International Management

Managing Political Risk Decision-Making and

Negotiations

Nature of International “Risk”

Three main categories of risk which effect international business managers – Unstable ethnic, religious and military conflicts

Including the types of threats within Political Risk

– Climatic extremes that threaten the health and safety of nonresident travelers

– Topographical extremes that endanger personal safety, communications and transportation.

Significant volume of information is available Requirements of “due dilligence”

– http://www.stern.nyu.edu/globalmacro/Geopolitics/PolRisk.htm– http://www.aon.com/risk-services/political-risk-map2/thank_you.html

Additional Internet Sites http://www.imf.org/ http://www.transparency.org http://www.duke.edu/~charvey/Country_risk/couindex.htm http://lcweb2.loc.gov/frd/cs/cshome.html http://www.economist.com/displayStory.cfm?Story_ID=383472 http://www.intracen.org http://www.itools.com/research-it/research-it.html http://www.access.gpo.gov/su_docs/ http://www.prsgroup.com/yearbook/yearbook.cfm http://www.grai.com/ http://www.ntu.edu.sg/library/stat/statdata.htm http://www.duke.edu/~charvey/Country_risk/pol/pol.htm

Conditions Favoring Corruption

Concentration of decision-making power: non-democratic regimes

Lack of government transparency in decision-making Large amounts of public capital involved in a project Self-interested closed cliques and "old-boy" networks Weak rule of law Poorly-paid government officials An apathetic and uninterested, or gullible and easily

led demos that does not scrutinize the political process sufficiently

From: http://www.answers.com/topic/political-corruption

Government Corruption

5 Most Corrupt Countries (1998 Data)

1. Cameroon

2. Paraguay

3. Honduras

4. Nigeria

5. Indonesia

2009 Corruption Ratings?

http://www.forbes.com/2009/03/18/most-corrupt-countries-bizcountries09-business-washington-corrupt-countries_slide.html

Corruption (2001 Data from Transparency International)

Most Corrupt1. Azerbaijan2. Bangladesh3. Bolivia4. Cameroon5. Indonesia6. Kenya7. Nigeria8. Pakistan9. Russia10. Tanzania11. Uganda12. Ukraine

Least Corrupt1. Australia2. Canada3. Denmark4. Finland5. Iceland6. Luxembourg7. Netherlands8. New Zealand9. Norway10. Singapore11. Sweden12. Switzerland

Rank Country

1. Myanmar

Somalia

2. Iraq

3. Haiti

4. Tonga

Uzbekistan

5. Afghanistan

Chad

Sudan

6. Congo, Democratic Republic

Equatorial Guinea

Guinea

Laos

2007

2009?http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table

Political Risk (From Perc Library)

http://www.asiarisk.com/library5.html

Importance of Degree of difficulty Country political risk of doing business 1. China 68.55 6.33 2. Hong Kong 62.32 3.61 3. Vietnam 56.54 5.75 4. Philippines 56.32 5.83 5. Taiwan 54.20 4.78 6. South Korea 50.24 5.62 7. Thailand 48.70 5.59 8. Indonesia 48.41 6.27 9. Malaysia 42.00 5.35 10. US 32.19 2.89 11. Japan 31.79 4.97 12. Singapore 27.07 3.50

1 Measured as a percentage of total country risk. (Balance of Economic and Political)2 Graded on a zero to 10 scale, with zero being the best grade possible, or an extremely hospitable business environment, and a 10 the worst grade possible, or a very difficult business environment

Macro Analysis of Political Risk

Purpose: To review the major political decisions likely to affect all business conducted in a country– Examples

Tightening controls on flow of foreign currencyBureaucratic legal systemsRequiring foreign investors to establish joint

ventures with local partners

Micro Analysis of Political Risk

Purpose: government policies that influence selected sectors of the economy or specific foreign business– Examples

Industry regulationTaxes on specific types of business activityRestrictive local taxes

Political Risks Transfer Risks - policies that limit the

transfer of capital, payments, production, people, and technology in or out of a country– Tariffs on exports or imports

Operational Risks - policies that constrain the management and performance of local operations– Price controls and financing restrictions

Ownership control risks - polices that inhibit ownership or control of local operations– Foreign ownership limitations

Managing Political Risk (cont.) General Nature of Investment

– Conglomerate investment Type of high-risk investment in which goods or services

produced are not similar to those produced at home

– Vertical investment Production of raw materials or intermediate goods that are to be

processed into final products

– Horizontal investment MNC investment in foreign operations to produce the same

goods or services as those produced at home

Special Nature of Investment– Determined by economic activity, technological

sophistication, and pattern of ownership

Managing Political Risk (cont.)

Quantifying the Variables in Managing Political Risk– Identify important factors and compare the results

from different geographic locales– Factors typically reflect the political and economic

environment

Formulating Appropriate Response– Relative bargaining power

MNC attempts to garner greater bargaining power than the host country

– Proprietary technology not available to the host country is one source of relative bargaining power

Bargaining Power Over TimeB

arga

inin

g P

ower

Low

High

Initialinvestment

Time

Host nation’sbargaining power

Interventionoccurs

Subsidiary’sbargaining power

A

B

C

DE

Fig. 10.3

Managing Political Risk (cont.) Formulating Appropriate Risk (cont.)

– Integrative techniques Help the overseas operation become a part of the host

country’s infrastructure– Produce as much locally using local suppliers– Create joint ventures with local companies– Develop effective labor-management relations

– Protective and defensive techniques Discourage the host government from interfering in

operations Encourage nonintegration of the enterprise in the local

environment– Do little local manufacturing– Limit the responsibility of local people– Conduct all research and development outside of the

country

Integrative and Protective andDefensive Techniques by Firms in

Select Industries

Advancedmanagement skill

United logistic,labor transmission

Low or stable technology

(14,3)

(7,10)

(11,14)

(16,6)

Inte

grat

ive

tech

niq

ues

Low 1

High 20

Moderate 10

Low

Protective/defensive techniquesModerate High

1 10 20

Dynamic high technology

The Nature of Investment

1. Conglomerate investment - The

production of goods or services dissimilar to those produced at home– High risk

2. Vertical investment - production of raw materials or intermediate goods that are to be processed into final products– Moderate risk

3. Horizontal investment - production of goods or services similar to those produced at home– Low risk

A Three-Dimensional Frameworkfor Assessing Political Risk

Transfer Ownershipcontrol

Operational

Low Low Low

High High High

High High High

Low Low Low

II

I

IV

III

V

Special

inve

stmen

ts

Conglomerate

Vertical

Horizontal

Gen

eral

inve

stm

ents

Special Nature of Investment

Economic Activity consists of: – primary sector (agriculture, forestry, etc.)

Highest risk factor

– industrial sector (manufacturing operations)

Lowest risk factor

– service sector (transportation, finance, etc.)Moderate risk factor

Science-based industries High risk factor

Non-science-based industriesLower risk factor

Technological Sophistication

– Wholly owned businesses High risk factor

– Partially owned businesses Lower risk factor

Patterns of ownership

Integrative Techniques

Designed to help overseas operations become part of the host country’s infrastructure– Examples

Developing good relations with host government

Producing products locallyCreating joint ventureParticipating in local research and

development

Protective & Defensive Techniques

Designed to discourage the host government from interfering in operations– Examples

Doing little local manufacturingConducting little local research and

developmentLimiting responsibility of local personnelDiversifying production in a number of

countries

Organizational Consequence of

Internationalization Aircraft Cameras Electronics Computers

Telecommunications

Aerospace

Autos

Synthetic fibers

Cement

Steel

Clothing

Packaged goods

High

Low

Low High

Pressure for Local Responsiveness

Pre

ssu

re f

or

Glo

balizati

on

Initial Division StructureUsed for Initial Entry into International Markets

– Exporting Common first choice for manufacturers of

technologically advanced products Firm can charge premium price due to little

competition

– Subsidiary A common for handling finance-related businesses

or other operations that require an on-site presence from the start

Subsidiaries During the Early Stage of

InternationalizationHome OfficeDepartments

OverseasSubsidiaries

CEO

Production Marketing Finance Personnel

V.P. InternationalOperations

France Japan Egypt Australia Argentina

International Division Structure

Advantages– Takes burden off the CEO

– Receives top management attention

– Promotes overall unified approach

– Develops internationally experienced managers

Disadvantages– Separating domestic and international managers may

cause differing objectives

– Home office may not be able to allocate resources globally, thereby penalizing growth

Home OfficeDepartments

OperatingDivisions

CEO

Production Marketing Finance Personnel

DomesticDivision

DomesticDivision

DomesticDivision

DomesticDivision

InternationalDivision

Australia Japan Italy

OfficeOperations

Marketing Government Relations

International Division Structure

Global Product Division

Advantages– Helps to manage diversity– Able to cater to local needs– Marketing, production, and finance can be co-ordinated

on a product-by-product global basis

Disadvantages– Duplication of facilities and staff personnel – Managers may pursue attractive short-term sites

instead of long-term sites– Managers spend to much time trying to tap local instead

of international markets

Domestic divisions are given worldwide responsibility for product groups

Global Product Division Structure

CEO

Production Marketing Finance Personnel

SouthAmerica

Africa Europe Australia Far East

ProductDivision A

ProductDivision B

ProductDivision C

ProductDivision D

ProductDivision E

Production

Marketing Finance Personnel

Great BritainFranceGermanyItalyNetherlands

Global Area Division

Advantages– Reduces cost per unit– Caters to local markets– Makes rapid decisions to accommodate environmental

changes

Disadvantages– Difficulty reconciling a product emphasis with

geographic orientation– Ignores new research and development by division

groups

Based on geographic rather than product orientation

Global Area Division Structure

Home OfficeDepartments

OperatingDivisions

CEO

Production Marketing Finance Personnel

NorthAmerica

SouthAmerica Europe Asia Africa

Great BritainFranceGermanyItalyNetherlands

Global Functional Division

Advantages– Emphasizes functional expertise

– Tight centralized control

– Relatively lean managerial staff

Disadvantages– Difficulty co-coordinating manufacturing and

marketing

– Difficulty managing multiple product lines

– Only CEO can be held accountable for profits

Worldwide operations based primarily on function and secondarily on product

A Global Functional Structure

CEO

Production Marketing Finance

DomesticProduction

Product AProduct BProduct CProduct D

ForeignProduction

Product AProduct BProduct CProduct D

DomesticProduction

Product AProduct BProduct CProduct D

ForeignProduction

Product AProduct BProduct CProduct D

Mixed Organization Structures

Advantages– Allows organization to create the specific type of

design to meet its needs

Disadvantages– Complexity increases– Difficulty arises in co-ordinating personnel

Combines global product, area, and functional divisions to supplement its primary structure with a secondary

one, and perhaps a tertiary (third) one

A Multinational Matrix Structure

CEO

Production Marketing Finance Personnel

Manager,Industrial GoodsNorth America

Manager,Industrial GoodsEurope

North America Industrial Goods Europe

Meeting the Challenges of Globalization

Synergy - (2 + 2 = 5)– whole is greater than the sum of its parts

Organizational Synergy– Pooling knowledge across regions – Sharing resources to meet world-wide needs– Pooling purchases for greater negotiating power– Coordinating strategies to become more efficient– Vertically integrating to be more cost effective

– Creating new businesses

Strategies: Mutual adjustment Use of direct, technically skilled supervisors Use of integrative leadership Technical training provided in-house Use of standard milestones in work design Flexible design standards

Organizing for Product Integration

Information Technology

Key Questions: Which information systems are needed? Are investments are worthwhile? How does technology fit into

management’s strategic thinking ? How should users and specialists connect

within the company? How do you design systems to improve

organizational performance?

Organizational Characteristics3 most critical for international

operations Formalization

– The use of defined structures used in decision making, communicating, and controlling

Objective - written descriptions Subjective -informal controls

Specialization– The assigning of individuals to specific, well-defined

tasks Horizontal specialization Vertical specialization

Centralization– Management system in which important decisions are

made at the top

Structural Deficiency Symptoms

Decisions are delayed or lacking in quality

Organization does not respond innovatively to a changing environment

Too much conflict from departments being at cross purposes is evident

Relate “Structure” to “Culture”

How do cultural dimensions affect structural dimensions?

Are some structures inherently more effective in some cultures?

INTERNATIONAL DECISION MAKING

British are highly decentralized

French tend to be centralized

Germans are fairly centralized

Swedes are also centralized

Japanese decide by consensus

FACTORS AFFECTING DECISION MAKING

CENTRALIZATION Large company Homogeneous product

lines Large capital investment High degree of

technology

DECENTRALIZATION Small company Heterogeneous product

lines Small capital investment Moderate to low degree of technology

See Table 12-1, p 333

Centralization and DecentralizationCentralization and Decentralizationof Decision Making in Subsidiary of Decision Making in Subsidiary

OperationsOperations

Adapted from Table 11–1: Factors That Influence Centralization or Decentralization of Decision Making in Subsidiary Operations

Comparing Decision MakingCo-determination

– Legal system requiring workers and management to discuss major decisions

Ringisei– From Japan; decision making by consensus

Tatemae– Japanese; “doing the right thing” accoring to

norms.Honne

– Japanese: What one really wants to do

TQM DECISIONS

Manufacturing

Rewards and

Recognition

U.S. has greatly improved the quality of their cars

Japanese use continuous improvement of quality

U.S. workers value individual recognition and praise

Japanese prefer group rewards

QUALITYOLD MYTH

Quality is the responsibility of the people in the Quality Control Department

Training is costly It is human to make mistakes Quality improvements are made in small, continuous

steps Quality improvement takes time Haste makes waste Suppliers need to be price competitive

QUALITY NEW TRUTH

Quality is everyone’s job Training does not cost, it saves Total customer satisfaction is a standard that should

be vigorously pursued In improving quality, both small and large

improvements are necessary Quality does not take time, it saves time Thoughtful speed improves quality Suppliers need to be quality competitive

TYPES OF CONTROL

Direct/IndirectInternal/External

INTERNAL dominating attitude bordering

on aggressiveness towards the environment

focused on self, function, one’s own group, and one’s own organization

discomfort when the environment seems “out of control” or changeable

Win some, lose some

EXTERNAL flexible attitude, willing to

compromise and keep the peace

focused on others such as customers, partners, and colleagues

Comfort with waves, shifts, and cycles, which are regarded as “natural”

Win together, lose apart

Direct vs. Indirect Controls

Direct Controls Involves face-to-face or personal

meetings to monitor operationsEx.) Monthly management meetings

Ex.) Visits by top executives to overseas affiliates or subsidiaries

Indirect Controls Use reports and other written forms of communication to control operations

Ex.) Monthly operating reports that are sent to the home office

Ex.) Balance sheet, income statement, cash budgets

The Controlling Process

Methods by which MNCs control overseas operations

– Most combine direct and indirect controls

– Some prefer heavily quantifiable methods – others more qualitative approaches

– Some prefer decentralized approaches – others greater centralization

CONTROL IN U.S. MNCs

Control in U.S. MNCs focuses more on the quantifiable, objective aspects of a foreign subsidiary

Requires more precise plans and budgets

Requires large central staffs and centralized information processing capability

CONTROL IN EUROPEAN MNCs

Requires more decentralization of operating decisions

Requires more capable expatriate managers who are willing to spend long periods of time abroad

Requires a high level of company-wide understanding and agreement regarding appropriate behavior

The Controlling Process

MNC will focus on the things that it does best– Management wants to ensure there is a market for

the goods and services it offers – First the company needs to find out what the

customers want and be prepared to respond appropriately

– This requires an external control focus Internal and external perspectives of control –

one is often given more attention than the other.

Types of ControlInternal and

External Control

The Impact of Internal and External-The Impact of Internal and External-Oriented CulturesOriented Cultures

on the Control Processon the Control Process

Adapted from Table 11–3: The Impact of Internal and External-Oriented Cultures on the Control Process

The Controlling Process

The use of face-to-face or personal meetings for the purpose of monitoring operations

International Telephone and Telegraph (ITT) holds monthly management meetings at its New York headquarters– Meetings are run by the CEO of the company– Reports are submitted by each ITT unit manager

throughout the world– Problems are discussed, goals set, evaluations made, and

actions taken to help the unit to improve its effectiveness

Types of Control Direct Controls

The Controlling Process

Other examples – Top executives visit overseas affiliates or subsidiaries to

learn firsthand the problems and challenges facing the unit and to offer assistance

– By determining who to send overseas to run the unit, MNCs can directly control how the operation will be run

– Designing a structure that makes the unit highly responsive to home-office requests and communications ensures MNCs that all overseas operations are run in accord with central management’s desires

Types of Control Direct Controls

The Controlling Process

The use of face-to-face or personal meetings for the purpose of monitoring operations

International Telephone and Telegraph (ITT) holds monthly management meetings at its New York headquarters– Meetings are run by the CEO of the company– Reports are submitted by each ITT unit manager

throughout the world– Problems are discussed, goals set, evaluations made, and

actions taken to help the unit to improve its effectiveness

Types of Control Indirect Controls

The Controlling Process

The use of reports and other written forms of communication to control operations at subsidiaries

Financial statements – Statements prepared to meet the national accounting

standards and procedures prescribed by the host country– Statements prepared to comply with the accounting

principles and standards required by the home country– Statements prepared to meet the financial consolidation

requirements of the home country

Types of Control Indirect Controls

CONTROL TECHNIQUES

Financial Performance

Quality Performance

Personal Performance

Types of Control

Input OutputProcesses

Feedforwardcontrol

Anticipatesproblems

Concurrentcontrol

Corrects problemsas they happen

Feedbackcontrol

Corrects problemsafter they occur

FINANCIAL PERFORMANCE

Based on profit and return on investment

Profit = Total Revenues - Total Exp

Using Financial Performance alone when controlling a subsidiary for effective performance can be misleading

QUALITY PERFORMANCE

Taguchi Method: Brainstorming and a few experiments seek to quickly find the problem.

Brainstorming session

Production problem

Employ Taguchi

Experimental production runs

Confirm results

PERSONAL PERFORMANCE

1. Success attracts the best people--and the best people sustain success

2. The top companies know precisely what they are looking for

3. These firms see career development as an investment, not a chore

4. Whenever possible, these companies promote from within

5. Performance is rewarded

The Negotiation Process

Planning

Interpersonal relationship building

Exchanging task-related information

Persuasion

Agreement

“Do’s” and “Don’ts” of Negotiation

Do not identify the counterpart’s home culture too quickly

Beware of western bias toward “doing” Try to counteract the tendency to

formulate simple, stable images Do not assume that all aspects of culture

are equally significant Do not overestimate your familiarity with

your counterpart’s culture

Cultural Differences Affecting Negotiations– Must understand the other party’s communication

patterns, time orientation, and social behaviors Society’s culture plays a major role in determining the

effectiveness of a negotiating approach– U.S. negotiators often differ from negotiators in many other

countries

Negotiation Tactics– Location

For important matters, neutral site preferred– Time Limits

Important when one party is under a time constraint

Managing International Negotiations

Managing International Negotiations

Negotiation Tactics (cont.)– Buyer-Seller Relations

Negotiators from different countries perceive outcomes of negotiations differently

– For example, desire to come out on top

Bargaining Behaviors– Use of Extreme Behaviors

Initial bargaining position

– Promises, Threats, and Other Behaviors Designed to influence the other party Behaviors often are greatly influenced by the culture

– Nonverbal Behaviors