6-1
Chapter
6
McGraw-Hill
International
Management
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6-2
Learning Objectives

After studying Chapter 6, you will know:




why the world economy is becoming more integrated than
ever before
what integration of the global economy means for individual
companies and for their managers
the strategies organizations use to compete in the global
marketplace
the various entry modes organizations use to enter overseas
markets
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives (cont.)

6-3
After studying Chapter 6, you will know:



how companies can approach the task of staffing overseas
operations
the skills and knowledge managers need to manage globally
why cultural differences across countries influence
management
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6-4
The Global Environment

Global environment


becoming more integrated than ever before
World Trade Organization (WTO)




rules apply to over 90 percent of international trade
has 144 member nations, including China
moved from reducing tariffs to eliminating nontariff barriers
International Monetary Fund (IMF)


McGraw-Hill
established by the United Nations
has 184 member countries
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
The Global Environment (cont.)

6-5
European unification

European Union (EU)



allows goods, services, capital, and human resources to flow
freely across national borders
goal is to strengthen Europe as an economic superpower
Maastrict Treaty


impact of EU is hard to predict

McGraw-Hill
agreement to adopt a common European currency
 Euro
“Fortress Europe” may restrict trade with countries outside of the
EU
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
The Global Environment (cont.)

6-6
Pacific Rim

important economic players include Japan and China


four tigers - Korea, Taiwan, Singapore, and Hong Kong
Asia-Pacific Economic Cooperation (APEC)

trying to:




holds promise in facilitating and strengthening international
business relationships

McGraw-Hill
reduce trade barriers
establish general rules for investment
develop policies that encourage foreign investment
member countries represent 40 percent of the world’s population and
50 percent of the world’s economic output
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
The Global Environment (cont.)

6-7
North America

North American Free Trade Agreement (NAFTA)




an economic pact that combined the economies of the U.S.,
Canada, and Mexico
constitutes the world’s largest trading bloc
provides access to previously protected markets in each country
Mexico will have to bolster its infrastructure and take care of
troubling environmental issues

McGraw-Hill
Border Environment Cooperation Commission (BECC) - addresses
environmental concerns of communities on the border
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
The Global Environment (cont.)

6-8
Rest of the world

globalization has left out three huge, high-potential regions




Middle East
Africa
Latin America
these regions have a major share of the earth’s natural
resources
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Consequences Of A Global Economy

6-9
Four consequences of the global economy

the volume of world trade has grown at a faster rate than the
volume of world output


foreign direct investment (FDI) is increasingly important


major investments have been among the U.S., Europe, and Japan
imports are penetrating deeper in to the world’s largest
economies


experts forecast increased competition as trade is liberalized
result of a trend toward the manufacture of component parts
companies around the world find their home markets under
attack from foreign competition
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
U.S. And Foreign Direct Investments,
In Millions of Dollars (2001)
6 - 10
United States
investment abroad
Foreign direct
Investment in U.S.
$1,381,674
$1,321,063
Canada
139,031
108,600
Europe
725,793
946,758
Latin America and Other
Western Hemisphere
269,556
58,881
Africa
15,872
3,264
Middle East
12,643
6,039
216,501
197,522
All countries
Asia and Pacific
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Consequences Of A Global Economy
(cont.)

6 - 11
Meaning of these consequences for managers


opportunities are greater - movement toward free trade has
opened up many formerly protected markets
the environment is more complex - challenge of doing
business in countries with different cultures



have to coordinate globally dispersed operations
the environment is more competitive - must deal with costefficient overseas competitors in addition to domestic
competition
an increasing number of medium-size and small firms also
engage in international trade
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 12
Global Strategy

Pressures for global integration

universal needs - consumer tastes in different countries are
similar with regard to certain types of products


pressures to reduce costs - impetus for global integration of
manufacturing


create strong pressures for a global strategy
key international competitors located where factor costs are low
global strategic coordination - response to global competitive
threats

McGraw-Hill
centralize decisions regarding the competitive strategies of
foreign subsidiaries
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 13
Global Strategy (cont.)

Pressures for local responsiveness

consumer tastes and preferences differ significantly among
countries




requires customized product and/or marketing messages
differences in traditional practices among countries
differences in distribution channels and sales practices
among countries
economic and political demands imposed by the host
government
McGraw-Hill
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6 - 14
Pressures for global integration
Organizational Models
High
Global
Views the world as a single market.
Operations are controlled centrally
from the corporate office.
Transnational
Specialized facilities permit local
responsiveness. Complex
coordination mechanisms provide
global integration.
Low
International
Uses existing capabilities to
expand into foreign markets.
Multinational
Several subsidiaries operating as
stand-alone business units in
multiple countries.
McGraw-Hill
Low
High
Pressures for local responsiveness
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Global Strategy (cont.)

6 - 15
Choosing a global strategy

international model - helps companies exploit their existing
core capabilities to expand into foreign markets – low local
responsiveness and low global integration





uses subsidiaries in each country
ultimate control exercised by the parent company
core functions are centralized in the parent company
advantage - facilitates the transfer of skills and know-how from
the parent company to the subsidiaries
disadvantages


McGraw-Hill
does not provide maximum latitude for responding to local
conditions
does not provide the opportunity to achieve a low-cost position by
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
means of scale economies
Global Strategy (cont.)

6 - 16
Choosing a global strategy (cont.)

multinational model - uses subsidiaries with substantial
discretion to respond to local conditions with ultimate control
exercised by the parent company – high local responsiveness
and low global integration




each subsidiary is a self-contained unit
each subsidiary can customize its products and strategies
advantage - less need for coordination and direction from
corporate headquarters
disadvantages


McGraw-Hill

higher manufacturing costs
duplication of effort
cannot realize scale economies
difficult to launch coordinated global© 2003
attacks
against
competitors
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Companies,
Inc. All rights reserved.
6 - 17
Global Strategy (cont.)

Choosing a global strategy (cont.)

global model - enables a company to market a standardized
product in the global marketplace – high global integration





product manufactured in locations where mix of costs and skills
is most favorable
characterized by centralized decision making and tight control by
the parent company over most aspects of worldwide operations
companies tend to become the low-cost players in any industry
advantage - often able to realize scale economies
disadvantages


McGraw-Hill
less responsive to consumer demands in different countries
requires increased coordination, paperwork, and staff
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 18
Global Strategy (cont.)

Choosing a global strategy (cont.)

transnational model - centralization of certain functions in
locations that best achieve cost economies


base other functions in national subsidiaries to facilitate greater
local responsiveness
major components may be manufactured in centralized
production plants to realize scale economies and then shipped
to local plants


fosters communications among subsidiaries by requiring:



McGraw-Hill
local plants finish product assembly to fit local needs
formal mechanisms such as transnational committees
transfers of managers among subsidiaries
headquarters must play a proactive role in coordinating activities
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 19
Entry Mode

Exporting


most manufacturing companies begin global expansion as
exporters
advantages



realize scale economies
consistent with a pure global strategy
disadvantages



McGraw-Hill
manufacturing costs in home country may exceed those in lowercost locations
high transportation costs
threat of tariff barriers
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 20
Entry Mode (cont.)

Licensing

foreign licensee buys rights to manufacture a company’s
product in its own country for a negotiated fee



McGraw-Hill
licensee provides most of the capital to start the overseas
operation
advantage - avoid the costs and risks of opening an overseas
market
disadvantage - may lose control of technological expertise to
the overseas company
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 21
Entry Mode (cont.)

Franchising



similar to licensing
used primarily by service companies – often food
(McDonalds, Subway, KFC, etc.)
company sells limited rights to use its brand name




receives a lump-sum payment and share of the franchisee’s
profits
franchisee must abide by strict business rules established by
franchisor
advantage - similar to that of licensing, but often includes
training, facilities, standardization,
disadvantage - quality control may suffer
McGraw-Hill
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6 - 22
Entry Mode (cont.)

Joint ventures


formal business agreement with a foreign company
advantages




local partner’s knowledge of local business conditions
sharing of development costs and risks
local laws may make this the only feasible entry mode
disadvantages


McGraw-Hill
loss of control over technology
shared ownership means potential loss of control over
subsidiaries
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6 - 23
Entry Mode (cont.)

Wholly owned subsidiaries


an independent company owned by the parent corporation
advantages



maintain control of technology when competitive advantage is
based on technology
retain tight control over foreign operations
disadvantages


McGraw-Hill
most costly entry mode
must bear the entire risk of establishing a foreign operation
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 24
Disadvantages
Advantages
Comparison Of Entry Modes
Wholly
owned
subsidiary
Exporting
Licensing
Scale
economies
Lower
development
costs
Lower
development
costs
Local
knowledge
Consistent
with pure
global strategy
Lower political
risk
Lower political
risk
Shared costs Maintains
and risks
control over
operations
May be the
only option
Loss of control
over technology
Loss of control
over quality
No low-cost
sites
High transportation costs
Franchising
Joint
Venture
Loss of control
over technology
Maintains
control over
technology
High cost
Conflict between High risk
partners
Tariff barriers
McGraw-Hill
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6 - 25
Automobile Companies

Ford – Astin-Martin, Jaguar, Land Rover, Mazda, Volvo

Chrysler – Mercedes-Benz, Jeep, (Mitsubishi)

, GM – Fiat, Hummer, Isuzu, Opel, Saab, Subaru, Suzuki,
(Toyota)
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 26
Example of Globalized Production
Of the $20,000 sticker price of a General Motors
Automobile LeMans:
 $6,000 goes to South Korea, where assembled
 $3,000 goes to Japan for sophisticated high-tech parts
(engines, transaxles, electronics)
 $800 goes to Taiwan, Singapore, and Japan for small
parts
 $500 goes to Great Britain for advertising and
marketing services
 $1,000 goes to Ireland for data processing
 $7,600 goes to GM and its external professional firms
in the United States
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Managing Across Borders

6 - 27
A foreign subsidiary may be staffed with:

expatriates - parent-company nationals who are sent to work
in a foreign subsidiary


host-country nationals - natives of the country where an
overseas subsidiary is located




working internationally can be very stressful
over time, reliance increases on host-country nationals
available, familiar with the local culture, and tend to cost less
local governments may provide incentives for hiring them
third-country nationals - natives of a country other than the
home country or the host country of an overseas subsidiary

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can soften political tensions between host and local country
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Managing Across Borders (cont.)

6 - 28
Skills of the global manager


shortage of U.S. managers equipped to run a global business
failure rate - percent of expatriate managers that come home
early

causes for failure include:





technical capability
personal and social issues
spouse’s inability to adjust to new surroundings
adjustment requires flexibility, emotional stability, empathy
for the culture, communication skills
unusual for women to be sent on foreign assignments

McGraw-Hill
success rate higher for women than men
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
How To Prevent Failed Assignments
6 - 29
• Structure assignments clearly
• Create clear job objectives
• Develop performance measurements based on objectives
• Use effective, validated selection and screening criteria
• Prepare expatriates and families for assignments
• Create a vehicle for ongoing communication with
•
expatriates
• Anticipate repatriation to facilitate reentry when they
•
come back home
• Develop a mentor program
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Managing Across Borders (cont.)

6 - 30
Understanding cultural issues



represents the most elusive aspect of international business
due to obliviousness to our own cultural conditioning
culture shock - the disorientation and stress associated with
being in a foreign environment
Geert Hofstede - four dimensions along which cultures differ




McGraw-Hill
power distance
uncertainty avoidance
individualism/collectivism
masculinity/femininity
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
3.56
- 31
Hofstede’s Framework

Power Distance
•

Uncertainty Avoidance
•

Degree to which influence/control are unequally distributed
among individuals within a particular culture
Degree to which members of a society attempt
to avoid ambiguity, risk, and indefiniteness
of future
Individualism / Collectivism
•
•
Extent to which society expects people to take
care of themselves and their immediate families
The degree to which individuals believe
they are masters of their own destiny
McGraw-Hill
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3.66
- 32
Hofstede’s Framework (cont.)
•

Tendency of group members to focus on the common
welfare and feel loyalty toward one another
Masculinity/Femininity
•
Degree to which acquisition of money
and material things is valued versus
quality of life
McGraw-Hill
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6 - 33
POWER DISTANCE

HIGH – Malaysia, Mexico, Venezuela, Arab Countries,
India, Singapore

MODERATE – Thailand, Portugal, Greece, South Korea,
Taiwan, Spain, Japan

LOW – United States (38/53), Finland, Norway, Sweden,
New Zealand, Denmark
McGraw-Hill
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6 - 34
UNCERTAINTY AVOIDANCE

HIGH – Greece, Portugal, Belgium, Japan, Peru, France

MODERATE – Taiwan, Arab Countries, Thailand, Iran,
Finland

LOW – United States (43/53), India, Great Britain, Sweden
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 35
INDIVIDUALISM
/COLLECTIVISM

HIGH – United States (1/53), Australia, Great Britain, New
Zealand, Denmark, Sweden, France

MODERATE – Japan, Iran, Brazil, Arab Countries, Greece

LOW – Columbia, Venezuela, Panama, Guatamala
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 36
MASCULINITY/FEMININITY

HIGH (Masculinity) – Japan, Austria, Venezuela, Italy,
Mexico, United States (15/53)

MODERATE – Canada, Malaysia, Pakistan, Brazil,
Singapore, Israel

LOW (Femininity)– Denmark, Netherlands, Norway,
Sweden
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 37
INDIVIDUALISM-COLLECTIVISM
Please indicate you level of agreement or disagreement with each of the following
statements using the following scale:
Strongly Disagree
`
1
Neither Disagree nor Agree
2
3
4
Strongly Agree
5
6
_____ 1. I would rather struggle through a personal problem by myself than discuss
it with my friends.
_____ 2. I do my own things without minding about my colleagues/co-workers, when I am
among them.
______3. I like to live close to my close friends.
______4. I would pay absolutely no attention to my close friends’ views when deciding
what kind of work to do.
McGraw-Hill
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6 - 38
______5. We ought to develop the character of independence among students, so that they
do not rely upon other students’ help in their schoolwork.
______6. It is a personal matter whether I worship money or not. Therefore, it is not
necessary for my friends to give my counsel.
______7. There is everything to gain and nothing to lose for classmates to group themselves
together for study and discussion.
______8. Classmates’ assistance is indispensable to getting a good grade at school.
______9. If you work, and you have to choose between (A) getting along very well with
your co-workers, and (B) being very competent and efficient in doing the job,
what combination of the two aspects would you like best? (Use the scale below to
make your response for this question.)
1 = 100% A
4 = 40% A, 60%B
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2 = 80% A, 20%B
5 = 20% A, 80%B
3 = 60% A, 40%B
6 = 100% B
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 39
_____10. Man is a social animal; he cannot flourish and grow without identifying himself
with some group.
_____11. Some of life’s greatest satisfactions are found in working cooperatively with
others.
_____12. Individuals do not really fulfill their human potentials unless they involve
themselves deeply in some group.
_____13. It is often more gratifying to work for the accomplishment of a goal held by a
group to which one belongs than to work for the attainment of a purely personal
goal.
_____14. In life an individual should for the most part “go it alone’ assuring oneself of
privacy, having time to oneself, attempting to resist being influenced by others.
_____15. It is just as important to work toward group goals and adhere to the established
rules of the group as it is to gratify one’s individual desires.
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 40
COLLECTIVISM SCORING







ITEMS 1, 2, 4, 5, 6, 9, AND 14 ARE REVERSED
SCORED
6=1
5=2
4=3
3=4
2=5
1=6
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 41
CULTURAL VALUES

Variable

Collectivism
Femininity
Masculinity
Power Distance
Uncertainty Avoidance




McGraw-Hill
United States Taiwan
57.72
4.47
4.95
2.19
3.18
66.78
4.77
4.65
1.98
3.56
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Managing Across Borders (cont.)

6 - 42
Ethical issues in international management

issues of right and wrong get blurred as we move from one
culture to another

for example, bribes



codes of conduct for international business



accepted part of business in some countries
U.S. - Foreign Corrupt Practices Act (1977) - prohibits U.S.
employees from making payments to foreign officials
define permissible actions
provide procedures and support systems to deal with ambiguous
situations
core values exist that are embraced by most nationalities
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
6 - 43
SIGNS FROM DIFFERENT COUNTRIES





Paris hotel: Please leave your values at front desk
Japanese hotel: You are invited to take advantage
of the chambermaid
Norwegian bar: Ladies are requested to not have
children in the bar
Russian sign: You are welcome to visit the
cemetary where famous Russian composers, artists
and writers are buried daily
Menu in Taiwan: Green people with beef fried rice
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.