating Modes for ForeignMarket ExpansionMarket Expansion



14314-143

ExportingExporting




Exporting is the transportation of anydomestic good/service to a destinationoutside a country or region.

Exporting is the transportation of anydomestic good/service to a destinationoutside a country or region.

ExportingExporting



145u mmary

Advantages• Relatively low

financial exposure• Permit gradual

market entry

• Acquire knowledgeabout local market• Avoid restrictions on

foreign investment

Disadvantages• Vulnerability to

tariffs and NTBs• Logistical

complexities• Potential conflictswith distributors


Forms of ExportingForms of Exporting



146u mmary

IndirectexportingDirect

exporting




147



148

Why Foreign Production May Be Preferable to ExportingWhy Foreign Production May Be Preferable to Exporting



149u mmary

• Companies may find more advantages by producing in foreigncountries than by exporting to them. The advantages occur

1. In situations where production abroad is cheaper than athome;

2. when transportation costs to move goods or servicesinternationally are too expensive;

3. when companies lack domestic capacity;4. when products and services need to be altered substantially to

gain sufficient consumer demand abroad;5. when governments inhibit the import of foreign products; and6. when buyers prefer products originating from a particular

country.


Collaborative Arrangements: Basic MotivesCollaborative Arrangements: Basic Motives



150u mmary

Collaborative arrangement: a formal, long-term contractualagreement between or amongst firms• Each partner in a collaborative arrangement has its own

primary objective for operating internationally and its ownmotive for collaborating.

– Scale alliances: provide efficiency through thepooling of similar assets so that partners can carry outbusiness activities in which they already haveexperience

– Link alliances: use complementary resources to

expand into new business areas




151

CollaborativeCollaborativeArrangements asArrangements as

International BusinessInternational Business

Operating ModesOperating Modes

Relationshipof StrategicAlli



152

Alliances to

Companies’InternationalObjectives

Collaborative Arrangements: Basic ConsiderationsCollaborative Arrangements: Basic Considerations



153u mmary

Dependencies theory: the out-of-vogue idea that emerging economiesessentially have no power as host countries when dealing with largeMNEs

Bargaining school theory: the idea that the negotiated terms of foreigninvestments depend upon investors’ and host countries’ needs for one another’s assets

• When a firm is highly diversified and/or its operations are limited,

existing foreign facilities and operations may not complement itsplanned expansion.

• The more a firm depends upon collaborative arrangements, thegreater the likelihood that it will lose control over decisions regardingquality, flexibility, revenues, competition, expansion, andinformation-sharing.


Foreign Market AnalysisForeign Market Analysis



154u mmary

• Assess alternative markets• Evaluate the respective

costs, benefits, and risks of entering each

• Select those that hold themost potential for entry or expansion


Factors in Assessing New Market OpportunitiesFactors in Assessing New Market Opportunities



155u mmary

• Product-marketdimensions• Major product-market

differences

• Structural characteristicsof national market• Competitor analysis

• Potential targetmarkets• Relevant trends• Explanation of change• Success factors• Strategic options


Factors in Assessing New Market OpportunitiesFactors in Assessing New Market Opportunities



156u mmary

• Dole FoodCompany’sinternationaloperations are subjectto a variety of costs,benefits, and risks.


LicensingLicensing



157u mmary

Licensing is when a firm, called the licensor ,leases the right to use its intellectual property—technology, work methods, patents, copyrights,brand names, or trademarks—to another firm,

called the licensee , in return for a fee.


The Licensing ProcessThe Licensing Process



158u mmary

$ $ $

Licensor leases therights to use

intellectual property

Earns new revenueswith low investment

Licensee uses the

intellectual propertyto create products

Pays a royaltyto licensor


Basic Issues in International LicensingBasic Issues in International Licensing



159u mmary

• Specifying the boundaries of the agreement• Determining compensation• Establishing rights, privileges, and constraints

• Specifying the duration of the contract


LicensingLicensing



160u mmary

Advantages• Low financial risks• Low-cost way to

assess marketpotential

• Avoid tariffs,restrictions on foreigninvestment

• Licensee providesknowledge of localmarkets

Disadvantages• Limited market

opportunities/profits• Dependence on

licensee

• Potential conflictswith licensee• Possibility of creating

future competitor


FranchisingFranchising



161u mmary

A franchising agreement allows an independent entrepreneur or organization, called the franchisee , to operate a business under the name of another, called the franchisor , in return for a fee.

Franchising, actually a special form of licensing, allows thefranchisor more control over the franchisee and provides for more

support from the franchisor to the franchisee than is the case inthe licensor-licensee relationship. The franchisor provides its

franchisees with trademarks, operating systems, and well-knownproduct reputations, as well as continuous support services suchas advertising, training, reservation services (for hotel operations),

and quality assurance programs.


Basic Issues in International FranchisingBasic Issues in International Franchising



162u mmary

• International franchising is likely to succeed when certain market

conditions exist. – First, it may work when the franchisor has been successfuldomestically because of unique products and advantageousoperating procedures and systems.

– Franchising may also be effective when the factors thatcontributed to domestic success are transferable to foreignlocations.

– Third, this may be a viable option if the franchisor has alreadyachieved considerable success in franchising in its domesticmarket.

– Finally, foreign investors must be interested in entering intofranchise agreements.





163u mmary

• Like licensing agreements, franchising agreements are spelled outin formal contracts, with a typical set of terms. The franchisor generally receives a fixed payment plus a royalty based on thefranchisee's sales for the rights to use the franchisor's name,trademarks, formulas, and operating procedures. The franchiseeusually agrees to adhere to the franchisor's requirements for

appearance, financial reporting, and operating procedures.However, franchisors are likely to allow some degree of flexibility inorder to meet local customs and tastes. As with other licensingarrangements, one of the services the franchisee offers thefranchisor is knowledge about the local market's culture and

customs.




164

Y ! B d F hi O t itiYum! Brands Franchise Opportunities




165u mmary

Advantages

• Low financial risks• Low-cost way to assess

market potential• Avoid tariffs, restrictions

on foreign investment• Maintain more control

than with licensing• Franchisee provides

knowledge of localmarket

Disadvantages• Limited market

opportunities/profits• Dependence on

franchisee• Potential conflicts

with franchisee• Possibility of

creating future

competitor


Contract manufacturingContract manufacturing



166u mmary

It is used by firms, both large and small, thatoutsource most or all of their manufacturing

needs to other companies. This strategyreduces the financial and human resources

firms need to devote to the physicalproduction of their products.


Contract ManufacturingContract Manufacturing



167u mmary

Advantages• Low financial risks• Minimize resources

devoted tomanufacturing

• Focus firm’sresources on other elements of the valuechain

Disadvantages• Reduced control

(may affect quality,delivery schedules,etc.)

• Reduce learningpotential

• Potential publicrelations problems


Management contract: an arrangement in which a contractor provides



168u mmary

a age e t co t act: g pmanagement personnel to per-form general or specialized functions to aclient for a fee

• On the one hand, host countries and clients get needed assistance withoutforeign ownership or control of operations; on the other, the managementfirm is able to generate revenues without making a capital investment.

Turnkey operation: an arrangement in which one firm contracts with another

to build complete, ready-to-operate facilities• Usually, suppliers of turnkey facilities and operations are industrial-equipment manufacturers and construction companies; projects may cost

billions of dollars; customers are most often governments or large MNEs.




Turnkey projectTurnkey project

A t k j t i t t d hi h fi g t f ll d ig



171u mmary

• A turnkey project is a contract under which a firm agrees to fully design,construct, and equip a facility and then turn the project over to the purchaser

when it is ready for operation. The turnkey contract may be for a fixed price, inwhich case the firm makes its profit by keeping its costs below the fixed price. Or the contract may provide for payment on a cost-plus basis, which shifts the risk of cost overruns from the contractor to the purchaser.

• International turnkey contracts often involve large, complex, multiyear projectssuch as construction of a nuclear power plant, an airport, or an oil refinery.Managing such complex construction projects requires special expertise. As aresult, most are administered by large construction firms.

• An increasingly popular variant of the turnkey project is the so-called B-O-Tproject, in which the firm builds a facility, operates it, and later transfers ownership of the project to some other party. Through this approach, thecontractor profits from operation and ownership of the project for some period of time but bears any financial risks associated with it during this period.




Equity allianceEquity allianceEquity allianceEquity alliance



173u mmary

Equity alliance: an arrangement in which at least one of the collaborating partners takes an ownership position(usually a minority) in the other's)

• The purpose of an equity alliance is to solidify acollaboration, thus making it more difficult to break a

contract.The more partners in a joint venture or an equity alliance, the more complex the management of thearrangement.




174

Control ComplexityControl Complexity

Related to CollaborativeRelated to CollaborativeStrategyStrategy

CollaborativeCollaborative ArrangementsArrangements :: ProblemsProblems

h f ll b



175u mmary

• Partners view the importance of a collaborative arrangement verydifferently.

• Partners have different objectives for a collaborative venture,particularly as a venture evolves over time.

• Partners disagree on control issues, or provide insufficient direction toa venture.

• Partners’ abilities to contribute, and their tendencies to appropriateeach others’ contributions, change over time.

• Differences in both national and corporate cultures lead to(i) incompatible operations or (ii) conflicting evaluations of thesuccess of a venture.

Although joint ventures from culturally distant countries tend to

survive at least as well as those between partners from similar cultures, nearly half of all joint ventures eventually fail.





176u mmary

• Motivations for collaborative arrangements specific tointernational operations are to gain location-specificassets, to overcome legal constraints, to diversify acrosscountries, and to minimize exposure in riskyenvironments.

• Although the type of collaborative arrangement a firmchooses should match its strategic objectives, the choicewill often mean a trade off amongst objectives. Althoughthe type of collaborative arrangement a firm choosesshould match its strategic objectives, the choice will oftenmean a trade off amongst objectives.





177u mmary

• Each partner to a collaborative arrangement has asay in critical decisions, but the global performanceof each partner may be improved in different ways.

• The forms of foreign operations differ in terms of how many resources a firm commits and theproportion of resources committed at home rather than abroad.




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