Information technology
Eureka Teleconferencing is one of many new firms that aim to make clients' teleconferencing experience simple, effective and cheap.
Of all the developments promoting global business today, the one that is transforming the international manager’s agenda more than any other is the rapid advance in information technology (IT). The speed and accuracy of information transmission are changing the nature of the global manager’s job by making geographic barriers less relevant. Indeed, the necessity of being able to access IT is being recognized by managers and families around the world, who are giving priority to being plugged in' over other lifestyle luxuries.
International managers are aware that though it is now much more difficult for information to be centrally or secretly controlled by governments or organizations , IT makes propaganda, rhetoric and advertising much more powerful because it is so much more pervasive. Political, economic, market and competitive information is available almost instantaneously to anyone around the world, but this does not necessarily permit informed and accurate decision making.
A gross example of misinformation comes from the tobacco industry. For nearly 40 years, the industry'-sponsored Council for Tobacco Research (Cl’R) waged what The Wall Street Journal recently labeled 'the longest-running misinformation campaign in US business history’. Self-portrayed as an independent scientific agency to examine 'all phases of tobacco use and health,' the CTR has actually been the centerpiece of a massive industry effort to cast doubt on the links between smoking and disease.
Managers should be alert for bias of all kinds. Cultural barriers are being lowered gradually by the role of information in educating societies about one another, but cultural and religious prejudices are still strong. When President Bush in 200142 announced a ban on aid to international organizations that perform or promote abortions, it signaled the end of US funding to family planning centers in Africa that provide sexual education to millions of young Africans. Although many such centers do not perform abortions, they do offer information and counselling on the procedures – and thus can expect to lose all the funding they receive directly and indirectly from the US, often about one-quarter of their annual budget.
On the other hand, commercial advertising and other sources of information have made consumers around the world more aware of how people in other countries live, and thus tastes and preferences have begun to converge. Global brands of colas, blue jeans, athletic shoes, and designer ties and handbags are now as much on the mind of the taxi driver in Shanghai as they are in the home of the schoolteacher in Sydney.
POLITICAL AND ECONOMIC ENVIRONMENTS
Proactive globally oriented managers maintain an up-to-date profile of the political and economic environment of the countries in which they maintain operations (or have plans for future investment).
An important aspect of the political environment is the phenomenon of ethnicity – a driving force behind political instability around the world. In fact, many uprisings and conflicts that are thought to be political in nature are actually expressions of differences among ethnic groupings. Often, religious disputes lie at the heart of those differences. Uprisings based on religion operate either in conjunction with ethnic differences (as between Tamils and Singhalese in Sri Lanka) or as separate from them (as between Sunnis and Shias in Iraq).
Many terrorist activities are based on religious differences. Managers therefore need to understand something of the ethnic and religious composition of their host countries in order to anticipate problems of general instability', as well as those of an operational nature, such as effects on the workforce, on production and access to raw materials, and on the market.
Political risk
Researchers risk becoming political prisoners in Indonesia’ said the headline to an article in The Age in 2003. The five-month jail sentence in that year in Indonesia for Australian- based academic researcher Lesley McCulloch sent a clear signal that the Indonesian military’s tolerance for what it regards as foreign interference in domestic issues was at an end. Both McCulloch and McCulloch’s associate, Joy Lee Sadler, an American nurse, were charged with violating a tourist visa.
The official Indonesian embassy website from Canberra makes no mention of what is or is not allowed under tourist visas. Indeed, the notes for tourist destinations and facilities in Aceh are missing. It seems that advice on travel in Indonesia may be divided between what is and what is not politically sensitive: but this suggests the possibility of unwelcome visitors becoming political prisoners – and this seems to be the clear message from Indonesia to foreigners.
Thus managers of international businesses need to investigate the political risks to which they expose their representatives in certain countries – not to mention the implications of those risks for the economic success of the firm.
Political risks are any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm. Political systems, arising from the local culture, shape economic systems. Policies by host governments may favor national interests, not market forces. Therefore they may include discriminatory application of laws and government interference in firms' managements. For example, the refusal by the US and Australian governments to sign the Kyoto Protocol was part of a policy lo protect national industrial interests – as was rejection of the euro by the UK and Denmark.
Global corporate leaders argue that their firms are at risk from any political interference anywhere that might lower their profits or lessen their value. But the argument works both ways: commercially driven foreign operations can damage seriously the infrastructure of developing countries. Thus what is seen as political risk for multinationals may be self- defense to host governments or to international watchdog agencies such as Corpwatch.
Sociopolitical risks include not only governmental risks (for instance, having to adapt to the local regulatory environment) but also acts of nationalization and protectionism. Nationalization refers to the forced sale of an MNC's assets to local buyers, with some compensation lo the firm, perhaps leaving a minority ownership with the MNC.
Expropriation, rare in the last decade, occurs when a government seizes and provides inadequate compensation for the foreign-owned assets of an MNC. When no compensation is provided, it is confiscation.
Changes to company investments pose another risk, as does public opinion – for example, expressions of strong nationalism. Managers may find their activities to be at risk from labor union movements, military threats and terrorism. Corruption is another form of risk, as is health. Technological risks include lack of appropriate technology support.
In unstable areas, multinational corporations weigh the risks of nationalization or expropriation. In countries that have a proven history of stability and consistency, the political risk to a multinational corporation is relatively low, while the risk of expropriation is highest in countries that experience continuous political upheaval, violence and change.
An event that affects all foreign firms doing business in a country or region is called a macropolitical risk. In the Middle East, the US invasion of Iraq in 2003 abruptly halted all international business with and within Iraq.
Micropolitical risks affect one industry or company or only a few companies. They have become more common than macropolitical risks. Typically, micropolitical problems with their investments present more difficulty for foreign firms than do major events that are insurable by political risk insurers.
The following list outlines seven typical political risk events common today (and possibly in the future):
Expropriation of corporate assets without prompt and adequate compensation
Forced sale of equity to host-country nationals, usually at or below depreciated book value
Discriminatory treatment of foreign firms in the application of regulations or laws
Barriers to repatriation of funds (profits or equity)
Loss of technology or other intellectual property (such as patents, trademarks or trade names)
Interference in managerial decision making
Dishonesty by government officials, including cancelling or altering contractual agreements, extortion demands, and so forth.
Political risk assessment
International companies conduct some form of political risk assessment to manage exposure to risk and to minimize financial losses. Typically, local managers in each country assess potentially destabilizing issues and evaluate their future impact on their company, making suggestions for dealing with possible problems.
Corporate advisers then establish guidelines for each local manager to follow in handling these problems. Classic Blue is an example of an Australian-based international business recovery company. Such firms offer contingency planning assessment to help business people understand and implement particular strategies – for instance, if a pandemic health outbreak should occur.
No matter how sophisticated the methods of political risk assessment become, nothing can replace timely information from people on the front line. In other words, sophisticated techniques and consultations are useful as an addition to, but not as a substitute for, line managers in foreign subsidiaries, many of whom are host-country nationals.
These managers represent the most important resource for current information on the political environment, and how it might affect their firm, because they are uniquely situated at the meeting point of the firm and the host country. Prudent executives, however, weigh the subjectivity of these managers’ assessments and also realize that similar events will have different effects from one country to another. Therefore, an additional technique, the assessment of political risk through the use of computer modeling, is now becoming fairly common.
Managing political risk
After assessing the potential political risk of investing or maintaining current operations in a country, managers face perplexing decisions on how to manage that risk.
On one level, they can decide to suspend their firm's dealings with a certain country at a given point – either by the avoidance of investment or by the withdrawal of current investment (by selling or abandoning plants and assets). On another level, if they decide that the risk is relatively low in a particular country or that a high-risk environment is worth the potential returns, they may choose to start (or maintain) operations there and to accommodate that risk through adaptation to the political regulatory' environment. That adaptation can take many forms, each designed to respond to the concerns of a particular local area:
Equity sharing: includes the initiation of joint ventures with nationals (individuals or those in firms, labor unions or government) to reduce political risks
Participative management: requires that the firm actively involve nationals, including those in labor organizations or government, in the management of the subsidiary Localization of the operation: includes modification of the subsidiary’s name, management style and so forth, to suit local tastes. Localization seeks to transform the subsidiary from a foreign firm to a national firm
Development assistance: includes the firm’s active involvement in infrastructure development (foreign-exchange generation, local sourcing of materials or parts, management training, technology transfer, securing external debt, and so forth).
In addition to avoidance and adaptation, two other means of risk reduction are dependency and hedging. Methods of keeping the subsidiary and the host nation dependent on the parent corporation include:
Input control: means that the firm maintains control over key inputs, such as raw materials, components, technology and know-how
Market control: requires that the firm keep control of the means of distribution (for instance, by only manufacturing components for the parent firm or legally blocking sales outside the host country)
Position control: involves keeping certain key subsidiary management positions in the hands of expatriate or home-office managers
Staged contribution strategies: mean that the firm plans to increase, in each successive year, the subsidiary’s contributions to the host nation (in the form of lax revenues, jobs, infrastructure development, hard-currency generation, and so forth).
Finally, even if the company cannot diminish or change political risks, it can minimize potential losses by hedging. For example, political risk insurance is offered by most industrialized countries. The Australian government Export Finance and Insurance Corporation (EFIC) notes that investors and contractors are usually prepared to carry the commercial risk of participating in offshore investments or projects. However, because of the unique nature of political risks, and their potential to expose an investment or project to significant losses, many investors, contractors and lenders take out special insurance to cover them against specified political events. But political risk insurance covers only the loss of a firm’s assets, not the loss of revenue resulting from expropriation. Local debt financing (money borrowed in the host country) can help firms hedge against being forced out of operation without adequate compensation: the firm withholds debt repayment in lieu of sufficient compensation for its business losses.
Multinational corporations also manage political risk through their global strategic choices. Many large companies diversify their operations both by investing in many countries and by operating through joint ventures with a local firm or government, or through local licensees. By involving local people, companies and agencies, firms minimize the risk of negative outcomes due to political events.
Dealing with the risk of terrorism
The threat of terrorism is now ever-present worldwide. For example, Australian tourists for generations have enjoyed the country’s geographical position in Asia by holiday-making in beautiful and tranquil Pacific islands such as Bali. But, sadly, on Tuesday 12 October 2004, many Australians took part in ceremonies in both Australia and Bali to mark the second anniversary of the Bali bombing, which killed 202 people, 88 of them Australian. 0
Australia as a country is still considered to be relatively free from fear of terrorist attacks, but in many regions they present a severe and random political risk, not least so because an act of terrorism is difficult to define." Perhaps the most honest definition is that terrorism is violence committed by those we disapprove of.
In any case, Fido, the Australian Securities and Investment Commission Financial Tips and Safety Checks, warns that many insurers reviewed the terms of their travel insurance policies and/or the way their policies were applied to specific events after terrorist attacks early this decade. As a result, definitions of terrorism and the nature of cover for terrorism vary from insurer to insurer.
The key point about terrorism is that it is politically motivated. This is what distinguishes it from, say, murder or football hooliganism. But the motive is not always clear – especially if no one has claimed responsibility. Another essential ingredient is that terrorism is calculated to terrorize the public or a particular section of it. But does it include threats, as well as actual violence?
Another suggested characteristic of terrorism is that targets must be random – the intention being to make everyone fear they might be the next victim. Thus the increasing incidence of terrorism, especially random acts of terrorism, concerns everybody. In particular, the kidnapping of business executives and employees has become a serious threat.
In May 2006 gunmen abducted an American working for the United Nations in southern Somalia. Robert McCarthy, employed by the UN Children's Fund (UNICFF) was kidnapped on the outskirts of the Afmadow region. Kidnapping foreign workers has become a lucrative business for many militias and warlords in Somalia. Many aid organizations have chosen to work through local agencies or staff due to the significant risks involved in delivering aid to the country's 10 million people.
One precaution by business managers against their firms becoming terrorist targets is to try to develop a benevolent image through charitable contributions to the local community. Foreign direct investment (FDI) is another kind of contribution to host countries and particularly important for developing countries. Private firms there are critical to economic growth. They provide not only goods and services but also the vast majority of jobs, and they are the primary source of taxes that contribute to public health, education, infrastructure and other services.
Foreign firms in developing countries can increase productivity by providing training and development in management best practices. These firms can also increase national income by generating sales and developing business for local companies. Foreign firms tend to be large and to hire local suppliers. They provide technical assistance and other information to improve the quality of their products.
Foreign firms sometimes bring with them innovative technology and budgets for further research and development. This technology' is transferred to sectors of the local economy through employee and supplier training and technical assistance, thereby decreasing the technology gap between developed and developing nations.
Technology is also diffused by foreign firms through local licenses. Employees of multinational firms are trained in new technology and management. Once they leave the foreign firm for a local company, or to create their own company, they bring their new expertise to their new positions.
Foreign direct investment normally expands women’s employment opportunities and increases women’s wages in the developing world. The gender wage gap tends to be lower in countries with higher net levels of such investment.
Apart from the above contributions, foreign firms’ managers generally find it safer to maintain low profiles and minimize publicity in host countries. They rent or buy modest accommodation, both residential and business. They employ local people as much as they can, celebrate local festivals, commission discreet corporate signs at company sites, paint slogans in the local language on their transport vehicles and generally blend in as much as possible with the local population.
ECONOMIC RISK
In financing a project, the economic risk is that the project’s output will not generate sufficient revenues to cover operating costs and to repay debt obligations. However, in international terms it refers to risks associated with changes in exchange rates or local regulations, which could favor the services or products of a competitor.
Economic risks may threaten foreign corporations through their subsidiary operations or other investments overseas. These may become unprofitable through no fault of the parent – for instance, if relevant government policies should change.
The University of Sydney Library Newsletter of May 2002 reported that the cost of books and journals was increasing at rates greater than other commodities. The challenge for libraries had been complicated further by devaluation of the Australian dollar. More than 80% of the information resources purchased by the library are imported and are paid in a foreign currency. Around 50% of these transactions are in US dollars.
Thus even small movements in the currency exchange rates have significant effects on relatively small corporate budgets; and the larger the company the more the risk.
LEGAL ENVIRONMENTS
The United Nations Convention on Contracts for the International Sale of Goods is an international agreement that regulates business worldwide by spelling out the rights and obligations of sellers and buyers. The Convention became law on 1 January 1988 and applies to contracts for the sale of goods between countries that have adopted it.
Prudent global managers consult with legal services, both locally and at headquarters, to comply with host-country regulations and to maintain cooperative long-term relationships. If managers wait until problems arise, little legal recourse may be available apart from local interpretation and enforcement.
This has been the experience of some foreign managers in China, where financial and legal systems have not kept pace with internalization. Chinese managers sometimes simply ignore their debts to foreign companies and Beijing does not always stand behind the commitments of its state-owned enterprises. However, managers of foreign subsidiaries or foreign operating divisions must and usually do comply with the host country's legal system. Such systems, derived from common law, civil law or Muslim law, are a reflection of the country’s culture, religion and traditions.
Under common law, used in Australia, the United States and 25 other countries of English origin or influence, past court decisions act as precedents to the interpretation of the law and to common custom.
Civil law is based on a comprehensive set of laws organized into a code. Interpretation of these laws is based on reference to codes and statutes. About 70 countries, predominantly in Europe (e.g. France and Germany), are ruled by civil law, as is Japan.
In Islamic countries, such as Saudi Arabia, the dominant legal system is Islamic law; based on religious beliefs, it dominates all aspects of life. Islamic law is followed in approximately 27 countries and combines, in varying degrees, civil, common and indigenous law. ‘Our Lord! Give us good in this world, and good in the Hereafter ,.. So begins the invitation of the Dow Jones Islamic Index Fund to people to invest in accordance with fundamentalist Islam.
Contract law
Under contract law, agreements are made between parties on the rules that will govern a business transaction. Contract law plays a major role in international business because of differences in respective legal systems and because the host government may be a third party in the contract.
Both common law and civil law countries enforce contracts, although their means of resolving disputes differ. Under civil law, it is assumed that a contract reflects promises that will be enforced without specifying the details in the contract; under common law, the details of promises must be written into the contract to be enforced.
Western company negotiators are inclined to believe they can avoid political risk by spelling out every detail in a contract, but in non-Western cultures the contract is in the relationship, not on the paper, and the way to ensure the reliability of the agreement is to nurture the relationship.
Astute international managers recognize that they will have to draft contracts in legal contexts different from their own, and so they prepare themselves accordingly by consulting with experts in international law before going overseas.
Neglect of contract law may leave firms burdened with agents who do not perform expected functions, or faced with laws that prevent management from laying off employees (often the case, for example, in Australia, Belgium, France, Germany, The Netherlands, New Zealand and Sweden).
In general, law has three basic characteristics in every society: it sets rules for 'good' behavior, demands these rules be followed and punishes those who break them. The four functions of law are to inform individuals of their rights and duties in society; to control and prevent undesirable behavior; to promote social and economic welfare of society; and lo reflect the norms, values, aims and general beliefs (the culture) of the society.
THE TECHNOLOGICAL ENVIRONMENT
The effects of technology around the world are pervasive – both in business and in private lives. Advances in information technology are bringing about increased productivity – for employees, for companies, and for countries. The Internet, the submarine fiber-optic cable and the communications satellite are now cast in the role once played by ocean-going steamships.
Investment-led globalization is leading to global production networks, a global diffusion of technology to link parts of the value-added chain in different countries. That chain may comprise parts of the same firm, or it may comprise suppliers and customers, or technology-partnering alliances among two or more firms. Either way, technological developments result in network structures within organizations that allow flexibility and rapid response to local needs.
New technology' represents a key competitive advantage to firms. International managers oversee the transfer and diffusion of proprietary' technology', with its attendant risks. Whether it is a product, a process or a management technology, its owners’ major concern is to profit from it while protecting it from competitors.
The most common forms of protecting proprietary technology are patents, trademarks, trade names, copyrights and trade secrets. Various international conventions do afford some protection in participating countries; more than 80 countries adhere to the International Convention for the Protection of Industrial Property, often referred to as the Paris Union, for the protection of patents. However, restrictions and differences in the rules in some countries not signatory to the Paris Union, as well as industrial espionage, pose continuing problems for firms trying to protect their technology.
One risk to a firm’s intellectual property is the inappropriate use of the technology by joint-venture partners, franchisees, licensees and employees. Some countries rigorously enforce employee secrecy agreements.
Another major consideration for global managers is the need to evaluate the appropriateness of technology for the local environment – especially in less developed countries. Studying the possible cultural consequences of the transfer of technology managers must assess whether the local people are ready and willing to change their values, expectations and behaviors on the job to use new technological methods.
Informed choice may be for capital-intensive, labor-intensive or intermediate technology, but in every case it should suit the level of development in the area, and the needs and expectations of the people who will use it.
Global e-business
In spite of global trade’s slower than expected pace of advancement over the Internet, without doubt the Internet has had a considerable impact on how companies buy and sell goods around the world – mostly raw materials and services going to manufacturers. Internet-based electronic trading and data exchange are changing the way companies do business, while breaking down global barriers of time, space, logistics and culture.
Internet-based electronic trading and data exchange involve new concepts and integration of systems, processes, organizations, value chains and entire markets. However, the Internet is not totally open; governments still make sure that their laws are obeyed in cyberspace. This became clear when France forced Yahoo! to stop displaying Nazi trinkets for sale where French people could view them. The reality is:
Different nations, and different peoples, may want a different kind of Internet – one whose language, content and norms conform more closely to their own?
E-commerce refers directly to the marketing and sales process via the Internet. Firms use e-business to help build new relationships between businesses and customers. The Internet and e-business provide a number of uses and advantages in global business, including the following:
Convenience in conducting business worldwide – facilitating communication across borders contributes to the shift toward globalization and a global market
An electronic meeting and trading place, which adds efficiency in conducting business sales
A corporate intranet service, merging internal and external information for enterprises worldwide
Power to consumers as they gain access to limitless options and price differentials
A link and efficiency in distribution.
Although most early attention was on e-commerce, experts now believe the real opportunities are in business-to-business (B2B) transactions. It is noteworthy that a large proportion of current and projected B2B use is by small and medium-sized firms.
Barriers to (lie adoption and progression of e-business around the world include lack of readiness of partners in the value chain, such as suppliers. If companies want to have an effective marketplace, they usually must invest in increasing their trading partners' readiness and their customers’ capabilities.
Other barriers to creating global e-businesses include differences in physical, information and payment infrastructure systems. In such situations, innovation is required to use local systems for implementing a Web strategy. In Japan, for example, very few transactions are conducted using credit cards. Typically, bank transfers and COD are used to pay for purchases. Also, many Japanese use convenience stores, such as 7-Eleven Japan, to pay for their online purchases by choosing that option online.
In spite of various problems, uses of the Internet continue to be discovered. For example, the European Commission advertises tender invitations online in order to transform the way public sector contracts are awarded.
In Australia, Steven Deare reported in June 2006 that Coles Supermarkets was creating an EANnet electronic product catalogue, a supply chain network expected to end the industry’s reliance on paper-based ordering. Those in charge hope to end administration costs associated with the paper-based form of purchase orders. One of the benefits of their B2B model is its ability' to track and trace all documents throughout the whole process of purchase order-settlement.
A major problem always with introduction of new technology is resistance to change. For example, at Coles some employees remain stubborn, dedicated users of the paper-based universal buying form (UBF). Many have been buying roles for decades 'and they really love that UBF. They love it!'
LECTURE 3. STRUCTURES AND CONTROLS FOR OVERSEAS EXPANSION