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The world is fast becoming a global village where there are no boundaries to stop free trade and communication. Keeping pace with it, the way we do business has changed in an unprecedented manner. The competition, in the global marketplace, is at its peak where all companies want to sell their goods to everyone, everywhere on the globe.
For example, the faucet we see in our bathroom may be from Italy. The towels we use may be a Brazilian product. The automobile we drive may be a Japanese or German brand. The air conditioners we use may be from France. It is almost impossible to stay isolated and be self-sufficient in this day and age. That is why multinational companies are a reality.
Any business that involves operations in more than one country can be called an international business. International business is related to the trade and investment operations done by entities across national borders.
Firms may assemble, acquire, produce, market, and perform other value-addition-operations on international scale and scope. Business organizations may also engage in collaborations with business partners from different countries.
Apart from individual firms, governments and international agencies may also get involved in international business transactions. Companies and countries may exchange different types of physical and intellectual assets. These assets can be products, services, capital, technology, knowledge, or labor.
Note − In this tutorial, we are primarily focusing towards business operations of the individual firm.
Let's try to explore the reasons why a business would like to go global. It is important to note that there are many challenges in the path of internationalization, but we'll focus on the positive attributes of the process for the time-being.
There are five major reasons why a business may want to go global −
There are multiple advantages of going international. However, the most striking and impactful ones are the following four.
International businesses having products that don't really sell well enough in their local or regional market may find a much better customer base in international markets. Hence, a business house having global presence need not dump the unsold stock of products at deep discounts in the local market. It can search for some new markets where the products sell at a higher price.
A business having international operations may also find new products to sell internationally which they don't offer in the local markets. International businesses have a wider audience and thus they can sell a larger range of products or services.
Competition can be a local phenomenon. International markets can have less competition where the businesses can capture a market share quickly. This factor is particularly advantageous when high-quality and superior products are available. Local companies may have the same quality products, but the international businesses may have little competition in a market where an inferior product is available.
Marketing in several countries reduces the vulnerability to events of one country. For example, the political, social, geographical and religious factors that negatively affect a country may be offset by marketing the same product in a different country. Moreover, risks that can disrupt business can be minimized by marketing internationally.
Doing business in more than one country offers great insights to learn new ways of accomplishing things. This new knowledge and experience can pave ways to success in other markets as well.
Although globalization and internationalization are used in the same context, there are some major differences.
There are many factors related to the change of technology, international policies, and cultural assimilation that initiated the process of globalization. The following are the most important factors that helped globalization take shape and spread it drastically.
After World War II, the General Agreement on Tariffs and Trade (GATT) and the WTO have reduced tariffs and various non-tariff barriers to trade. It enabled more countries to explore their comparative advantage. It has a direct impact on globalization.
The Uruguay Round of negotiations (1986–94) can be considered as the real boon for globalization. It is considerably a large set of measures which was agreed upon exclusively for liberalized trade. As a result, the world trade volume increased by 50% in the following 6 years of the Uruguay Round, paving the way for businesses to span their offerings at an international level.
Over the last 25 years, sea transport costs have plunged 70%, and the airfreight costs have nosedived 3–4% annually. The result is a boost in international and multi-continental trade flows that led to Globalization.
Expansion of e-commerce due to the growth of the Internet has enabled businesses to compete globally. Essentially, due to the availability of the Internet, consumers are interested to buy products online at a low price after reviewing best deals from multiple vendors. At the same time, online suppliers are saving a lot of marketing costs.
Multinational Corporations (MNCs) have characterized the global interdependence. They encompass a number of countries. Their sales, profits, and the flow of production is reliant on several countries at once.
The 'regional trade agreement' (RTA) abolished internal barriers to trade and replaced them with a common external tariff against non-members. Trading blocs actually promote globalization and interdependence of economies via trade creation.
The International business environment includes various factors like social, political, regulatory, cultural, legal and technological factors that surround a business entity in various sovereign nations. There are exogenous factors relative to the home environment of the organization in the international environment. These factors influence the decision-making process on the use of resources and capabilities. They also make a nation either more or less attractive to an international business firm.
We will take up the most important factors and see how they affect the operational process of a business.
Firms do not have any control over the external business environment. Therefore, the success of an international company depends upon its ability to adapt to the overall environment.
Its success also depends on the ability to adjust and manage the company's internal variables to leverage on the opportunities of the external environment. Moreover, the company's capability to control various threats produced by the same environment, also determines its success.
A term called 'country attractiveness' is often discussed in the international business fraternity. It is important to consider attractiveness before we move on to discuss environmental factors.
Country attractiveness is a measure of a country's attractiveness to the international investors. In international business, investment in foreign countries is the most important aspect and hence firms want to determine how suitable a country is in terms of its external business environments.
International business firms judge the risks and profitability of doing business in a particular country before investing and starting a business there. This judgment includes studying the environmental factors to arrive at a decision.
It is pretty clear that businesses prefer a country that is less costly, more profitable, and has fewer risks. Cost considerations are related with investment. Profitability is dependent on resources. Risks are associated with the environment and hence it is of prime concern.
Risks may be of various types. However, the general consensus is that a country that is more stable in terms of political, social, legal, and economic conditions is more attractive for starting a business.
There are numerous types of business environments, however the political, the cultural, and the economic environments are the prime ones. These factors influence the decision-making process of an international business firm. It is important to note that the types of environments we discuss here are interlinked; meaning one's state affects the others in varying dimensions.
The political environment of a nation affects the legal aspects and government rules which a foreign firm has to experience and follow while doing business in that nation. There are definite legal rules and governance terms in every country in the world. A foreign company that operates within a particular country has to abide by the country's laws for the duration it operates there.
Political environment can affect other environmental factors −
There are four major effects of political environment on business organizations −
Note − You can check The Index of Economic Freedom. It ranks and compares the countries depending on how politics impacts business-decisions in those locations.
Economic factors exert a huge impact on international business firms. The economic environment includes the factors that influence a country's attractiveness for international business firms.
Cultural environments include educational, religious, family, and social systems within the marketing system. Knowledge of foreign culture is important for international firms. Marketers who ignore cultural differences risk failure.
Cultural Differences Ireland's evening meal is called tea, not dinner. If you nod in Bulgaria, it means “no” and moving the head from one side to the other means “yes”. Pepsodent toothpaste did not sell well in Southeast Asia, as it promised white teeth. Black or yellow teeth are symbols of prestige there.
Cultural Differences
Protectionism is a policy of protecting the domestic businesses from foreign competition by applying tariffs, import quotas, or many types of other restrictions attached to the imports of foreign competitors' goods and services.
There are many protectionist policies in place in many nations despite the fact that there is a popular consensus that the world economy, as a whole, benefits from free trade.
Currently, protectionism is in a unique form. Economists term the form as administered protection. Most rich nations have fair trade laws. The announced purpose of Free Trade Laws is twofold −
These mechanisms are meant to augment free trade.
End of Protectionism in History Great Britain started to end the protective tariffs in the first half of the 19th century after achieving industrial leadership in Europe. Britain's removal of protectionist measures and acceptance of free trade was symbolized by the repeal of the Corn Laws (1846) and various other duties on imported grains. Europe's protectionist policies became relatively mild in the latter half of the 19th century. However, France, Germany, and many other nations imposed customs duties to shelter the improving industrial belts from British competition. Customs duties fell sharply in Western world by 1913, and import quotas were almost never used. The damage and displacement in World War I inspired an increasing raise of customs barriers in Europe in the 1920s. Great Depression of the 1930s resulted in record levels of unemployment which led to an epidemic of protectionism. The United States was also a protectionist country, and the levied tariffs reached the top during 1820s and the Great Depression. The Smoot-Hawley Tariff Act (1930) raised the average tariff on imported goods by about 20 percent. US protectionist policies started getting vanished by the middle of the 20th century. By 1947, the United States became one of the 23 nations to sign reciprocal trade agreements (the General Agreement on Tariffs and Trade – GATT). GATT, which was amended in 1994, was taken over by the World Trade Organization (WTO) in Geneva (1995). WTO negotiations have led to reduced customs tariffs by most of the major trading nations.
End of Protectionism in History
Great Britain started to end the protective tariffs in the first half of the 19th century after achieving industrial leadership in Europe. Britain's removal of protectionist measures and acceptance of free trade was symbolized by the repeal of the Corn Laws (1846) and various other duties on imported grains.
Europe's protectionist policies became relatively mild in the latter half of the 19th century. However, France, Germany, and many other nations imposed customs duties to shelter the improving industrial belts from British competition. Customs duties fell sharply in Western world by 1913, and import quotas were almost never used.
The damage and displacement in World War I inspired an increasing raise of customs barriers in Europe in the 1920s. Great Depression of the 1930s resulted in record levels of unemployment which led to an epidemic of protectionism.
The United States was also a protectionist country, and the levied tariffs reached the top during 1820s and the Great Depression. The Smoot-Hawley Tariff Act (1930) raised the average tariff on imported goods by about 20 percent.
US protectionist policies started getting vanished by the middle of the 20th century. By 1947, the United States became one of the 23 nations to sign reciprocal trade agreements (the General Agreement on Tariffs and Trade – GATT). GATT, which was amended in 1994, was taken over by the World Trade Organization (WTO) in Geneva (1995). WTO negotiations have led to reduced customs tariffs by most of the major trading nations.
Liberalization is the process of relaxation from government control. It is a very important economic term. Technically, it means the reductions in applied restrictions of the government on international trade and capital. Liberalization is also used in tandem with another term − Deregulation.
Deregulation is the disappearance of state restrictions on both domestic and international business. However, in principle, the two terms are distinct because liberalized markets are often subject to government regulations for various reasons, such as consumer protection. But in practice, both terms generally refer to the removal of state intervention in markets.
The advantages of liberalization and deregulation are questioned in many ways. Both of these phenomena are related with the “Washington consensus.” The consensus is a set of market-related policy prescriptions supported by neoliberals for economic growth of developing countries. Critics, however, argue that the policies are used to exploit poorer workers by corporations from rich countries.
Activists and scholars alike somewhat agree that markets are, in reality, neither truly free nor fair. For example, there are subsidies paid by the government to cotton producers in the United States and the European Union. This, in reality, artificially drives the prices down, putting African cotton farmers in an uncomfortable state.
Critics note that the issue is not about the freeing of markets per se but, rather, that the companies of wealthier countries are manipulating the term to their own benefits at large.
Due to close resemblance and similar attributes, the term LPG (Liberalization, Privatization, and Globalization) is generally used nowadays to describe the phenomena of freeing up of markets.
Although the three terms are distinct and have their own attributes, it is particularly helpful to describe the contemporary and new market conditions of 21st century through the term LPG. In fact, liberalization is the gateway to globalizations and hence, when we talk about the benefits of globalization, it is always a manifestation of the process of liberalization.
It is impossible to consider the business aspects without having a global view in many of the scenarios and hence, LPG is a way to deal with the latest marketing and operational trends in international marketing.
Liberalization and deregulation stimulated the epic run of three major areas of business −
Liberalization and deregulation contributed heavily to the globalization of the world economy.
In the 18th and 19th century, almost all nations and nation-states believed that protectionism is a must for the well-being of domestic economies. However, with passing time, this idea started to change. The idea of liberalizations and thereby abolishment of protectionist measures peaked in the middle half of the 20th century. The epitome of liberalism took the first palpable shape as GATT, which was later replaced by the WTO.
General Agreement on Tariffs and Trade (GATT) includes some multilateral trade agreements formed to abolish the quotas and reduce various tariffs among the participating nations. GATT was formed by 23 countries signing the agreement at Geneva, in 1947. It was aimed to offer an interim arrangement which could be replaced by a United Nations agency soon.
GATT played a hero's role in expanding the world trade in the latter half of the 20th century. 125 nations had already become signatories to GATT when it was replaced by the WTO in 1995.
GATT's major principle was trade without discrimination. The participating nations opened the markets impartially to every other member. According to GATT, once a nation and its largest trade allies had agreed to reduce a tariff, that reduction automatically became applicable to all other GATT members.
GATT's role was instrumental in the following aspects −
Finally, GATT was the “court of international trade.” Settling the disputes between two or more parties was one of its primary objectives. GATT had become a legal guardian of nations for settling trade disputes.
The World Trade Organization (WTO) is the single global international organization dealing with the rules related to international trade. WTO's agreements are negotiated and signed by a majority of prominent trading nations. The agreements are ratified in the parliaments of the contracting countries.
On 1st January, 1995, the World Trade Organization replaced GATT. The reasons for GATT being replaced by the WTO are the following.
The WTO was a natural demand of the times for a holistic development of economies.
WTO promotes business liberalization and economic globalization. It has implemented a substantial decline in tariff levels.
WTO members experienced an average of 40% decline in tariff rate. Agriculture industry and textile trade expansions, security enhancement, anti-dumping and countervailing, dispute-free investment and trade in services and intellectual properties have been the most significant achievements of the WTO.
WTO STATISTICS In 1999, tariff rate in developed countries dropped from 6.3% to 3.9%. Imported duty-free manufactured goods increased from 20% to 43%, and tariffs on imported manufactured goods reduced to 5% on average.
WTO STATISTICS
In 1999, tariff rate in developed countries dropped from 6.3% to 3.9%. Imported duty-free manufactured goods increased from 20% to 43%, and tariffs on imported manufactured goods reduced to 5% on average.
WTO plays a major role in promoting peace among the countries. WTO lets international trade and investment to run smoothly. Countries also get a constructive and fair institution for dealing with disputes over trade issues due to the presence of the WTO.
The WTO also plays a role in decreasing the cost of living. Protectionism increases the cost of the goods. WTO lowers the trade barriers via negotiation and through its non-discrimination policy.
Developing countries usually don't have the muscle to negotiate in the international markets and they need to follow the developed countries' terms. WTO's Most favored Nation (MFN) principle, which allows market liberalization, helps the developing nation to trade and prosper. Besides, it also supports the multilateral framework for rules and agreement.
Developing countries benefit from the intellectual property rules of WTO. Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement offers a suitable policy framework that helps to promote technology transfer and FDI flow to developing nations.
There are some preferential treatments available for the developing countries too. Generalized System of Preferences (GSP) enables non-reciprocal preferential treatment by developed countries.
WTO offers flexibility to developing countries to implement their TRIPS obligation, especially those that are adopted in the Uruguay round. It helps in holistic improvement of developing nations.
Global trade and investment or broadly, globalization, is a common market condition for all countries of the world now. However, it is not free from challenges. To be specific, there are seven major challenges to global trade and investment the world is facing now.
Globalization has a tough challenge against polarization and conflicting issues. The world is experiencing increased conflicts, major economic powers are seizing influence, financial sanctions are being used as a weapon, and the Internet is breaking into pieces. Therefore, the international flow of money, information, products and services may slow down.
Globalization is a kind of Americanization. The United States is still a dominating economy and the hallmark of the international financial system. Moreover, information age is promoting the democratization of information. It is paving the way for demanding more information and the autocrats now need to care more about public opinion. The developments of developing countries are making them more or less like America.
The United States was a strong nation in the last quarter of the century. But now, state capitalism in a modern form is gripping many nations. This is creating new segments in the markets and destroying the uniformity expected from globalization. Now, there is nothing predominantly American or about globalization itself.
Globalization will continue rapidly, but the U.S led world order is getting diminished. An inconsistent, war-ridden United States lacks the will and ability to provide global leadership. Moreover, no other country is interested in taking its place. The West is having its own problems, and allies are only interested in hedging their bets. Therefore, there is no clear and definite way for globalization to progress and it is getting distorted.
China, Russia, Turkey, India, and some other emerging nations are getting powerful enough to dismantle the US led theory of globalization. But they lack synchronization and influence. Their values and interests are not compatible. So, a regionalized world is emerging. Americanization and globalization are neither believed to be one and the same now nor is it preached by these power-seeking nations.
The regional economic powerhouses are getting more room to operate in today's world. Russia is intruding in its backyard, Germany is experiencing firm control over Euro zone, and China is rapidly rising in the Asia-Pacific. These major countries are trying to consolidate power without caring for the smaller countries near them. It is a kind of 'hollowing of the peripherals' that is accelerating.
The oil monopoly is deteriorating and many clashes and terrorist incidents are tearing the world apart. In such turmoil, the very essence of globalization is somehow getting blurred. These time-sensitive challenges are being faced by all international and huge global companies. While the problems don't seem to end soon, the global companies now have the choice to exercise their power in a global scale. They may or may not adapt to the new trend, but their superiority and powers have definitely got a boost due to the predominantly geopolitical crises.
There are many theories and concepts associated with international trade. When companies want to go international, these theories and concepts can guide them to be careful and prepared.
There are four major modern theories of international trade. To have a brief idea, please read on.
The Heckscher–Ohlin theory deals with two countries' trade goods and services with each other, in reference with their difference of resources. This model tells us that the comparative advantage is actually influenced by relative abundance of production factors. That is, the comparative advantage is dependent on the interaction between the resources the countries have.
Moreover, this model also shows that comparative advantage also depends on production technology (that influences relative intensity). Production technology is the process by which various production factors are being utilized during the production cycle.
The Heckscher–Ohlin theory tells that trade offers the opportunity to each country to specialize. A country will export the product which is most suitable to produce in exchange for other products that are less suitable to produce. Trade benefits both the countries involved in the exchange.
The differences and fluctuations in relative prices of products have a strong effect on the relative income gained from the different resources. International trade also affects the distribution of incomes.
According to Samuelson–Jones Model, the two major reasons for which trade influences the income distribution are as follows −
There are three factors in this model − Labor (L), Capital (K), and Territory (T).
Food products are made by using territory (T) and labor (L), while manufactured goods use capital (K) and labor (L). It is easy to see that labor (L) is a mobile factor and it can be used in both sectors. Territory and capital are specific factors.
A country with abundant capital and a shortage of land will produce more manufactured goods than food products, whatever may the price be. A country with territory abundance will produce more foods.
Other elements being constant, an increase in capital will increase the marginal productivity from the manufactured sector. Similarly, a rise in territory will increase the production of food and reduce manufacturing.
During bilateral trade, the countries create an integrated economy where manufactured goods and food production is equal to the sum of the two countries' productions. When a nation does not trade, the production of a product will equal its consumption.
Trade gains are bigger in the export sector and smaller in the competing import sector.
The Krugman–Obsfeld Model is the standard model of trade. It implies two possibilities −
The exchange rate is obtained by the intersection between the two curves. An improved exchange rate – other elements being constant – implies a substantial rise in the welfare of that country.
Michael Porter identified four stages of development in the evolution of a country. The dependent phases are − Factors, Investments, Innovation, and Prosperity.
Porter talked extensively on attributes related to competitive advantages which an organization can achieve relative to its rivals which consists of Lower Cost and Differentiation. These advantages derive from factor(s) that permit an organization to outperform its competition, such as superior market position, skills, or resources.
In Porter's view, the strategic management of businesses should be concerned with creating and continuing competitive advantages.
The International Institute for Management Development defines competitiveness as “a field of economic knowledge which analyzes the facts and policies that shaped the ability of a nation to create and maintain an environment that sustains more value creation for its enterprises and more prosperity for its people.”
The World Economic Forum defines global competitiveness as “the ability of a country to achieve sustained high rates of growth in gross domestic product (GDP) per capita.”
Business firms abide by the rules and regulations formed by the government. The government assumes a very important role in enhancing competitiveness. Governments must promote trade by reengineering systems and procedures. Governments should be more responsive, reducing bureaucratic red tape.
GLOBAL COMPETITIVENESS INDEX The Global Competitiveness Reports asses the competitiveness landscape of 144 economies of the world. It provides information about the drivers of their productivity and prosperity. The Report is the most comprehensive assessment of national competitiveness worldwide.
GLOBAL COMPETITIVENESS INDEX
The Global Competitiveness Reports asses the competitiveness landscape of 144 economies of the world. It provides information about the drivers of their productivity and prosperity. The Report is the most comprehensive assessment of national competitiveness worldwide.
A regional trading bloc (RTB) is a co-operative union or group of countries within a specific geographical boundary. RTB protects its member nations within that region from imports from the non-members. Trading blocs are a special type of economic integration. There are four types of trading blocs −
The advantages of having a Regional Trading Bloc are as follows −
The disadvantages of having a Regional Trading Bloc are as follows −
There are four major trade blocs in current times that have the reputation and will to make a significant impact on international business process.
Association of Southeast Asian Nations (ASEAN) was established on August 8, 1967, in Bangkok (Thailand).
The European Union (EU) was founded in 1951 by six neighboring states as the European Coal and Steel Community (ECSC). Over time, it became the European Economic Community (EEC), then the European Community (EC), and was ultimately transformed into the European Union (EU). EU is the single regional bloc with the largest number of member states (28).
Mercado Comun del Cono Sur (MERCOSUR) was established on 26 March 1991 with the Treaty of Assunción. The major languages spoken in this region are Spanish and Portugese.
The North American Free Trade Agreement (NAFTA) was signed on 1 January 1994.
To survive in the world of cut-throat competition, companies must sell their products in the global market. It is necessary to come up with new strategies to win more customers. Effective strategic management requires strategic estimation, planning, application and review/control.
The path for strategic management is activated by compulsions like modern developments in the societal and economic theory and the recent changes in the form of business, apart from the economic context.
Here is a list of some compulsions that a global business might have to face −
Standardization and differentiation are the two sides of globalization. By standardization, we mean to show the global representation, while differentiation looks upon local competitiveness. The following figure depicts how standardization differs from differentiation.
Strategic Options include a set of strategies that helps a company in achieving its organizational goals. It is important to do a SWOT analysis of the internal environment and also the external environment to get the a list of possible strategic alternatives.
A business can't run on gut feeling and hence, strategic options are indispensable tools for every international business manager. The following diagram shows the very basic options to choose – whether to go global or act local while improving the business in a holistic manner.
There are many factors that need to be taken care of while choosing the best possible strategic options. The most influential ones are the following −
Global Portfolio Management, also known as International Portfolio Management or Foreign Portfolio Management, refers to grouping of investment assets from international or foreign markets rather than from the domestic ones. The asset grouping in GPM mainly focuses on securities. The most common examples of Global Portfolio Management are −
Global Portfolio Management (GPM) requires an acute understanding of the market in which investment is to be made. The major financial factors of the foreign country are the factors affecting GPM. The following are the most important factors that influence GPM decisions.
Tax rates on dividends and interest earned is a major influencer of GPM. Investors usually choose to invest in a country where the applied taxes on the interest earned or dividend acquired is low. Investors normally calculate the potential after-tax earnings they will secure from an investment made in foreign securities.
High interest rates are always a big attraction for investors. Money usually flows to countries that have high interest rates. However, the local currencies must not weaken for long-term as well.
When investors invest in securities in an international country, their return is mostly affected by −
Investors usually shift their investment when the value of currency in a nation they invest weakens more than anticipated.
Foreign securities or depository receipts can be bought directly from a particular country's stock exchange. Two concepts are important here which can be categorized as Portfolio Equity and Portfolio Bonds. These are supposed to be the best modes of GPM. A brief explanation is provided hereunder.
Portfolio equity includes net inflows from equity securities other than those recorded as direct investment and including shares, stocks, depository receipts (American or global), and direct purchases of shares in local stock markets by foreign investors.
Bonds are normally medium to long-term investments. Investment in Portfolio Bond might be appropriate for you if −
Global mutual funds can be a preferred mode if the Investor wants to buy the shares of an internationally diversified mutual fund. In fact, it is helpful if there are open-ended mutual funds available for investment.
Closed-end funds invest in internationals securities against the portfolio. This is helpful because the interest rates may be higher, making it more profitable to earn money in that particular country. It is an indirect way of investing in a global economy. However, in such investments, the investor does not have ample scope for reaping the benefits of diversification, because the systematic risks are not reducible to that extent.
Global Portfolio Management has its share of drawbacks too. The most important ones are listed below.
The long-term advantages of doing international business in a particular country depend upon the following factors −
By considering the above-mentioned factors, firms can rank countries in terms of their attractiveness and profitability. The timing of entry into a nation is a very important factor. If a firm enters the market ahead of other firms, it may quickly develop a strong customer base for its products.
There are seven major modes of entering an international market. In this chapter, we will take up each mode and discuss their advantages and disadvantages.
An item produced in a domestic market can be sold abroad. Storing and processing is mainly done in the supplying firm's home country. Export can increase the sales volume. When a firm receives canvassed items and exports them, it is called Passive Export.
Alternately, if a strategic decision is taken to establish proper processes for organizing the export functions and for obtaining foreign sales, it is known as Active Export.
In this mode of entry, the manufacturer of the home country leases the right of intellectual properties, i.e., technology, copyrights, brand name, etc., to a manufacturer of a foreign country for a predetermined fee. The manufacturer that leases is known as the licensor and the manufacturer of the country that gets the license id known as the licensee.
In this mode, an independent firm called the franchisee does the business using the name of another company called the franchisor. In franchising, the franchisee has to pay a fee or a fraction of profit to the franchisor. The franchisor provides the trademarks, operating process, product reputation and marketing, HR and operational support to the franchisee.
Note − The Entrepreneur magazine's top ranker in “The 2015 Franchise 500” is Hampton Hotels. It has 2,000 hotels in 16 countries.
It is a special mode of carrying out international business. It is a contract under which a firm agrees – for a remuneration – to fully carry out the design, create, and equip the production facility and shift the project over to the purchaser when the facility is operational.
In Mergers & Acquisitions, a home company may merge itself with a foreign company to enter an international business. Alternatively, the home company may buy a foreign company and acquire the foreign company's ownership and control. M&A offers quick access to international manufacturing facilities and marketing networks.
When two or more firms join together to create a new business entity, it is called a joint venture. The uniqueness in a joint venture is its shared ownership. Environmental factors like social, technological, economic and political environments may encourage joint ventures.
Wholly Owned Subsidiary is a company whose common stock is fully owned by another company, known as the parent company. A wholly owned subsidiary may arise through acquisition or by a spin-off from the parent company.
Every international business firm has to face various issues related to organizational policies. These organizational issues are to be addressed carefully in order to keep the business healthy and profitable. Although there are numerous issues, both small and big, we will primarily concentrate only on the major issues that need to be addressed.
Centralization is the systematic and consistent reservation of authority at central points in the organization. In centralization, the decision-making capability lies with a few selected employees. The implications of centralization are
Almost every important decision and operational activities at the lower level are taken by the top management.
Decentralization is a systematic distribution of authority at all levels of management. In a decentralized entity, major decisions are taken by the top management to build the policies concerning the entire organization. Remaining authority is delegated to the mid- and lower-level managers.
International firms, especially the fully-owned ones, usually have a board of directors to oversee and direct the top-level management. The major responsibilities of board-members are to −
Any international business organization, depending on its requirements and operations, would have an organization structure to streamline all its processes. In this section, we will try to understand some of the major types of organizational structures.
Initial division structures are common in subsidiaries, export firms, and on-site manufacturers. Subsidiaries that follow this kind of organization structure include firms where the main export is expertise, for example, consultants and financial firms. Export firms include those having technologically advanced products and manufacturing units. Companies having on-site manufacturing operations follow this structure to cut down their costs.
This structure is built to handle all international operations by a division created for control. It is often adopted by firms that are still in the development stages of international business operations.
Advantages
Disadvantages
Global product divisions include domestic divisions that are allowed to take global responsibility for product groups. These divisions operate as profit centers.
Global area division structure is used for operations that are controlled on a geographic rather than a product basis. Firms in mature businesses with select product lines use it.
This structure is to primarily organize global operations based on function; product orientation is secondary for firms using global function division structure.
This structure combines global product, area, and functional arrangements and it has a cross-cutting committee structure.
Control mechanisms play an important role in any business organization, without which the roles of managers get constrained. Control is required for achieving the goals in a predefined manner because it provides the instruments which influence the performance and decision-making process of an organization. Control is in fact concerned with the regulations applied to the activities within an organization to attain expected results in establishing policies, plans, and practices.
Control mechanisms can be set according to functions, product attributes, geographical attributes, and the overall strategic and financial objectives.
There are three major objectives for having a control mechanism in an international firm. They are −
In 1916, Henri Fayol defined management control as follows −
“Control of an undertaking consists of seeing that everything is being carried out in accordance with the plan which has been adopted, the orders which have been given, and the principles which have been laid down. Its object is to point out mistakes in order that they may be rectified and prevented from recurring”
There are various modes of control. The most influential ones are the following −
Personal controls are achieved via personal contact with the subordinates. It is the most widely used type of control mechanism in small firms for providing direct supervision of operational and employee management. Personal control is used to construct relationship processes between managers at different levels of employees in multinational companies. CEOs of international firms may use a set of personal control policies to influence the behavior of the subordinates.
These are associated with the inherent bureaucracy in an international firm. This control mechanism is composed of some system of rules and procedure to direct and influence the actions of sub-units.
The most common example of bureaucratic control is found in case of capital spending rules that require top management's approval when it exceeds a certain limit.
Output Controls are used to set goals for the subsidiaries to achieve the targeted outputs in various departments. Output control is an important part of international business management because a company's efficiency is relative to bureaucratic control.
The major criteria for judging output controls include productivity, profitability, growth, market share, and quality of products.
Corporate culture is a key for deriving maximum output and profitability and hence cultural control is a very important attribute to measure the overall efficiency of a firm. It takes form when employees of the firm try to adopt the norms and values preached by the firm.
Employees usually tend to control their own behavior following the cultural control norms of the firm. Hence, it reduces the dependence on direct supervision when applied well. In a firm with a strong culture, self-control flourishes automatically, which in turn reduces the need for other types of control mechanisms.
There are seven major approaches for controlling a business organization. These are discussed below −
The market approach says that the external market forces shape the control mechanism and the behavior of the management within the organizational units of an MNC. Market approach is applied in any organization having a decentralized culture. In such organizations, transfer prices are negotiated openly and freely. The decision-making process in this approach is largely directed and governed by the market forces.
The rules approach applies to a rules-oriented organization where a greater part of decision-making is applied to strongly impose the organizational rules and procedures. It requires highly developed plan and budget systems with extensive formal reporting. Rules approach of control utilizes both the input and output controls in an organized and exclusively formalized manner.
In organizations that follow the corporate culture approach, the employees internalize the goals by building a strong set of values. This value-syndication influences the operational mechanism of the organization. It has been observed that even when some organizations have strong norms of behavioural controls, they are informal and less explicit. Corporate culture approach requires more time to bring the aimed changes or adjustments in an organization.
Reporting culture is a powerful control mechanism. It is used while allocating resources or while the top management wants to monitor the performance of the firm and the employees. Rewarding the personnel is a common practice in such approaches of control. However, to get the maximum out of reporting approach, the reports must be frequent, correct, and useful.
Visiting the subsidiaries is a common control approach. The disadvantage is that all the information cannot be exchanged via visits. Corporate staff usually and frequently visit subsidiaries to confer and socialize with the local management. Visits can enable the visitors to collect information about the firm which allows them to offer advice and directives.
Management performance Evaluation is used to evaluate the subsidiary managers for the subsidiary's performance. However, as decision-making authority is different from the operational managers, some aspects of control cannot be managed via this approach. Slow growth rates of firms and risky economical and political environment requires this kind of approach.
Cost and Accounting Comparisons is a financial approach. It arises due to the difference in expenditure among various units of the subsidiaries. A meaningful comparison of the operating performances of the units is necessary to get the full output from this approach. Cost accounting comparisons use a set of rules that are applicable to the home country principles to meet local reporting requirements.
Control mechanisms can never be uniform in every country. International firms have to face severe constraints based on which they modify their control mechanisms in every country. Here is a list of major constraints that affect an organization in setting its managerial control mechanism −
It is an important part of every business organization to measure the performance of both employees and the firm as a whole. We will, however, restrict our focus on organizational performance measurement. The standard process of measuring the performance of a global business is as shown in the following diagram −
The prominent features of each stage are discussed below.
Standard of performance is applicable to cost, quality, and customer service. More than one standard may be necessary because they reflect expected levels of various units of the manufacturing performance. This includes process yields, product quality, overhead spending levels, etc.
To measure actual performance, the use of automated data collection systems is suggested to gather information. A standard cost measurement system includes man-hours, machine-hours, and material usage.
There must be some set standards to compare the actual performance. The standards should be realistic and achievable. The results of the comparison can be used to apply further rules, targets, and reporting.
Constructing and implementing an action plan is key to success. Variance analysis can be used to detect potential problem areas. Finding the source of the problem and improving the situation may be useful. Its effectiveness depends on the management's adaptability to the information obtained.
Review and revise is an important step, as modern organizations are in a constant state of change. If the variances are significant, the performance standards can be adjusted. Effective Performance Measurement must be integrated with the overall strategy. This step requires various financial and non-financial indicators.
For getting an effective performance measurement system −
A performance evaluation system must contain periodic review of operations so that the objectives of the firm are accomplished. It is important to have the accounting information to evaluate domestic and foreign operations' costs and profitabilities.
It is not all that simple to measure the performance of an individual, a division, a subsidiary, or even a company as a whole. It is a lengthy and hectic process. The objectives of performance evaluation are to −
ROI (Return on Investment) − ROI is the most common method to evaluate the performance of an international firm. It shows the relationship between profit to invested capital and encompasses almost all important factors related to performance. An improved ROI can act as a logical motivator of the managers.
Budget as Success Indicator − Budget is an accepted tool for measuring and controlling the operations. It is also used to forecast future operations. A budget is a clearly expressed set of objectives that guide the managers to set their individual performance standards. A good local or regional budget helps the company to facilitate its strategic planning process smoothly.
Non-Financial Measures − The major non-financial measures that can be used to evaluate performance are − Market Share, Exchange Variations, Quality Control, Productivity Improvement, and Percentage of Sales.
Performance evaluation systems can be of the following types −
Production is the core of any business organization having its operations on an international scale. International business firms must look closely at production factors for profitability and sustainability. Production refers to manufacturing, acquiring, and developing products for the business market.
There are three major areas an international organization must focus on in order to increase its production efficiency. They are −
We will look into each of them in the following sections.
Facility Location refers to the appropriate location for the manufacturing facility; it should have optimum access to customers, workers, transportation, etc.
The main goal of an organization is to satisfy and delight customers with its product and services. The manufacturing unit plays a major role in this direction. One of the most important factors for determining the success of a manufacturing unit is its location.
To get commercial success and retain its competitive advantage, any international business firm would pay attention to the following critical factors while choosing its business location −
Scale is the synonym for size in business. Business organizations can leverage on their size by making dealings, favorable terms, and volume-discounts with other firms.
Operating the business at scale means allocating and optimizing resources to get the greatest results and volume in all market segments. It is linked with optimization, not duplication, of efforts. Keeping costs under control while increasing the sales offers the opportunity for reducing costs and acquiring new customers, and more market share, without lowering the average margin (economies of scale).
Small-Scale Business − Also termed a small business, a small-scale business employs a small number of workers and does not have a high volume of sales. The U.S. Small Business Administration states that small-scale businesses have fewer than 500 employees. Financially, a non-manufacturing small-scale business is one that earns below or equal to $7 million a year.
Large-Scale Business − Based on the home country and the industry, a small-scale company usually employs between 250 and 1,500 people. Anything above that is a large-scale company.
Economies of Scale − It refers to the cost advantages that a business obtains due to its size, output, or scale of operation. Usually, cost per unit generally decreases with the increasing scale, as fixed costs are spread out over more products.
It is a cost incurred by a company in manufacturing a product or delivering a service. Production costs depend on raw material and labor. To determine the cost of production per unit, the cost of production is divided by the total number of units produced. It is important to know the cost of production to better price an item or a service and to decide its total cost to the company.
Cost of production includes both Fixed and Variable Costs.
Make-or-buy decisions are taken to arrive at a strategic choice between manufacturing an item internally (in-house) or buying it externally (from an external supplier). The buy side of the decision is also known as outsourcing. Make-or-buy decisions of a firm is important when it has developed a product or part – or significantly modified a product or part – but is having problems with the current suppliers, or has decreasing capacity or changing demand.
The major reasons for manufacturing an item in house includes the following −
Buy decisions are applicable under the following conditions −
Globalization is changing the way the international firms used to deal with their supply chain networks. This is happening because companies are actively seeking to compete and gain market share. Global companies nowadays manage multiple supply chains, not only to deliver goods on time, but to meet diverse customer and supplier wants related with pricing and packaging. Personalizing the offerings for various customer clusters is necessary to address these issues.
Volatility of markets, economic contractions and mediocre recovery cycles influence distribution, manufacturing, invoicing and sourcing. Reaching out to encompass new markets brings complex taxation, invoicing and localization burdens. Moreover, dispersed segments of markets ask for different pricing models and services. Hence, optimizing the supply chain is necessary to stay competitive.
Many businesses tend to apply outdated processes and technologies to global supply chain operations. Many times, available systems are not compatible with the modern demands. Lack of understanding of current situations and contemporary supply chain can be disastrous. It can result in a rise in costs and decreased efficiency. With the expansion of logistics, the ability to quickly estimate the cost and service implications must increase.
An optimized global supply chain can help a company in the following areas −
Global Marketing combines the promotion and selling of goods and services with an increasingly interdependent and integrated global economy. It makes the companies stateless and without walls.
The 4P's of Marketing − product, price, place, and promotion − pose many challenges when applied to global marketing. We take each one of the P's individually and try to find out the issues related with them.
The product and service mix is one of the most important ingredients for the global marketer today. The diverse demand for products and services in the era of globalization is mind-blowing. Presence of industrialized and emerging markets, increasing purchasing power, and the growth of Internet has made the customers aware, smart, and more demanding. The result is a greater competition between firms.
Here are the important factors to consider when going global with a product or service.
The global consumer makes purchasing decisions to get the best quality products at the most affordable price. They have information available in abundance, thanks to the Internet. Therefore, innovation takes center-stage to gain adequate attention from potential consumers.
A global marketer must be flexible enough to modify the attributes of its products in order to adapt to the legal, economic, political, technological or climatic needs of a local market. Overall, global marketing requires the firms to have available and specific processes for product adaptation for success in new markets.
Culture can differentiate a standardized product from an adapted one. Making cultural changes in product attributes is like introducing a new product in your home country. The product should meet the needs, tastes, and patterns that are permitted by the market culture.
Lastly, it is essential to understand that a product or service is not just one “thing.” It should be seen as a part of the whole marketing mix so that a great synergy can be built among different strategies and actions.
Pricing is a crucial part of the marketing mix for international firms. Pricing techniques play a critical role when a company wants to penetrate into a market and expand its operations.
The most important factors that decide the prices are labelled the 4 C's −
Global firms face the following challenges while pricing their products and services to suit the requirements of international market −
Promotion comes into picture when a global company wants to communicate its offering to potential customers. How an organization chooses to promote its products and services can have a direct and substantial impact on its sales.
Advertising can create a popular culture and a culture may influence the ad as well. Culture's impact in advertising is prevalent, especially in culturally-sensitive issues like religion and politics.
Cultural Effect Procter & Gamble had problems advertising the Pert Plus shampoo in Saudi Arabia, where only veiled women can be shown in TV commercials. The company had to show the face of a veiled woman, and the hair of another from the back.
Cultural Effect
Procter & Gamble had problems advertising the Pert Plus shampoo in Saudi Arabia, where only veiled women can be shown in TV commercials. The company had to show the face of a veiled woman, and the hair of another from the back.
A global marketer can consider budgeting rules such as percentage of sales (creating budget as a percentage of sales revenues), competitive parity (taking competitor's ad spending as a benchmark), or objective-and-task (treating promotional efforts to achieve stated objectives). Global markets use three approaches to reach allocation decisions −
When global marketers choose a standardized approach, the same global campaign is applied throughout all countries.
The NIH Syndrome: A Barrier to Standardized Approach “Not Invented Here” syndrome occurs when agencies or business subsidiaries reject using a standardized campaign simply because they did not invent or come up with the campaign.
The NIH Syndrome: A Barrier to Standardized Approach
“Not Invented Here” syndrome occurs when agencies or business subsidiaries reject using a standardized campaign simply because they did not invent or come up with the campaign.
Global media decisions are a big concern for global firms. The media buying patterns vary across countries. A global marketer must find the best media channels in a market.
Foreign regulations on advertisements may be present in a specific country. Research of the laws in the country of operation is necessary before developing a campaign, to avoid legal implications and waste of time and money.
Choosing an ad agency may prove more effective due to their understanding of the country and market they are doing business in.
Sales events, direct marketing, sponsorships, mobile marketing, product placement, viral marketing, and public relations and publicity are also applicable.
A GIMC is a system of promotional management that coordinates global communications – horizontally (from country to country) and vertically (promotion tools). GIMC is meant to harmonize the promotional and communication disciplines in every way. All communication vehicles may be integrated so that they convey the single idea to all concerned in a unified voice.
In order to be successful in a global market, a marketer must make its products and accessible to customers at all costs. Distribution channels make up the “place” in the 4 P's of the marketing mix (along with Product, Price, and Promotion).
The distribution process deals with product handling and distribution, the passage of ownership (title), and the buy and sell negotiations.
Negotiations take place between the producers and the middlemen and then between the middlemen and the customers.
Traditionally, import-oriented distribution structures relied on a system where importers controlled a fixed supply of goods. The marketing was based on the idea of limited suppliers, high prices, and smaller number of customers. Today, the import-oriented model is hardly used. Channel structures have become more advanced with overall development.
To understand a foreign distribution system, marketers should never believe that it is the same as the domestic one. Many distribution patterns exist in retailing and wholesaling. Size, patterns, direct marketing, and the resistance to change affect the composure of distribution channels.
The channel process starts with manufacturing and ends with the final sale to the customer. It is most likely to counter many different middlemen in the process. There are three types of middlemen in distribution channels −
Channel of distribution or middlemen selection must precede the understanding of the characteristics of the foreign market and the established common system there. The major factors to consider while choosing a particular channel are −
The following illustration depicts the global marketing mix of McDonald's. It shows how McDonald's varies its marketing strategy according to the requirements of different local markets.
The proliferation of MNCs began 200 years back, but then, foreign investments were quite limited. Investments were made through portfolio and long-term Greenfield or joint venture investments were low. Globalization, however, has led MNCs to become more dominant players in the global economy.
The end of the cold war that brought the idea of liberalization of the developing markets and opening of their economies has played a major role in international investments. With the vanishing of foreign investment barriers, privatization of the state economic organizations and development of FDI policies, MNCs have started investing aggressively.
FDI has become by far the single largest component of the net capital inflows. It also has effects on the human capital of the economies. Countries benefit substantially from the investment. Investments in developing countries have integrated the developing economies with other countries of the world. This is often referred to as economic openness.
Note − Seventy percent of world trade is controlled by just 500 of the largest industrial corporations. In 2002, the combined sales volume of the top 200 companies was equivalent to 28% of the overall GDP of the world.
International corporations have shaped the global economy in the 20th century. Now, any of the world's Top 100 or global companies exceed the GDP of many nations. The MNCs are also creating most of the output and employment opportunities in the world.
The MNCs have started building local relationships and establishing a strong local presence through FDI's to benefit from different advantages, where the countries focusing on getting more FDI investment have become busy with giving MNCs more freedom and assistance in seeking economic cooperation with them.
As the importance MNCs in the global economy increases, companies have been both criticized and appreciated. The growing shares of MNCs in developing economies and the impact of their decisions in overall economic conditions of the host countries have been under review.
MNCs want to minimize the cost and maximize their economies of scale. They invest in different locations to operate better in their home base. It motivates firms to expand and invest abroad and become multinational. Looking for new markets, want of cheaper raw materials, and managerial knowledge or technology and cheaper production are the major motivations for global expansion.
International companies want the perfect mix of the factors for finding “where to invest”. Labor costs and skill and educational levels of workforce, the purchasing power of the market and proximity to other markets are considered while making an investment decision.
Funding is the act of acquiring resources, either money (financing) or other values such as effort or time (sweat equity), for a project, a person, a business, or any other private or public institution. The soliciting and gathering process of funds is called fundraising.
Economically, funds are invested as capital by lenders in the markets and are taken up as loans by borrowers. There are two ways how capital can end up at the borrower
An international business depends on its capital structure to find the best debt-to-equity ratio of the funding to maximize value. There must be a balance between the ideal debt-to-equity ranges to minimize the firm's cost of capital. Theoretically, debt financing generally is least costly due to its tax deductibility. However, it is not the optimal structure as a company's risk generally increases as debt increases.
There are three types of risks associated with foreign exchange −
Internal techniques to manage/reduce forex exposure include the following −
Transaction risks can also be hedged using a range of financial products −
Recruitment is a process of attracting a pool of qualified applicants. Selection is choosing applicants from this pool whose qualifications match the job requirements most closely. Traditionally, there are three types of employees −
Staffing and managing approaches strongly affect the type of employee the company looks for. In Ethnocentric approach, the parent country nationals are chosen for headquarters and subsidiaries. In polycentric approach, host country nationals work in the subsidiaries, while parent country nationals are chosen for headquarters. An organization with a geocentric approach chooses employees purely based on talent, regardless of their origin type.
A balance between internal organizational consistency and local labor practices policy is a goal during recruitment. People in achievement-oriented nations consider skills, knowledge, and talents while hiring a new employee.
The overall aim of the development function is to provide adequately trained personnel in a company as well as to contribute to better performance and growth with their work. At the international level, human resource development function manages −
Creation and transfer of international human resource development programs may be carried out in two ways −
In companies, performance evaluation is most frequently carried out for administration or development purpose.
For administration purposes, performance evaluation is done when the decisions on work conditions of employees, promotions, rewards and/or layoffs are in question. Development intention is oriented to the betterment of work performance of employees, as well as to the enhancement of their abilities. It is also a way for advising employees regarding corporate behavior.
Performance evaluation can be quite challenging, especially when it carried out at an international level. The international organization must evaluate the employees from different countries. Consistency across subsidiaries for performance comparisons with contrasting cultural background makes the evaluation meaningful. As with other functions, the approach to performance evaluation depends on the organization's overall human resource management strategy.
Expatriates management is one of the most important issues in international business. The most important issues related to Management of Expatriates are the following −
In international companies, the high failure rate of expatriates can be contributed to six factors − career blockage, culture shock, lack of cross-cultural training, an overemphasis on technical qualifications, using international assignments to get rid of problematic employees, and family problems.
Expatriates and their families need time to become familiar with their new environment. The culture shock occurs when after some time, the expatriates find new job conditions unattractive. It usually takes three to six months after arrival, to get out of the culture shock.
After the expatriate completes his assignment and returns home, the work, people, and general environment becomes unfamiliar. The expatriate is generally unprepared to deal with reverse culture shock.
The choice of employee for an international assignment is a critical decision. To choose the best employee for the job, the management should −
Expatriates when trained to prepare for work abroad are more successful. Lack of training can lead to expatriate failure. Cross-cultural training (CCT) is very important. It prepares to live and work in a different culture because coping with a brand new environment can be challenging.
There are three common aspects that determine the remuneration of expatriates. In a home-based policy, employees' remuneration is according to their home countries. The host-based policy sets salaries according to the norms of the host country. Finally, region also effects in determining the remunerations.
Remuneration for foreign employees depends on their relocation − whether it is within their home region or in another region. With this approach, closer to home (within the region) jobs fetch lower remuneration than the away (outside the region) jobs.
Although globalization has brought with it a lot of benefits, it can sometimes have adverse effects as well. In this chapter, we will discuss how a country gets adversely affected by allowing multinationals to flourish.
When two countries get engaged in an international business, one country's economic condition affects the economy of the other country. Large-scale exports also hamper and discourage the developments in industrialization of the importing country. Therefore, the economy of the importing country may feel the heat.
Due to internationalization, all countries come to a single platform of business. As developing countries cannot compete with the developed ones, the growth and development of the developing nations get affected. If the developing countries do not regulate international business, it may be detrimental for their economies.
Globalization has increased the level of competition among countries. Due to intense competition and eagerness to get an upper-hand in exporting more commodities, sometimes the nations may come across unhealthy business circumstances. It may lead to rivalry among nations, diminishing international peace and harmony.
Heavy exporters often undermine the issues of the importing nation. If the importing country depends too much on the imported products, it may turn into a colony. Overt economic and political dependence on the exporting nation coupled with industrial backwardness may harm the importing nation.
Developed countries, due to their economic prowess, may try to exploit the developing and third-world countries for their business motives. As the prosperous and dominant nations usually tend to regulate the economy of poor nations, international business may lead to exploitation of developing countries by the developed countries.
International businesses may also create various legal problems. It is a fact that there are many legal aspects of international business. The international business organizations may sometimes neglect these laws and indulge in illegal activities. Varied legal regulations and customs formalities are followed by different countries. This affects export and import and general trade. Legal problems are common in many nations.
There are many cultural effects of internationalization. A multinational company may not be vigilant enough to pay attention to host country's cultural, norms. As cultural values and heritages differ among countries, there are many aspects of international organizations, which may not be suitable for the host country. The atmosphere, culture, tradition, etc., get affected due to this.
Dumping is a real danger. As the industrially mature economies can produce and sell the products in cheaper rate than the home country, the products may be dumped in the less developed nations. This creates an unfair competition in the local markets. People often go for the cheaper priced items, being unaware that their own country and the industries may get destroyed due this type of dumping policies.
As exporting brings enough profit, sometimes, traders may prefer to sell their products in a foreign country. The exporters may sell the good quality products in foreign nations even when there is a demand in the local markets. This often results in shortage of quality goods within the home country.
International business poses a threat to the survival of small-scale industries. As the big companies have enough muscle power, they do not let the start-ups compete and add value. Due to such kind of unfair foreign competition and unrestricted imports, the start-ups in the home country find it difficult to survive.
In this chapter, we will discuss the types of organizational conflicts and how an international business concern manages its internal conflicts.
Conflicts in an organization can arise due to multiple reasons, based on which they can be categorized into different types.
Conflicts may be personal (intrapersonal and interpersonal) and organizational. Organizational conflicts can be intra-organizational and inter-organizational. Inter-organizational conflicts occur between two or more organizations. Intra-organizational conflicts can be further divided into intergroup and intragroup conflict.
Conflicts may be substantive and affective. An affective conflict deals with interpersonal aspects. Substantive conflict is also called performance, task, issue, or active conflict. Procedural conflicts can include disagreements about the process of doing a job.
Conflicts can be constructive or destructive, creative or restricting, and positive or negative. Constructive conflicts are also known as functional conflicts, because they support the group goals and help in improving performance. Destructive conflicts are also known as dysfunctional conflicts, they prevent people from reaching their goals. Destructive conflicts take the attention away from other important activities, and involve negative behaviour and results, such as name-calling.
Conflicts may be distributive and integrative. Distributive conflict is approached as a distribution of a fixed amount of positive outcomes or resources. In an Integrative conflict, groups see the conflict as a chance to integrate the needs and concerns of both groups. It has a greater emphasis on compromise.
Conflicts may be competitive and cooperative. Competitive conflict is accumulative. The original issue that began the conflict becomes irrelevant. Costs do not matter in competitive conflict. A cooperative conflict is of interest-based or integrative bargaining mode; it leads the parties involved to find a win-win solution.
If some people are granted certain rights by law, contract, agreement, or established practice and when that right is denied, it leads to a conflict. These conflicts are settled by law or arbitration. In conflict of interests, a person or group may demand some privileges, no law or right being existent. Negotiation or collective bargaining solves this type of conflict.
In an international business, there can be various factors behind a conflict −
Organizations face a great deal of conflict within and externally while doing business. Experts agree that managing conflicts can be actually quite challenging. International businesses use five distinct forms of solutions to solve conflicts. These are − avoidance, accommodation, competition, compromise, and collaboration.
Borisoff and Victor identify five steps in the conflict management process that they called the “five A's” of conflict management − assessment, acknowledgement, attitude, action, and analysis.
International negotiations need the parties to follow legal, procedural, and political regulations of more than one nation. These laws and procedures are often inconsistent, or even directly opposing in nature. International business agreements should look into these differences. Arbitration clauses, specification of the governing laws, and tax havens should be well defined in the agreements. We have listed here the most common attributes and elements that must be taken into account while doing international negotiations.
The role of international agencies in the negotiation process is indispensable. The agencies play a key role in finding an amicable and mutually beneficial negotiation. Organizations like the WTO have a big role in making the MNCs find a good solution to their international disputes. The requirement of such agencies become critical mainly in three areas.
In many cases, business negotiations occur in a situation and place that is unfamiliar to the organization. These negotiations lead the managers out of their comfort zone and into unfamiliar territory. Often, the managers may not be quite knowledgeable in legal and cultural matters.
In such situations, the international agencies can play a big role. If the organizations' managers are unsure of the issues under discussion or do not know the perfect rules of the game, an agency may be quite helpful in offering a helping hand.
If the negotiation process takes place in an unfamiliar territory, the customs and rules are generally unknown to the key managerial decision makers. In this case, an international agency may be handy.
This also applies when the managers of an organization are under a tight deadline. When these managers don't have the time and resources to meet with the other parties in a distant location or cannot participate in all steps in the process, they are quite unlikely to represent themselves well. In this situation also, an international agency may fill the gap.
If the organization is dreading to have negotiations with a party they had clashed earlier, then an international agency may play a key role. The agency may calm both the parties and ensure that the business negotiation remains a matter of business.
This is a good strategy in case of contentious diplomatic contexts, such as the negotiation of a cease-fire between warring armies. In the business world, if the rancour between a company and another over a business contract is deep-seated and ongoing, both sides may get benefits by employing experienced agents to move the negotiation process forward.
If the business thinks that they won't be able to pursue their business interests effectively – especially when there are chances of aggressive behavior on the other side, an international agency may bridge the gap in finding an amicable and win-win negotiation.
As political, legal, economic, and cultural norms vary from nation to nation, various ethical issues rise with them. A normal practice may be ethical in one country but unethical in another. Multinational managers need to be sensitive to these varying differences and able to choose an ethical action accordingly.
In an international business, the most important ethical issues involve employment practices, human rights, environmental norms, corruption, and the moral obligation of international corporations.
Ethical issues may be related to employment practices in many nations. The conditions in a host country may be much inferior to those in a multinational's home nation. Many may suggest that pay and work conditions need to be similar across nations, but no one actually cares about the quantum of this divergence.
12-hour workdays, minimal pay, and indifference in protecting workers from toxic chemicals are common in some developing nations. Is it fine for a multinational to fall prey to the same practice when they chose such developing nations as their host countries? The answers to these questions may seem to be easy, but in practice, they really create huge dilemmas.
Basic human rights are still denied in many nations. Freedom of speech, association, assembly, movement, freedom from political repression, etc. are not universally accepted.
South Africa during the days of white rule and apartheid is an example. It lasted till 1994. The system practiced denial of basic political rights to the majority non-white population of South Africa, segregation between whites and nonwhites was prevalent, some occupations were exclusively reserved for whites, etc. Despite the odious nature of this system, Western businesses operated in South Africa. This unequal consideration depending on ethnicity was questioned right from 1980s. It is still a major ethical issue in international business.
When environmental regulation in the host nation is much inferior to those in the home nation, ethical issues may arise. Many nations have firm regulations regarding the emission of pollutants, the dumping and use of toxic materials, and so on. Developing nations may not be so strict, and according to critics, it results in much increased levels of pollution from the operations of multinationals in host nations.
Is it fine for multinational firms to pollute the developing host nations? It does not seem to be ethical. What is the appropriate and morally correct thing to do in such circumstances? Should MNCs be allowed to pollute the host countries for their economic advantage, or the MNCs should make sure that foreign subsidiaries follow the same standards as set in their home countries? These issues are not old; they are still very much contemporary.
Corruption is an issue in every society in history, and it continues to be so even today. Corrupt government officials are everywhere. International businesses often seem to gain and have gained financial and business advantages by bribing those officials, which is clearly unethical.
Corruption in Japan In the 1970s, Carl Kotchian, an American business executive who served as the president of Lockheed Corporation, paid $12.5 million to Japanese agents and government officials to sell Lockheed's TriStar jet to All Nippon Airways. After the case was discovered, U.S. officials charged Lockheed with falsification of its records and tax violations. The revelations created a scandal in Japan as well. The ministers who took the bribe were charged, and one committed suicide. It even led to the jailing of Japan's prime minister. The Japanese government fell in disgrace, and the Japanese citizens were outraged. Kotchian had, without doubt, engaged in unethical behavior.
Corruption in Japan
In the 1970s, Carl Kotchian, an American business executive who served as the president of Lockheed Corporation, paid $12.5 million to Japanese agents and government officials to sell Lockheed's TriStar jet to All Nippon Airways. After the case was discovered, U.S. officials charged Lockheed with falsification of its records and tax violations.
The revelations created a scandal in Japan as well. The ministers who took the bribe were charged, and one committed suicide. It even led to the jailing of Japan's prime minister. The Japanese government fell in disgrace, and the Japanese citizens were outraged. Kotchian had, without doubt, engaged in unethical behavior.
Some of the modern philosophers argue that the power of MNCs brings with it the social responsibility to give resources back to the societies. The idea of Social Responsibility arises due to the philosophy that business people should consider the social consequences of their actions.
They should also care that decisions should have both meaningful and ethical economic and social consequences. Social responsibility can be supported because it is the correct and appropriate way for a business to behave. Businesses, particularly the large and very successful ones, need to recognize their social and moral obligations and give resources and donations back to the societies.