What is different about operating abroad? Culture and Politics.
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Transcript of What is different about operating abroad? Culture and Politics.
Operating Margins for 147 of the Fortune Global 500
0
4
8
12
1990 1995 2001
Domestic
Foreign
%
%
%
%
Source: Gestrin, OECD
What is different about operating abroad?
• Geographic distance• Different economic conditions and
currency• Different language, culture, and
institutions• Different governments
Economic conditions and currency
• Level of economic development– Income inequality
• Currency– Foreign exchange risk if currency is not at
Purchasing Power Parity
Big Mac Index of Currencies
-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70
China
Singapore
Japan
South Korea
Euro area
UK
Switzerland
Source: Economist, based on July 2008 prices
% Undervalued Relative to US $ % Overvalued Relative to US $
Real trade-weighted dollar exchange rateppp=100
50
60
70
80
90
100
110
120
130
1975 77 79 81 83 85 87 89 91
Source: Goldman Sachs
Why persistent deviations from PPP?
• PPP assumes arbitrage equalizes exchange rates
• Barriers to arbitrage prevent convergence– Trade barriers, transport costs, tax differences – Untraded inputs
• Price of untraded inputs slow to convergeHence exchange rates can deviate from PPP for long periods
• Most efficient way to hedge against persistent PPP deviations is local production/procurement
Culture and Politics
HeadquartersSubsidiary manager
Subsidiary employees
Local Firms
Customers
Government Press
1
3
2
1
2
4
1. Communication of goals and directives/interpretation of behavior2. Communication/Negotiation3. Communication/negotiation4. Marketing mix adaptation
Home Country Host Country
Cost of foreignness: the dumb foreigner syndrome
• Management
• Politics
• Marketing and communication
• Business takes place within societal rules• These rules determine how the game is
played and who wins and loses• Rules can be explicit (laws) or implicit
(customs)• Rules both affect and are affected by
business• This is true both at home and abroad, but
foreigners are at a disadvantage because they do not know, cannot impact, and often cannot accept
The social group in which rules are enforced can vary – family– Tribe– Region/province– country– Multicountry grouping (EU)– world
The rules of the game determine..
• Employer-employee relationships (management costs)
• Firm-firm relationships
• Firm-government relationships
• Firm-customer relationships
We will now look at…• Cultural differences and their impact on
intra and inter-organizational relationships
• Cultural and institutional differences and their impact on relationships with non-business actors (political risk)
• Cultural and environmental differences and their impact on relationships with consumers (product and service adaptation)
Different Language and Culture
• Language– Spoken and silent
– Impact on international business
• Culture– Dimensions of culture
– Impact on international business
EncoderSender
Culture Choice of words
Choice of symbols
Meaning
Seller’s field of experience
Seller in country A
Decoder Receiver
CultureChoice of wordsChoice of symbols Understanding
Buyer in country B
Message
Medium
Buyer’s field of experience
Meanings of color China Korea Japan USA
Blue High quality Powerful
High quality
Adventurous
Sincere
Trustworthy
Sincere **
Trustworthy **
High quality *
Dependable
Dependable **
High quality *
Sincere
Trustworthy
Expensive
Powerful
Black Powerful **
Expensive
High quality
Dependable
Trustworthy
Powerful *
Expensive
Powerful *
Expensive
Dependable
Powerful **
Expensive
Red Happy **
Love *
Adventurous *
Love **
Good-tasting
Adventurous
Love **
Good-tasting
Happy
Adventurous
Love **
Adventurous
Happy
Good-tasting
Inexpensive
Yellow Happy
Pure **
Progressive*
Happy **PureGood-tasting
Dependable
Happy **
Pure*
Good-tasting
Happy
Pure
Good-tasting
Green Pure
Trustworthy Dependable Sincere
Pure 纯洁 *Adventurous Sincere
Trustworthy
Pure Good-tastingAdventurous
Good-tasting
Adventurous
Grey Inexpensive * Inexpensive Expensive
High quality
Dependable
** 50% or more of respondents made this association.
* 30-49% of respondents made this association.
All others, 20-29% of respondents made this association.
Source: Jacobs/Keown/Worthley/Ghymn (1991), p. 24.
Hofstede’s Cultural Dimensions
• Surveyed 116,000 employees from 70 countries
• Highlighted four dimensions of culture– Power distance– Uncertainty avoidance– Individualism– Masculinity/femininity
Power distancethe extent to which less powerful members of institutions and
organizations accept that power is distributed unequally
High power distance
Managers make decisions autocratically
Close supervision is appreciated by subordinates
Employees fear to disagree with their boss
Employees put high value on conformity
Low power distance
Managers consult with subordinates
Close supervision is resented by subordinates
Employees disagree with their boss
Managers can seek help from employees
IndividualismTendency of people to look after themselves and their immediate family
only
High Individualism
Everybody is expected to take care of himself/herself
Everyone is responsible for his/her fate
Emotional independence of the individual from the organization
Emphasis on individual initiative and achievement
Low Individualism
Extended families and clans protect individuals in exchange
for loyalty
Belief in group decisions
Emotional dependence or the individual on the organization
Emphasis to belonging to organizations
Masculinity/Feminity
A masculine society is one where the dominant values in society are success, money, and things
Masculinity
Great importance put on earnings, recognition,
advancement, and challenge
Feminity
Importance put on relationships and cooperation
Uncertainty Avoidance
Extent to which people feel threatened by ambiguous situations
High Uncertainty Avoidance
Concern with security in life
Uncertainty is a threat that must be fought
Belief in experts and their knowledge
Strong need for consensus
Low Uncertainty Avoidance
Willingness to take risks
Uncertainty more accepted
Belief in generalist and common sense
More acceptance of dissent
Values of Hofstede’s Dimensions
Power Distance
Individualism Masculinity Uncertainty Avoidance
Brazil 69 38 49 76
China 58 17 45 69
Germany 35 67 66 65
Japan 54 46 95 92
Mexico 81 30 69 82
Netherlands 38 80 14 53
Norway 31 69 8 50
U.K. 35 89 66 35
U.S. 40 91 62 46
ARA
ARG
AUL
AUT
BEL
BRA
CAN
CHL
COL
COS
DEN
EAF
EQA
SAL
FIN
FRA
GER
GBR
GRE
GUA
HOK
IND
IDO
IRA
IRE
ISR
ITA
JAM
JPN
KOR
MAL
MEX
NET
NZL
NOR
PAK
PAN
PER
PHI
POR
SIN
SAF
SPA
SWE
SWI
TAI
THA
TUR
USA
URU
VEN
WAF
47
101316192225283134374043464952555861646770737679828588919497
100103106109112115
0 18 36 54 72 90 108
Masculinity Index (MAS)
Unc
ert
ain
ty A
void
anc
e I
nd
ex
(UA
I)
Strong uncertainty avoidance Feminine
Strong uncertainty avoidance Masculine
Weak uncertainty avoidance Feminine
Weak uncertainty avoidance Masculine
Masculinity-Femininity and Uncertainty Avoidance (for 50 countries and 3 regions)
WAF
VEN
URU
USA
TUR
THA
TAI
SWI
SWE
SPA
SAF
SIN
POR
PHI
PER
PAN
PAK
NOR
NZL
NET
MEX
MAL
KOR
JPN
JAM
ITA
ISR
IRE
IRA
IDO
IND
HOK
GUA
GRE
GBR
GER
FRA
FIN
SAL
EQA
EAF
DEN
COS
COLCHL
CAN
BRA
BEL
AUT
AUL
ARG
ARA
4
12
20
28
36
44
52
60
68
76
84
92
100
108
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110
Power Distance Index (PDI)
Unc
erta
inty
Avo
idan
ce In
dex
(UA
I)
Small power distance Strong uncertainty avoidance Feminine (well-oiled machine)
Power Distance and Uncertainty Avoidance (for over 50 countries and 3 regions)
Large power distance Strong uncertainty avoidance
(pyramid of people)
Small power distance Strong uncertainty avoidance(vintage market)
Large power distanceWeek uncertainty avoidance
(family)
WAF
VEN
URU
USA
TUR
THA
TAI
SWISWE
SPA
SAF
SIN
POR
PHI
PERPAN
PAK
NOR
NZL
NET
MEX
MAL
KOR
JPN
JAM
ITA
ISR
IRE
IRA
IDO
IND
HOK
GUA
GRE
GBR
GER
FRA
FIN
SAL
EQA
EAF
DEN
COSCOL
CHL
CAN
BRA
BEL
AUT
AUL
ARG
ARA
468
10121416182022242628303234363840424446485052545658606264666870727476788082848688909294
5 22 39 56 73 90 107
Power Distance Index (PDI)
Ind
ivid
ua
lism
Ind
ex
(ID
V)
Small power distance High individualism
Large power distance High individualism
Small power distanceLow individualism
Large power distanceLow individualism
Power Distance and Individualism-Collectivism (for 50 countries and 3 regions)
Japanese
Arab
Greek
Spanish
Italian
English
French
American
Scandinavian
German
German-Swiss
High-context culture
Low-context cultures
Many people lack cultural self-awareness
• “We are the world”– Middle Kingdom– The World (World Series)
• Everybody is like us (or should be)!
• Just be sincere and it will show through
Cultural frictions are a major, but underestimated, management
problem in international business
They greatly impair the implementation of global strategies– global marketing coordination– technology transfer– Joint ventures and mergers and acquisitions
• Unclear that cultures are converging
• Management practices are not universal – Accounting
– Motivation techniques
– Decision making
Managers in Latin American affiliates of MNEs (as percent of total managers)
US MNEs European MNEs
Japanese MNEs
Parent-Country Nationals
44 78 83
Host-Country Nationals
47 16 17
Third-Country Nationals
9 5
Executive pay*1996, $000s
0
200
400
600
800
Variable compensationFixed compensation
Source: Towers Perrin *Total remuneration for chief executive officer
Adaptation problem is harder with values than with customs
• Customs are explicit and easier to imitate
• Values are implicit and must be inferred
• Ignorance of local values create the most problems– Federal Express in Germany– Mitsubishi and Toyota in US
Coping with cultural differences
• Try to make sense of it
• Sleep over it
• Question friends and colleagues
• It’s not all about you!
• Keep your sense of humor
0,51
1,52
2,53
3,54
4,55
5,56
6,57
3-4
6-9
13-2
446
-48
Time in Months
Degree of Adjustment
Honeymoon
Adjustment
Mastery
Culture Shock
The U-curve of cross-cultural adjustment
SOURCE:
Black, J.S. & M. Mendenhall. 1991.”The U-Curve adjustment hypothesis revisited: A review and theoretical framework.” Journal of International Business Studies, Vol. 22 second quarter, pp. 225-247.
Culture and Politics
HeadquartersSubsidiary manager
Subsidiary employees
Local Firms
Customers
Government Press
1
3
2
1
2
4
1. Communication of goals and directives/interpretation of behavior2. Communication/Negotiation3. Communication/negotiation4. Marketing mix adaptation
Home Country Host Country
Governments…
• Buy and subsidize or penalize
• Regulate (competition, employment, pollution)
• Set standards (technical, health)
• Set tariff and non-tariff barriers
Porter’s strategic framework
• Firms compete on technology, product differentiation, costs, not politics
• The rules of the game are exogenous and given
Political strategies
• Tariffs and quotas: US response to Japanese competition
• Subsidies: ADM and gasohol; subsidies for foreign investment
• Government procurement: MDD in China; M-K and LA metro
• National Security: DP World, Lenovo and IBM PC, CNOOC and Unocal
• Environmental regulations: Venezuelan gasoline
Political strategies
• Know the rules of the game
• Impact the rules of the game
• obtain access
• exert influence• knowledge
• offer support (money, votes, etc.)
• Political rules of the game differ across countries in form and/or in content
• centralized vs. federal
• regulatory vs. incitative (pollution control)
• are often implicit and difficult to fathom
• things that “are not done”
Opacity Index, 2004
0
10
20
30
40
50
60
Fin
land
Unite
d K
ingdom
Denm
ark
Sw
eden
Hong K
ong
US
A
Aust
ralia
Canada
Sin
gapore
Neth
erla
nds
Germ
any
Japan
Taiw
an
Kore
a
Fra
nce
Bra
zil
Pola
nd
Italy
Mexi
co
Russ
ia
India
Nig
eria
Chin
a
Phili
ppin
es
Venezu
ela
Lebanon
Indonesi
a
Country Category OPA
COR LEG ENF ACC REG
Finland 3 11 23 17 9 13
United Kingdom 20 3 25 33 13 19
Denmark 6 15 21 33 19 19
Hong Kong 26 12 14 33 15 20
USA 28 19 27 20 10 21
Australia 19 16 26 33 10 21
Canada 26 17 37 20 16 23
Singapore 15 19 25 50 10 24
Germany 28 14 33 17 32 25
Japan 38 24 31 22 22 28
Taiwan 47 33 20 40 28 34
Korea 61 35 22 30 37 37
Brazil 47 48 32 40 35 40
Poland 63 35 47 40 19 41
Italy 52 32 45 63 24 43
Mexico 65 60 35 33 25 44
Russia 78 44 39 40 31 46
India 74 44 49 30 46 48
Nigeria 80 65 48 0 50 49
China 74 39 39 56 43 50
Philippines 75 56 52 33 36 50
Indonesia 82 54 90 22 49 59
Table: The Opacity Index
Foreigners cannot do
Constrained by home-country rules and public opinion– Corruption– Embargoes– Working conditions
Foreigners have no impact
• Foreigners are outsiders
• Foreigners have fewer contacts
• are outside the network of reciprocity
• Foreigners carry their home flag (+ or -)
• US firms in Arab countries
Firms are exposed to political risk
• In all countries and by all regimes
• For all types of entry modes
• Through many forms of risk
GO
General
Instability
Risk
Transfer
Risk
Ownership/
Control
OperationsRisk
(Expropriation)Risk
STOP STOP STOP STOP
- Revolution?- Subversion?- Turmoil?- External aggression?
- Nationalization?- Intervention?- Requisition?- Coerced sale?- Coerced contract renegotiation?- Contract revocation?
- Import restrictions?- Local content requirements?- Taxation?- Price control?- Foreign staff limits?- Labor codes /strikes?- Export requirements?- Discrimination
- Restrictions on repatriation of dividends, royalties, interest, fees, or capital?- Exchange rates?
nononono
yes yes yes yesChaotic? Too high? Unacceptable
effects onlocal-currency ROI?
Unacceptableeffects onDollar ROI?
Political risk is micro
• Limited value of political risk indices (Euromoney, Institutional investor) – Generally export receipts = solvency risk
What to do?
• Consider the political dimension
• Monitor and stay informed
• Become an insider
• Protect investments
• Consider the political dimension –P&G and Ariel
–Cargill and Indian salt mine
• Monitor and stay informed– Both internal and external sources
Become an insider
• Take joint venture partners
• Hire local managers
• Enlist local stakeholders– directors
– banks
• PR campaigns– Toyota in US, IBM in France