MIB, BBA 2010 1

WK2 Agenda• Hot topic:

– News?– Facebook– Companion websites– No class last week of July

• MIB Student survey• India vs. China• Reading Discovery• Nonverbal Communication• FDI• Mini FDI Decision Homework

2

India vs. China• BBC video clips, Fed Article• What is the focus of each country?• Why China and India walk different path?• What kind of business that you will prefer India

over China?• Apply the concepts you’ve learned to compare

China and India for the overall attractiveness of the country.

• What other information would be helpful for your reasoning? Where can you get it?

BBA, MIB 2010

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Reading Discovery

• Read the following articles.• What’s the main theme of those stories?• Why is it important?• How do we learn other cultures?• What are the determinants of culture?• Fill up this table.

Company Method of study Innovative way

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Nonverbal Communication

• Need two volunteers.• Act from the following list of body language.• Ask your classmates: What does it mean?

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Foreign Direct Investment

• Watch the video clips from PBS– Hanes brand relocates to Vietnam, Thailand, and China– FDI in Ethiopia

• What makes Vietnam and Ethiopia attractive for FDI?

• What are the issues in these stories?• What can the companies do to help improve the

situation?• What are the advantages and disadvantages of FDI?

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Homework for Friday• In a group of 4-5, select a particular business.1. Your goal is to decide on the best country for your

business.2. Create a list of criteria (4-6).3. Weight each criteria against each other.4. Create the country options(3-4) and compare all options

according to each criteria.5. Compare each option based on all criteria combined.

Compare the option score.6. Detail instruction example is in the sheet provided.7. Where can you get the data for this exercise?

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WK2.2 Agenda• Hot topics: World Cup? This time for?• Review: Monday discovery• Exchange students FDI interviewing exercise• Lecture• Mind map• Homework

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Exchange students interview(FDI analogy)

• In a group of 4-5, interview your friends from abroad(anywhere outside Ubon)

• Reasons for coming here. How long have they studied here? Did they start from high-school?

• What are the advantages and disadvantages of both sides(local students and exchange students)? What did you gain? What did you loose?

• Any investment? Expense?• How can we encourage more exchange students to come

here?• How can we decrease the number of exchange students to

come here?

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Review

• What’s the meaning of this diagram?

• Two types of model you can choose.

• Adaptive• Changing agent• How to choose?• Depend on your resources

(time & money), sustainable growth.

Business

Culture

Politics

Economics

Law

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Culture

• Culture: the collection of values, belief, behaviors, customs, and attitudes that distinguish one society from another

• A society’s culture determines the rules that govern how firms operate in the society.

• A society is a group of people who share common set of values and norms– Values: abstract ideas of about what

the group believes to be good, right and desirable i.e. Asian value?

– Norms: social rules and guidelines that prescribe appropriate behavior in a particular situation i.e. dress code

Culture Norms

and Value

Religion

Political

Philosophy

Economic

Philosophy

Education

Language

Social Struct

ure

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Values and Norms

Nation with

subculture: the US,

India

Society Culture with

many nations:

Middle East, Hispanic

• Values form the basis of a culture: abstract concept & emotional significance.

• Abstract concepts: freedom, democracy, truth, justice, honesty, loyalty, responsibility,

• Emotional significance: people fight over freedom, fight for democracy

• Norms: folkways & mores• Folkways: the routine conventions

of everyday life such as dress code, social manner and neighborly behavior

• Mores: norms that are seen as central to the functioning of a society and to its social life such as theft and incest.

• Which one is more serious, folkways or mores?

MIB, BBA 2010

Thailand?

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Social Structure

• Social structure refers to its basic social organization• There are two dimensions:

– Degree of individual and group– Degree of class or caste – Country in each quadrant?

Individual

Group

ClassCaste

BharminK

shatriya

Vaishay

Sutra

Untouchable

High

Middle

Low

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Individuals and Groups

-Western Societies

-Individualism: high mobility,

entrepreneurial economy, innovative products

-Raise the cost of doing business:

-No loyalty, no network, no

team building

-Asian Societies-loyal to the

firm, life time employment,

cooperation in solving business

problemsExample: Sony,

Toshiba

-Suppress creativity and

initiative-Long time for

decision making

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Social Stratification• All societies are stratified on hierarchical

basis into social categories or social strata i.e. birth, occupation, and education

• All societies are differ by– The degree of mobility between social

strata– The significance attached to social strata in

business contact

• Social Mobility is the ability from which an individual can move out from which they are born…How?

• The social stratification of a society is significant if it affects the operation of business organizations.

• What would be the concerns for MNEs operating in highly stratify countries?

• Front end: your market segment• Back end: hiring and promotion

procedures

BharminK

shatriya

Vaishay

Sutra

Untouchable

High

Middle

Low

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Religious and Ethical System

• Religion: a shared belief and rituals • Ethical systems: a set of moral principles, or values

that are used to guide and shape behavior• Four major religions:

– Christianity, Islam, Hinduism, and Buddhism– Confucianism

• Economic research suggests that strong religious beliefs stimulate economic growth, because they help to sustain aspects of individual behavior that lead to higher productivity.

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Religions

-The world’s largest religion-Europe and America

-Economic implication: Protestant Work Ethic: hard work, wealth creation, and

frugality=>capitalism

-The world’s second largest religion

-Middle East, North Africa, South Asia

Doctrine: Peace, justice, and tolerance

-Pray 5 times a day-Economic implication:

People do not own property, but only act as stewards of God.Example: no interest, no alcohol

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Religions

-India-Focuses on the importance of

achieving spiritual growth and

development, not material=>Nirvana

-Promotion and adding new responsibilities

may not be the goal of an employee, or may be infeasible due to

employee’s caste

-Central and South East Asia

-Focus on spiritual growth and the afterlife,

rather than the achievement

-Emphasize on wealth creation but

entrepreneurial behavior is not stressed

-No caste system, individuals do have

mobility and can work with different classes

-China-Focus on the

importance of attaining personal salvation

through right action-Loyalty, reciprocal

obligations(guanxi), and honesty=> lowering the cost of doing business in

Confucianism societyExample: If people

behave in a moral way, expensive contract is not

necessary.

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Language

• Means of communication: spoken and unspoken language(facial expression, personal space, and hand gesture).

• Express how people see the world.• More languages, more cultures: Swiss,

Belgium, India• Language is a competitive advantage for doing

international business.• Example:

Chevy No Va, Toyota Camry in Thai

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Education

• Formal education is the medium through which individuals learn many of the language, conceptual, and math skills that are crucial for the society.

• Education is important for the nation’s competitive advantage. The US, UK, Germany, and Japan have their distinctive systems.

• General education level can be a good index of what kinds of product to sell or invest in a particular country.

• Example: Illiterate country is unlikely to sell popular books.

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Culture and the workplaceHofsteds’s Five Dimensions of National Culture

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Research and our result• Collectivism: relationship over task, learn how to do things not learn how to learn• Transition state: lecture vs. activities, Power tolerance: need resourceful democrat teacher, but also

Power respect: Parental teacher: tell you what to do in every situation• Uncertainty avoidance: like structure and objective, teacher must know all, dislike rules(uncertainty

acceptance because you’re still young)• Passive goal: use intuition, emphasize on life quality• Long term: but no goal???

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Implication for Manager• Culture changes over time.• Beware of ethnocentric behavior.• Manager need cross cultural literacy for success.

Culture Norms

and Value

Religion

Political

Philosophy

Economic

Philosophy

Educatio

n

Language

Social Struct

ure

Back end: Production choice, work ethic, meeting, HR policy such as hiring, promotion, incentive, and compensation. You can use either adaptive model(act locally) or be the changing agent with your employees. Emphasize your “Corporate culture”.

Front end: provide the products or services that best satisfied your customers. You can use either adaptive model(act locally) or be the changing agent in that market.

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Foreign Direct Investment• FDI: occurs when a firm invest directly in new

facilities to produce and/or market in a foreign country (an ownership share of at least 10-25%)=>MNE

• FDI can be:– Greenfield investment: wholly own company– Merger and Acquisition (M&A, Brownfield)

with firms in the foreign country

• Does it require capital movement?

• The flow of FDI: amount of FDI undertaken over a given time period

• The stock of FDI: total accumulated value of foreign-owned assets at a given time

• Out flows of FDI: the flows of FDI out of the country

• In flows of FDI: the flows of FDI into a country

• Gross fixed capital formation: the total amount of capital invested in factories, stores, and office buildings.

• FDI: source of capital investment and economic growth

• MNE

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Out flow In flow

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Trends in FDI• FDI has increased

tremendously for the past 30 years, except for these past two years due to world economic collapse.

• Reasons:– Fear of protectionism– The shift toward

democratic and free market economies, FDI↑

– Globalization, ensure presence in the regional market

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The Direction of FDI• Historically, most FDI have been directed

to the developed nations, with the US as the favorite target.

• While the US still maintain its rank as the largest for host and home country of FDI, some EU countries have lost their ranks and got the negative inflow of FDI.

• The emerging direction includes: South, East, and South East Asia—particularly China.

• Latin America is also an emerging market for FDI, especially for oil and energy sector.

• Notice the increasing trend of FDI to Africa.

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The Forms of FDI Acquisition vs. Greenfield Investments

• Most cross border investment are in the form of M&A rather than Greenfield investment

• Firms prefer to acquire existing asset because:– M&A are quicker to execute than Greenfield investments– M&A are easier and less risky than to build from the

ground up– Firms believe that they can increase the efficiency of an

acquired unit by transferring capital, technology or management skills

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The Shift to Services

• FDI is shifting away from extractive industries and manufacturing, and towards services.

• The shift to service is driven by:– General move in developed nations toward services– The fact that many services need to be produced where

they are consumed i.e. Starbucks, cement– A liberalization of policies governing FDI in services i.e.

banking, insurance– The rise of Internet-based global telecommunication

networks

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Why FDI?

Motivations

Limitations

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Theories of FDI

• Internalization:Market Imperfection

• FDI advantage when:cost↑, trade barrier↑, know how protection↑, want control↑, firms capabilities ↑

What didn’t he explain?

Licensing drawbacks:-Give away know how to potential competitor: RCA=>Sony in 1960-No tight control over manufacturer, marketing, or strategy to max profit-Know how or corporate culture is not amendable: Toyota lean manufacturing, Philip managing skills, P&G marketing skills.

Firms of the same industry do FDI at the same time at roughly the same location because: - Strategic rivalry or imitative behavior in the oligopolistic industries: Honda, Toyota, Nissan, Airline industry-Multipoint competition: Kodak vs. Fuji, Coke vs. Pepsi, Nike vs. Adidas, Mc Donald vs. Burger King

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Theories of FDI

Firms undertake FDI at particular stages in a life cycle of a product. Firms invest in:-Developed countries when demand in those countries are high.-Developing countries when standardize product or market susurration to save production cost.

Vernon fails to explain why it is profitable for firms to undertake FDI rather than continuing to export from home base or licensing a foreign firm.

In addition to the various factors discuss earlier, Eclectic Paradigm suggest that we consider:

-Location specific advantages: that arise from using resource endowments or assets that are tied to a particular location and that firms find valuable to combine with its own unique assets i.e. oil and mineral, low cost highly skilled Bangalore-Externalities: knowledge spillovers that occur when companies in the same industry locate in the same area i.e. rubber town, silicon valley

John DunningRaymond Vernon

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Political Ideology and FDI• Ideology towards FDI range from

– Radical View: hostile to all FDI, MNEs are the instrument of imperialist (only until 80s)

– Pragmatic View: pragmatic nationalism, only if the benefit outweigh the cost

– Free Market View: non-inverterventionist, disperse products and increase overall efficiency

Free Market Pragmatic Radical

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Benefits and Costs of FDI for Host Country

• Benefit1. Resource transfer effect: capital,

technology, management resource

2. Employment effect: bring jobs3. Balance of payment effect: receive

from other countries, FDI can help achieve a current account surplus

4. Effect on competition and economic growth: more green field investment~more suppliers~competition~priceconsumer welfare ↑

Increase competition:productivity↑,innovation↑, economy↑

• Cost1. Possible adverse effect on

competition (MNE might do better due to larger support)

2. Adverse effect on the BOPs:repatriate earnings to the parent country, MNE still import parts from abroad

3. Loss of national sovereignty and autonomy: no commitment from MNE, host country government has no real control

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Benefits and Costs of FDI for Home Country

• Benefit1. Positive effect on BOP:

from the repatriate money

2. Employment effect: Toyota supplier in Japan, Thai companies still order the machines for operating from abroad

3. Gain from learning new skills that can transfer back to the home country

• Cost1. Initial capital outflow

to finance FDI2. Job loss: Serve home

market from the low cost labor, FDI is a substitute for direct export

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International Trade Theory and FDI

• International trade theory suggested that the home country concern about the negative economic effects of offshore production may not be valid because of the following reasons: – Free up resource in the home country to concentrate on

comparative advantage– Consumers benefit if the price of the products falls as a

result of offshore production– Not worth losing market share to international competitor

• Therefore, the long run economic effect of FDI, outweigh the minor BOP and employment effects.

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Government Policy on FDI for Home Country

• Encouraging Outward FDI– Government backed

insurance to cover major types of foreign investment risk, special loan, tax incentive, eliminate double tax, encourage host country to open market: US, Japan

• Restricting Outward FDI– Most countries limit

capital outflows, manipulate tax rules, or outright prohibit FDI (Cuba, Iran)

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Government Policy on FDI for Host Country

• Encouraging Inward FDI– Offer incentive to foreign

firms such as tax concessions, low interest loan, grants or subsidies, improve infrastructure and education

• Why should we encourage inward FDI?

• Restricting Inward FDI– Government can use

ownership restraint and performance requirement

• To protect national security and competition: Sweden excludes foreign ownership in tobacco and mining industry, US government rejected DP United Arab Emirates, Malaysia protects its infant auto business

• Max the benefit of resource transfer and employment: Japan during the 80s allowed JV with valuable technology only

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Implications for Manager Decision factors to undertake FDI

• Supply factors=>Cost– Production costs: better location, tax rate, labor– Logistics: transportation cost– Resource availability: oil, gas, tuna etc.– Access to key technology: faster than developing by itself i.e. Swiss

Pharmaceutical• Demand factors=>Benefit

– Sales expansion: market size, market growth– Customer access: require presence i.e. fast food chain– Marketing advantage– Exploiting competitive advantage: brand, trade mark, technology– Customer mobility: to continue to supply the customer i.e. Japanese auto

supplier• Political Factors=>Risk

– Avoidance of trade barriers i.e. Fuji– Economic development incentive, BOI, Chinese government– Share the risk: not depend only on home country market

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Implications for Managers

• What type of firm that should not be licensing?– High technology

(need to protect firms expertise)

– Global oligopolies (need tight control)

– Industries with cost pressures (need tight control)

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Mind Map & Homework

• Summarize this lecture through your mind map.

• Any question for Friday homework?

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Different Diagrams of the Same Topics

Why FDI? Benefit

Cost

Risk

Why FDI?

Resource

Seeking

Market Seeking

Efficiency

Seeking

Strategic Asset Seeking

Why FDI?

Motivation

Sales expansion

Resource acquisition

Diversify sales&supplies

Minimize risk

Limitation

Capacity, quality

Exporting limitation

Licensing limitation

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WK2.3 Agenda• Discussion: news? CCTV?

– China– Mind map all elements? How

can we have all elements? Do we need all elements?

– Facebook, PPT, notebook

• The good, the bad, and the ugly mind maps.

• FDI Decision Homework– Business?– Criteria?– Options?– Result of option score?

• BOI target countries:– Africa: Nigeria, Morocco– Middle East: Iran, Qatar, Dubai,

Oman, Jordan– South Asia: India, Pakistan– Latin America: Brazil, Chile,

Caribbean– Neighboring countries: Lao,

Cambodia, Myanmar, Vietnam, China

• Business:Construction, Energy, Petrochemical, Food, Automotive parts, Textile, Shoes, Tourism and services

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FDI Decision Homework• The order of creating criteria vs. options, will lead

you to different result or different path of doing business. It doesn’t mean that you won’t be success. You’ll have to use different strategy.

• Creating the criteria first will lead you to try to find all of your options. Creating options first, will make you think of how to compare them.

• If you have more than 6 criteria, you should not use this method because you might end up having very little importance(weight) to all those criteria.