International Strategic International Strategic ManagementManagementPolitical Risk and Management Decision and Control

Chapters 10 and 11, Hodgetts, Luthans and Doh, International Management: Culture, Strategy and Behavior , 6th edition (New York: McGraw-Hill Irwin, 2006)

Adapted from PowerPoint slides by R. Dennis Middlemist, Professor of Management, Colorado State University

Mark McKennaBUS 162 (6), International and Comparative ManagementSan Jose State University

OVERVIEWOVERVIEW

1. Decision Making and Control

2. “Starbucks: Building Relationships with Coffee Growers”

3. Political Risk

DECISION MAKING DECISION MAKING AND CONTROLAND CONTROL

1. Definitions

2. Organizational Characteristics

3. Centralized vs. Decentralized Decision Making

4. Total Quality Management

5. Types of Control

DefinitionsDefinitionsDecision Making

◦The process of choosing a course of action among alternatives.

Controlling◦The process of evaluating results in relation

to plans or objectives and deciding what action to take, if any.

Management Decision and Control◦The choice of a course of action among

alternatives and the evaluation of results of those choices in relation to plans or objectives.

Organizational Characteristics Organizational Characteristics and Decision Making and Decision Making Formalization: The use of defined

structures and systems in decision making

Centralization/decentralization: The Locus of decision making (at the top or delegated to operating personnel)

Specialization: Assigning to individuals specific, well-defined tasks

Note: Organizational structures don’t always determine how firms function internally

Centralized vs. Decentralized Centralized vs. Decentralized Decision MakingDecision MakingReasons for increased centralization

◦To increase efficiency and better capture economies of scale

◦To tighten controls and improve firm-level responsiveness to crises and uncertainty

Differences in domestic and international responses◦Domestically, firms often decentralize in

response to competition to increase responsiveness

◦ Internationally, firms often centralize in response to competition to increase control

Cultural DifferencesCultural DifferencesBritain: firms generally decentralized

◦Reliance on middle managersFrance: companies more centralized

◦Tradition of professional educationGermany: codetermination

◦Mandated manager-labor consultationJapan: ringisei (consensus decision

making)◦Tatemae – doing the right thing◦Honne – what one really wants to do

Types of ControlTypes of ControlInternal vs. external controls

◦Internal: self, function, group, firm◦External: customers, partners,

colleaguesDirect vs. indirect controls

◦Direct: face-to-face meetings◦Indirect: operating reports and

financial statementsFactors influencing preference

◦Culture◦Timeframe

Control TechniquesControl TechniquesFinancial performance

◦Profit (balance after expenses)◦ROI (profits divided by assets)

Quality performance◦Quality Control Circles (QCC)

Personnel performance◦Assessment centers◦360 degree evaluations

STARBUCKSSTARBUCKS1. Key Elements of a Keiretsu

a) Manufacturers and suppliers partner in design and production

b) Financial links between manufacturers and suppliers

c) Cross-marketing of products

2. Look for these elements in the film

3. How does Starbucks address decision and control issues?

POLITICAL RISKPOLITICAL RISK

1. What is Political Risk?

2. Macro Risk Factors

3. Micro Risk Factors

4. Assessing Political Risk

What is Political Risk?What is Political Risk?

Political risk◦The likelihood that a business’s foreign

investment will be constrained by a host government’s policy

Macro political risk analysis◦Analysis that reviews major political

decisions likely to affect all enterprises in the country

Micro political risk analysis◦Analysis directed toward government

policies and actions that influence selected sectors of the economy or specific foreign businesses in the country

Macro Risk FactorsMacro Risk FactorsFreezing the movement of assets out

of the host countryPlacing limits on the remittance of

profits or capitalDevaluing the currencyIndustrial piracy (e.g. counterfeiting)Political turmoil (including terrorism)Government corruptionRefusing to abide by the contractual

terms of agreements

Critical Risks to Firm OperationsCritical Risks to Firm OperationsA.T. Kearney 2004 FDI Confidence IndexA.T. Kearney 2004 FDI Confidence Index

Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

Micro Risk FactorsMicro Risk FactorsDifferential treatment of MNCs (by

industry, country of origin, etc)Industry-specific regulations or taxesRestrictive local laws (regarding

employment, sourcing, access to capital)

Government policies that promote exports and discourage imports

Impact of WTO decisions and or regional trade agreements/consortia

Government PoliciesGovernment Policies

Result from policies that limit the transfer of capital, payments, production, people, and technology in and out of the country

Tariffs on exports and imports Restrictions on exports Dividend remittance Capital repatriation

Transfer risksTransfer risks

Government PoliciesGovernment Policies

Result from policies and procedures that directly constrain management and performance of local operations

Price controls Financing restrictions Export commitments Taxes Local sourcing requirements

Transfer risksTransfer risks

Operational risks

Operational risks

Government PoliciesGovernment Policies

Result from policies or actions that inhibit ownership or control of local operations

Foreign-ownership limitations Pressure for local participation Confiscation Expropriation Abrogation of proprietary rights

Transfer risksTransfer risks

Operational risks

Operational risks

Ownership control risks

Ownership control risks

Assessing Political RiskAssessing Political Risk

Transfer Operational Ownership control

Political Risks

Conglomerate

Vertical

Horizontal

Gen

eral

Inve

stm

ents

Special Investm

ents

Adapted from Figure 10–2: A Three-Dimensional Framework for Assessing Political Risk

Adapted from Table 10–2: A Guide to Evaluation of Political Risk

Country RiskCountry Risk

100

80

60

40

20

0

Ris

k

Minimum

MaximumS

inga

pore

Hon

g K

ong

Chi

leTa

iwan

Mal

aysi

aTh

aila

ndP

olan

dIs

rael

Hun

gary

Indi

aS

audi

Ara

bia

Chi

naS

outh

Afri

caM

exic

oB

razi

lE

gypt

Iran

Col

ombi

aU

krai

neP

akis

tan

Turk

eyN

iger

iaIn

done

sia

Cot

e d’

Ivoi

reK

enya

Ven

ezue

laA

ngol

aA

rgen

tina

Iraq

Adapted from Figure 10–1: Country Risk

Managing Political RiskManaging Political RiskRelative bargaining power analysis

◦The MNC works to maintain a bargaining power position stronger than that of the host country

Integrative, protective, and defensive techniques

Proactive political strategies

Integrative TechniquesIntegrative TechniquesHelp the overseas operation become

a part of the host country’s infrastructure◦ Developing good relations with the host

government and other local political groups

◦ Producing as much of the product locally as possible with the use of in-country suppliers and subcontractors

◦ Creating joint ventures and hiring local people to manage and run the operation

◦ Doing as much local research and development as possible

◦ Developing effective labor–management relations

Protective and Defensive Protective and Defensive TechniquesTechniques

Discourage the host government from interfering in operationsoDoing as little local manufacturing as

possible and conducting all research and development outside the country

o Limiting the responsibility of local personnel and hiring only those who are vital to the operation

o Raising capital from local banks and the host government as well as outside sources

oDiversifying production of the product among a number of countries

Proactive Political Proactive Political StrategiesStrategiesLobbying, campaign financing, a

advocacy and other political interventions designed to shape and influence the political decisions prior to their impact on the firm◦Formal lobbying◦Campaign financing◦Seeking advocacy through the embassy

and consulates of the home country◦Formal public relations and public affairs

activities such as grassroots campaigning and advertising

Use of Integrative, Protective Use of Integrative, Protective and Defensive Techniquesand Defensive Techniques

Protective/defensive techniques

Inte

gra

tive

tec

hn

iqu

esHigh 20

Moderate 10

Low 11

Low10

Moderate20

High

(11, 14)Low or stable technology

((7, 10)Advanced

management skill

Unified logistic, labor transmission

(16,6)

(14, 3)Dynamic high technology

Adapted from Figure 10–4: Use of Integrative and Protective and Defensive Techniques by Firms in Select Industries