International Business Management
Culture is defined as a system of values and norms shared among people in a group, and that constitutes the design of living when taken together.
There are several determinants of culture: Religion, social structure, political philosophy, education, and language.
The trend of economies becoming interlinked and borderless constitute what is known as globalization
The key trends emerging in globalization include disintegrating borders, an increase in global standards of production and quality, a rise in internet and information technology, and a rise in competitors in the world market.
Several factors cause globalization
- Growing consumer demand for products produced in other countries
- Improvement in transportation modes, technology, and infrastructure
- The decrease in trade and investment barriers among countries.
In globalization, the World Trade Organization remains the only international organization that controls trade between nations while the world bank fosters economic growth.
The United Nations is responsible for maintaining order in the international monetary system.
The three trade agreements existing in the world today are the European Union, the North American Free Trade Agreements, and the Asia-Pacific Economic Cooperation.
As trade becomes global, companies are venturing into foreign businesses and ensuring the right international employees are selected, whether from the home country or the host country. However, there are some requirements that many companies consider before hiring a multinational manager. These include and not limited to having a global mindset, emotional intelligence, long-range perspective, ability to motivate employees to achieve set organization objectives, the ability to understand the host nation’s culture, and the willingness to seek overseas assignments.
There is a rise in ethical issues in international business management. Examples include the rise in corruption cases, human rights, the moral obligation of both employees and organization as a whole, employment practices, and lastly, the rising concern for environmental pollution.
Corporate social responsibility refers to the idea that every business has a responsibility towards the stakeholders and society at large, beyond making a profit.
Organizations make ethical decisions by following two approaches:
- The teleological ethical theory – This follows the argument that an action’s consequences determine whether it is right or wrong.
- Deontological ethical theory – Actions are good or bad in and of themselves.
Ethical behavior is determined by several factors including the social culture, decision-making process, leadership, unrealistic performance goals, and personal ethics.
Managers employ specific moves to ensure the competitiveness of the business and in guiding the firm. These moves are called strategies and can either be offensive or defensive.
Offensive strategies include direct attacks like reducing price and adding new features to the existing products, end-run offensives such as venturing into markets with no or minimal competition or ignoring competition completely, preemptive competitive strategies such as getting an advantageous position in the market first, and lastly, by acquisitions which occurs when a firm purchases the competitor.
Defensive strategies include a reduction in the risk of being attacked, blunting or reducing the impact when attacked by competitors, and convincing the competitor to achieve its objectives through other means.
Porter’s Forces Model:
- The threat to new entrants
- Threat of substitutions
- Rivalry
- Bargaining power of suppliers
- Bargaining power of buyers
The SWOT analysis includes four factors: Strengths, weaknesses, opportunities, and threats.
Economic systems can either be capitalist, socialist, mixed.
Capitalist economic systems include decentralized production to private property rights owners. This is common in countries and societies where individual goals are given priority over the collective goals
Socialist economic systems involve centrally coordinated production where resources are owned by the state. In such systems, collective goals are given priority over individual goals.
Mixed economic systems include elements of both the capitalist system and the socialist system.
The role of internal human resources
Human resources form an important part of any organization as it helps provide a better working environment for the employees and understand how employees feel regarding the treatment they receive from the management. It also plays a key role in the selection and development of human resources in challenging international business, providing a platform that considers employee’s critical resources to the organization and lastly, making it easier to send employees overseas.
There are four basic positions that a multinational corporation can acquire. They are home-country nationals, host-country nations, third-country nationals, and inpatriates.
Home-country nationals – These are expatriate managers (headquarters nationals) who are also nationals of the country in which the multinational corporation is headquartered. Using such nationals provides the organization with several benefits including:
- An easier way of starting operations
- To offer technical expertise
- To develop promising managers for the future
- To facilitate coordination and control of business activities
Host-country nations – These are local managers within the host country, hired by the multinational corporation to facilitate trade activities. Reasons why a multinational corporation may choose to hire host-country nations to include:
- They are familiar with the culture
- They possess knowledge of the language used in the host country
- They are cheaper to hire and require less training
- It is a better way of creating good public relations
Third-country nationals – These are managers who are citizens of countries other than the home country and host country. Reasons, why a multinational corporation may choose to hire third-country nationals, include:
- They can be more effective in achieving corporate objectives than the expatriates or local nationals
- When the corporation is expanding rapidly, third-country nationals can substitute the expatriates and complement viewpoints of local nationals as well as headquarters personnel.
- They offer a transnational image and a unique cross-cultural skill in joint ventures.
Inpatriates – These are individuals from the host country or third country, who are hired to work in the home country or headquarters. Reasons why a multinational corporation may choose to hire inpatriates, include:
- They are a source of multi-experienced and multilingual global managers
- There is an increased number of international executives who are more skilled than both home-country national and host-country nationals
- They are highly demanded and can easily move to countries where there is demand
- A multinational corporation can reduce human resources costs and offer more flexibility to its activities by hiring inpatriates.
International selection criteria
There are several factors a corporation considers before hiring an individual for an international assignment. Among the factors include the following:
Adaptability screening – This determines how an individual for instance with a family, can effectively cope with the stress of working in another country. Research shows that individuals who can deal with the new situation have a high probability of developing social-cultural and psychological adjustments such as adjusting to the new living conditions, learning how to interact with the host-country nationals, feeling happy and enjoying day-to-day actives and lastly, feeling comfortable with the new challenges. Others are:
- Age and experience
- Experience
- Education
- Knowledge of the local language
- Motivation
- Leadership skills
- Support from family
Preparing for international assignments involves three phases
Phase 1 – The individuals focuses on self-evaluation and general awareness by assessing whether the internal assignment is meant for them and whether the spouse or family support the decision.
Phase 2 – This involves assessing the technical skills required for the job, learning the language, customs, and etiquette of the region, developing cultural awareness, and lastly, informing the superiors of your interest with the international assignment.
Phase 3 – The individual attends training sessions as provided by the corporation, gets more information from experienced individuals who have ever worked in the same assignments, and lastly, visiting the host country with the spouse or family member before the formal departure.
Despite the economic recessions in the past years, multinational corporations are still sending expatriates on foreign assignments because of the growth in emerging markets such as China, and the continued integration of the European Union.
The difference between anticipatory adjustment and in-country adjustment is that the former deals with cross-cultural seminars and workshops, as well as previous experience while the latter deals with the ability of the individuals to maintain a positive outlook, perceive, and evaluate the cultural values and norms of the host country correctly.
The five elements of the compensation package include:
Base salary – This is the amount of money the expatriate receives in the home country
Benefits – This includes the availability of home-country benefits to the local nationals
Allowances – This includes the cost of living covering expenses like relocation, housing, education, and hardship. This can be replaced with a one-time, lump-sum premium
Incentives – These includes one-time payment for the individual
Taxes – This considers the concept of tax equalization as the individual may have two bills to pay for the same pay i.e. host-country and the home-country internal revenue service
Compensation benefits can be tailored using the balance sheet approach which makes sure the individual does not lose money while on assignment, negotiation approach which negotiates an acceptable ad hoc arrangement, localization which pays expatriates a sum comparable to local nationals, a lump-sum method that pays a one-time premium and lastly, cafeteria approach which offers the expatriate a series of options to choose from.
In most occasions, the firm agrees with the expatriate on how long they will work in the overseas before being repatriated into the home-country and get a mutually acceptable job. However, several challenges exist in these strategies which include:
- Adjusting to life back home after the assignment
- Getting a financial package that may not be as good as that of the overseas assignment
- Not receiving any counseling from the corporation after the assignment
- Less autonomy in a state-side job
The four managerial philosophies of training
Ethnocentric MNC – Such corporation stresses on nationalism and puts home-country nationals in charge of key managerial positions.
Polycentric MNC – Local nationals are given key managerial positions and allowed to appoint and develop their people.
Egocentric MNC – Such corporations rely more on the local managers to control operations in the area.
Geocentric MNC – These corporations integrate diverse regions of the world through the decision making approaches.
The four types of training are; standard training used mainly by small firms, tailor-made training designed for specific needs of the participants, cultural assimilator which expose members of one culture to specific cultural values, customs, and attitudes of another culture and lastly, the positive organizational behavior training that applies positively oriented human resources strengths and capacities developed and managed to improve performance.
Positive organizational behavior provides various advantages such as improving employee satisfaction and matching employee skills and talents with the goals and expectations of the organization.
Summary
Regarding the impact of age, experience, and education on expatriate managers, many companies consider an academic degree, preferably a graduate degree, to be of critical importance to an international executive. As corporations strive to achieve a balance between age and experience, there is sufficient evidence to suggest that younger managers are more eager for international assignments than older managers.
Historically, multinational corporations have staffed key positions in their foreign affiliates with expatriates.
Three-quarters of companies surveyed in 2015 were facing increasing pressure to decrease the overall cost of their expatriate programs. The research was conducted by Brookfield Global Relocation Services.
The ability to speak with locals in their language is a major achievement for many expatriates for feeling connected with the foreign country.
There is an increasing trend toward localization which reflects the effort to tap into local talents or offer less generous packages to locally hired employees.
Whether the objective of the manager is to lower turnover rates or increase productivity, it is always good to get a sense of how the employees feel they are being treated.
Multinational corporations rely much on inpatriates to help develop global core competencies
The process of altering employee’s behavior and attitude to increase the probability of attaining a goal is called training. Training is useful to prepare workers for overseas assignments. These reasons are categorized into either organizational or personal reasons.
Localization approach used by the corporation as a compensation package to individuals who are being given long-term overseas assignments.
Traditionally, multinational corporations rely on technical competence when selecting individuals for overseas assignments.
The two commonly used selection procedure by MNC are tests and interviews
Research indicates that corporations that tie human resource management and training with the management strategy outperform those that do not.
Cultural integrator ensures that the business systems are in accord with the local culture
According to Borstorff and her associates on the willingness of employees to work overseas, the employee and spouse perceptions of organizational support for expatriates are very essential to the willingness of the employee to work overseas. The study also argues that unmarried employees are often more willing to accept overseas assignments.
Study indicates that local managers are more effective in subsidiaries located in developing countries and corporations that mostly rely on the local customer base.
According to Luthans and Youssef, efficient and innovative organizations promote positive behavior by having positive traits, states, and systems.
One factor that plays a key role in anticipatory adjustment is the employee’s previous experience with a previous assignment in the assigned country or with countries with similar cultures.
Third-country managers have a better understanding of the policies of a corporation for the foreigner perspective.
Revision
What is globalization?
Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries. International business is a mechanism to bring about globalization.
What causes globalization?
People cause globalization, because humans are by nature prosocial
What are the Hofstede cultural dimensions?
Power distribution index, individualism, masculinity, uncertainty avoidance index, long term orientation
What is common law?
Common law is based on a system of precedent
What is civil law?
Civil law is based on an interpretation of written laws
What is religious law?
Law based on what religious codes/texts say to do
What is the Rule of Law vs Rule of Man
- Rule of Law – the written rules are the law of the land, no one can supersede these (Antonio’s lunch example during his exam; teacher wouldn’t accommodate)
- Rule of Man – absence of the rule of law. A society in which one person or regime exercises complete authority over the law
What is a Command Economy?
- The government determines what goods and services are sold and at what price/quantity. Typically preferred by communist nations.
What is a Market Economy?
- The free market determines what goods and services are sold and at what price/quantity. Laissez-faire = leave it alone – govt should not interfere. Typically preferred by democracies.
Individualism
A political system that stresses individual goals rather than a collective goal
Socialism
A political system in which the state/government owns all the companies and their means of production, distribution and exchange.
Collectivism
A political system that stresses a group or collective goal rather than an individual goal
State Capitalism
- Form of capitalism pursued by the state instead of by the market participants (govt manipulates market outcomes for political purposes)
What is constitutional law?
Defines the procedures and authorities of political bodies to establish law
What is criminal law?
Specifies what conduct is criminal and prescribes punishment
Absolute vs Comparative Advantage
- Absolute = When a nation can make a product at a higher quality and faster rate than another
- Comparative = specialization through free trade can increase total global output even if one country has an absolute advantage in the production of all products
How does country size affect trade?
Geographically larger nations don’t need to trade as much as smaller or more distant/isolated nations
What is factor proportions theory?
Factors that are in relative abundance are cheaper than factors that are relatively scarce
How does country similarity affect trade?
It is easier for more similar nations to engage in trade (ex: Canada and the US)
What systems would we expect from a nation that is culturally individualistic?
- Political: Democracy
- Legal: Rule of Law
- Economic: Market or Mixed Economy
- Ideology: Capitalism (Socialism if mixed)
What systems would we expect from a nation that is culturally collectivistic?
- Political: Totalitarianism
- Legal: Rule of Man
- Economic: Command Economy
- Ideology: Communism
What is GATT?
GATT (or General Agreements on Tariffs and Trade) was the predecessor to the WTO, formed in 1947 to abolish quotas and tariffs. It included the Most Favored Nation clause (MFN), which declares trade among nations without discrimination
What is the WTO?
The World Trade Organization is responsible for:
-Promoting global trade
-Continuing the MFN clause of GATT
-Providing a mechanism for dispute settlement
What is (neo)mercantilism?
Proposes that a country should try to establish a favorable balance of trade (export more than import) to receive an influx of gold.
Will the pace of globalization increase or decrease in the coming years?
Globalization will slow down as a result of growing anti-globalization movements
What are the six dimensions of globalization?
- Cultural
- Ecological
- Political
- Economic
- Technological
- Ideological
What are the 3 dimensions of a culture?
- Language
- Religion
- Work Motivation
Political ideologies are determined by…
The cultural background of each country
What are the four types of political risk?
Systemic – follows from change in public policy
Procedural – impediments that constrain the flexibility of operations (Nigerian governor must sign off on everything)
- Distributive – gradual elimination of the local property rights of foreign companies
- Catastrophic – devastates companies and countries (such as massive political conflicts, wars, etc.)
It is important to use alternative economic indicators (such as Happynomics) because…
Traditional economic indicators do not help to predict critical events, such as uprising, that inadvertently affect a country’s economy
What is power distance?
High power distance means subordinates prefer little interaction with superiors. Low power distance means subordinates prefer consultative styles, where management often interacts with them.
Low-Context vs. High Context Cultures
Low-Context = People only regard as relevant firsthand info, they want to great straight to the facts, no small talk
High-Context = People regard peripheral info and small talk as significant; things said indirectly or casually are important
What is customary law?
Based on the norms of behavior that gain legitimacy through long-term practice
What is a mixed economy?
A mixed economy combines elements of both command and market economies; both governments and private enterprise influence production/consumption. Preferred by socialist nations.
Which nations make up BRICS?
- Brazil
- Russia
- India
- China
- (South Africa)
What is inflation?
Inflation is the sustained rise in prices measured against a standard level of purchasing power – the increase in the cost of living.
What is product life cycle theory?
- States that the production location of certain manufactured products shifts as they go through their life cycles. There are four stages where products move:
- Introduction – in innovating (industrial) country
- Growth – mainly in industrial, but exporting out to others
- Maturity – growth in developing countries; decrease in industrial
- Decline – mainly in developing; some developing countries begin exports
What is the diamond of national competitive advantage?
Companies development and maintenance of internationally competitive products depend on favorable:
-Demand Conditions
-Factor conditions
-Related and supporting industries
-Firm strategy, structure, rivalry
Differences between Monochronic vs Polychronic Cultures
- Monochronic = people prefer to work sequentially (such as finishing transactions w one customer before dealing with the next)
- Polychronic = people are more comfortable when working simultaneously on a variety of tasks (such as dealing immediately with multiple customers who need service)
What is the “Infant Industry” argument for governmental intervention?
(economic rationale) Holds that a gov’t should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market before it can compete on its own. Counterargument: Gov’t cant know what to protect & little incentive for efficiency if no competition
What is the industrialization argument for governmental intervention?
(economic rationale) Presumes that the unregulated importation of lower-priced manufactures prevents the development of a domestic industry
What is the essential-industry argument?
(noneconomic rationale) Gov’ts apply trade restrictions to protect essential domestic industries during peacetime so the country is not dependent on foreign supplies during war
What is the promoting acceptable practices abroad argument?
(noneconomic rationale) Countries may reduce or increase their trade with another nation to promote their interests abroad. (ex: US threatened nations that harbored Snowden)
What is the preserving national culture argument?
(noneconomic rationale) To sustain a nation’s identity, they prohibit exports of art and historical items & limit imports of items that may conflict with their history/values. Counterargument: How long can a nation preserve its culture?
