Assessing the Environment & Managing Interdependence, Social Responsibility, Ethics and Sustainability
30/09/2014 Dr Nick Papageorgiadis

The notion of a firm with a unique national identity is quickly fading. A Bermuda-incorporated, Paris-headquartered firm, listed on the NYSE with US style investor protections and disclosure rules, a chief information officer in Bangalore, a chief finance officer in Brussels and a chief operating officer in Beijing may not sound nearly so fanciful in the near future.
Desai, M. A. (2009). The decentering of the global firm. The World Economy, 32(9), 1271-1290.

What is International Management?

The process of developing strategies, designing and operating systems, and working with people around the world to ensure sustained competitive advantage

The Global Manager’s Role

Contents
Assessing the Environment:
• • • Understand the global business environment and how it affects the strategic and operational decisions which managers must make. Critically assess the developments, advantages, and disadvantages of globalization. Develop an appreciation for the ways in which political, economic, legal, and technological factors and changes impact the opportunities that companies face. Appreciate the complexities involved in the corporation’s obligations toward its various constituencies around the world. Understand the changing perceptions and demands of corporations doing business in other countries, in particular the responsibilities toward human rights. Recognize that companies must provide benefits to the host country in which they operate in order to maintain cooperation. Discuss the need for corporations to consider sustainability in their longterm plans in order to manage environmental impacts on host locations.

Managing Interdependency:
•

•
• •

1

The Globalization of Risk
Top two risks: • Severe income disparity • Chronic fiscal imbalances Other issues: natural disasters such as 2011 earthquake in Japan, flood in Thailand, political uncertainty in China and Middle East Globalization has compounded the types and level of business risks

1

Typical Challenges that Managers Face in the 21st Century      Political and cultural differences Global competition Terrorism Technology Finding ways to balance their social responsibilities, their images, and their competitive strategies

1

What is Globalization?
Global competition characterized by networks of international linkages that bind countries, institutions, and people in an interdependent global economy

1

Global Trends
• Five key global trends:
• Changing balance of growth towards emerging markets • Need for increased productivity and consumption in

developed countries • Increasing global interconnectivity • Increasing gap between supply and demand of natural resources • Challenge for governments to develop policies for economic growth and financial stability

Challenges to Globalization
Backlash against capitalism and rekindling of nationalism
Increased protectionism of high-demand resources Need to develop top managers with international understanding and experience Increasing pressure and publicity for companies to consider the social responsibility of their actions

1

Effects of Globalization on Corporations
Global companies are becoming less tied to specific locations
Companies that desire to remain competitive will have to develop a cadre of experienced international managers Small companies are also affected by and in turn affect globalism

1

Regional Trading Blocs
Much of today’s world trade takes place within these three regional free-trade blocs: Western Europe, Asia, and the Americas Much of today’s world trade is grouped around three dominant currencies: euro, yen, and the dollar These trade blocs are continually expanding their borders to include neighboring countries

1

The European Union “EU”
A unified market over 500 million people living in 27 nations Stability of the euro is in question and the ability of the “EU” to deal with the debt crisis of some members EU poses two challenges for global managers:
1. “Fortress” Europe 2. Dealing with multiple cultures within this unified market

Asia
China India ASEAN South Asia Association of Regional Cooperation (SAARC) Japan Asian Tigers:
Hong Kong Singapore South Korea Taiwan

The Americas
    North American Free Trade Agreement (NAFTA) Brazil MERCOSUR Central America Free Trade Agreement (CAFTA)

1

Other Regions in the World
The Russian Federation Middle East The African Union—AU South Africa Less developed countries—LDCs
Low Gross National Product (GNP) Low Gross Domestic Product (GDP) Large, relatively unskilled workforce High international debt

Globalization of Information Technology
 The speed and accuracy of information transmission are

changing the nature of international manager’s jobs  Cultural barriers are being lowered gradually  Technology gets dispersed around the world by MNEs  Explosive growth of information technology is both a cause and effect of globalism

Globalization of Human Capital
Increasing trend in the offshoring of manufacturing jobs and outsourcing of white-collar jobs The Indian ITES sector has 700,000 jobs worldwide and comprises 35% of BPO market For global firms, winning the war for talent is a pressing issue

Develop an appreciation for the ways in which political, economic, legal, and technological factors and changes impact the opportunities that companies face.

The Political and Economic Environment
Sustainability—economic, political, social, and environmental—has become a significant worldwide issue
Ethnicity—a driving force behind political instability around the world Religion—religious disputes lie at the heart of regional instabilities, for example, former Yugoslavia, the Middle East… 1

Political Risk
Any governmental action or politically motivated event that could adversely affect the long-term profitability or value of a firm

Examples:
Argentina announced plans to nationalize Repsol YPF, the Spanish oil co., taking 51%. In Russia, the Kremlin exploited the financial crisis to take control of energy companies.

Definition of Political Risk
“Risk is not a tangible thing but a bundle of expectations concerning potential future instability that have a market value and determine future earnings. In other words, risk is a subjective perception of how instability may affect the firm and it is assessed in order to predict the likelihood of different types of instability. Being a subjective measure, political risk can be overemphasised by analysts . . . or underemphasised.”

Frynas (1998), p. 458-9

22

Political Risk
Typical Political Risks
Expropriation and confiscation Nationalization Terrorism Discriminatory treatment Barriers to repatriation of funds Interference in managerial decision making Dishonesty by government officials

Political Risk Assessment
Helps companies manage exposure to risk and minimize financial loss

Two forms: Consultation with experts Development of internal staff capabilities – increasingly common

Managing Political Risk
Avoidance and Adaptation
Equity sharing Participating management

Dependency and Hedging
Input control Market control Position control Staged contribution Political risk insurance (OPIC and FCIA) Local debt financing

Localization of the operation
Development assistance

Managing Terrorism Risk
Develop a benevolent image (IBM and Exxon).
Maintain a low profile and minimize publicity. Using teams to monitor terrorist activities

Hiring counterterrorism consultants

Measuring Political Risk
Objective measurement of risk – use of available data to quantify possible adverse outcomes and allocate a probability of such outcomes Problems – often dealing with outcomes which are hard to identify and measure and likelihood of them occurring is not known

26

Methods of measuring political risk
Subjective measurement of risk – obtain best opinion from experts to assess type and likelihood of adverse outcomes –either qualitative or quantitative assessment. Problems – quality of expert opinion – problems of deciding on the importance or qualitative assessment – validity of quantitative assessments

27

Global Peace Index

Vision of Humanity (2010)

28

Economic Risk
Closely related to political risk Determined by a country’s ability or intention to meet its financial obligations Historically, most industrialized nations have posed little risk of economic instability, however the level of economic risk in the EU is of great concern

Categories of Economic Risk
1. Loss of profitability due to abrupt changes in monetary and fiscal policies 2. Loss of profitability due to changes in foreign investment policies 3. Risk of currency exchange rate

1

Managing the Economic Risk

Quantitative Approach

Qualitative Approach

Checklist Approach

Combination of these Methods

The Legal Environment

Consists of the local laws and legal systems of those countries in which an international company operates, and of international law, which governs relationships between sovereign countries

The Legal Environment
Types of Legal Systems
Common law Civil law Islamic law

Approaches to Contract Law
Common law: details must be written in the contract to be enforced

Civil law: assumes promises will be enforced without specifying the details In Asia the contract may be in the relationship, not on the paper

Other Regulatory Issues
• Protectionist policies, such as tariffs or quotas • The attractiveness of the tax system • The level of government involvement in the economic and regulatory environment

The Technological Environment
The appropriability of technology The International Convention for the Protection of Industrial Property (the Paris Union) Inappropriate use of technology by JVs, franchisees, licensees, and employees Appropriateness of technology for the local environment

The Impact of Information Technology
• • • •
•

Making Geographic barriers less relevant Both cause and effect of globalization Lowering cultural barriers Encouraging convergence of consumers’ tastes and preferences However, China still monitors and limits electronic information

Global E-Business
E-Business—the integration of systems, processes, organizations, value chains, and entire markets using Internet-based and related technologies and concepts

E-Commerce—marketing and sales process via the internet

B2B—Business to Business (Example: Alibaba in China, large proportion is SMEs) B2C—Business to Customer (Example: Amazon.com)

Intellectual Property Management in Extended Entreprises

Firms as Managers of IP
Human Capital Experience Know-how Skills Creativity

Intellectual Assets
Documents Drawings Programs Data Inventions Processes

Complementary Business Assets
Manufacturing facilities Distribution networks Customer lists Supplier networks Organisational capabilities

Structural Capital
Physical workspace IT systems Marketing plans HR policies

Intellectual Property Patents Copyright Trademarks Trade Secrets Designs (eg Semiconductor)

Commercialisation

Source: Sullivan (1998)

39

Strengthening patent legislation levels

Papageorgiadis et al. index (2014)
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Country Finland Denmark Sweden New Zealand Netherlands Singapore Norway Canada Switzerland Australia Germany Japan Hong Kong UK Iceland Austria Ireland Belgium USA France Chile Israel Spain Portugal Taiwan Score 9.41 9.40 9.31 9.23 9.05 9.04 8.95 8.92 8.90 8.81 8.41 8.41 8.35 8.29 8.25 8.20 8.20 8.02 7.88 7.65 7.64 6.90 6.90 6.80 6.77 Rank 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 Country Poland Korea (South) Hungary Czech R. Malaysia South Africa Jordan Italy Turkey Slovakia China Greece Brazil Romania India Colombia Mexico Argentina Thailand Philippines Indonesia Russia Ukraine Venezuela Score 6.43 6.42 5.95 5.80 5.59 5.58 5.52 5.51 5.39 5.35 5.18 5.11 4.98 4.96 4.84 4.79 4.62 4.60 4.55 4.46 4.26 3.98 3.87 3.38

Note: 0-10 scale (0=weak and 10=strong)

Strategies against counterfeiting and piracy
Internal • Innovation (one step ahead) • Technical solutions (Holographic and three dimensional labels, smart tags) • Product line extension • Price reduction • Added value (connect with services) • Investigation and monitoring • Internal assessment of value chain • External users(lawsuits)

43

Strategies against counterfeiting and piracy
External • Industry coalitions • Collaboration / network / lobby with enforcement agencies • Campaigns to educate the public • Internalisation of retailing • Licensing

44

Managing Interdependence

Social Responsibility and
Ethics

The Social Responsibility of MNC’s

CSR Dilemma

Profit is MNC’s only goal

MNCs should anticipate and solve social needs

MNC Stakeholders
MNC Stakeholders
Home Country
Owners Customers Employees Unions Suppliers Distributors Strategic Allies Community Economy Government

Host
Economy Employees Community Host Government Consumers Strategic Allies Suppliers Distributors

MNC
Society in General

Global interdependence/standard of living Global environment and ecology Sustainable resources Population’s standard of living

Benefits from CSR
•
• •

•
•

Improved access to capital Secured license to operate Revenue increase and cost and risk reduction Better brand value and reputation with customer attraction and retention Improved employee recruitment, motivation, and retention

Global Consensus or Regional Variation?
Global Corporate Culture: An integration of the business environments in which firms currently operate

The United States and Europe adopt strikingly different positions that can be traced largely to history and culture.

International Codes of Conduct

 



International Chamber of Commerce OECD ILO United Nations Commission on Transnational Corporations The Sweatshop Code of Conduct The Electronic Industry Code ofConduct (EICC) Social Accountability 8000 (SA 8000)


 

Dealing with Confusion About Cross-Cultural Dilemmas
• Engaging stakeholders (and sometimes NGOs) in a dialog • Establishing principles and procedures for addressing difficult issues such as labor standards for suppliers, environmental reporting, and human rights • Adjusting reward systems to reflect the company’s commitment to CSR

General Guidelines for Code of Morality and Ethics in Individual Countries
• Addressing the need for a moral standard that is accepted by all cultures • Applying the morality used in home country—regardless of the host country’s system of ethics
• Adopting the local moral code of whatever country in which a firm is operating

Moral Universalism

Ethnocentric Approach

Ethical Relativism

Corruption Perception Index

Transparency International (2010)

53

Institutions Perceived to be Most Affected by Corruption
The 2009 Global Corruption Barometer asked more than 73,000 individuals around the world the extent to which they perceive six key sectors and institutions to be corrupt.
Transparency International (2009)
54

Ethics in Global Management

International Business Ethics

The business conduct or morals of MNCs in their relationship with individuals and entities

Ethics vary based on the cultural value system in each country or society

A Moral Philosophy of Cross-Cultural Societal Ethics

Robertson, C. J., & Crittenden, W. F. (2003). Mapping moral philosophies: Strategic implications for multinational firms. Strategic Management Journal, 24(4), 385-392.

Ethical Use of Technology
• Varied expectations about the use of technological devices/programs as they intersect with people’s private lives • EU Directive on Data Protection  Google mapping service • Sony PlayStation Network

To Bribe or NOT to Bribe?
Questionable Payments
Paying mail carriers in Mexico to prevent them from “losing” mail Paying $100 to get a computer picked up from a rainy dock Gift-giving to bond social ties

Managing Corruption
Foreign Corrupt Practices Act (FCPA)
Organization for Economic Cooperation and Development convention on bribery

Three Tests of Ethical Corporate Actions

Is it legal?
Does it work in the long run?

Can it be talked about?

The Process for Companies to Combat Corruption and to Minimize the Risk of Prosecution
• Having a global compliance system which shows that employees have understood, and signed off on, the legal obligations regarding bribery and corruption in the countries where they do business • Making employees aware of the penalties and ramifications for lone actions, such as criminal sanctions • Having a system in place to investigate any foreign agents and overseas partners who will be negotiating contracts • Keeping an effective whistle-blowing system in place

Policies to Help MNCs to Confront Concerns About Ethical Behavior and Social Responsibility
• Develop worldwide code of ethics. • Build ethical policies into strategy development. • Plan regular assessment of the company’s ethical posture. • If ethical problems cannot be resolved, withdraw from that market.

Recognize that companies must provide benefits to the host country in which they operate in order to maintain cooperation.

Managing Subsidiary—Host-Country Interdependence
Common Criticism of MNC Subsidiary Activities
1. MNCs locally raise their needed capital, contributing to a rise in interest rates in host countries. 2. The majority (sometimes even 100 percent) of the stock of most subsidiaries is owned by the parent company. Consequently, hostcountry people do not have much control over the operations of corporations within their borders. 3. MNCs usually reserve the key managerial and technical positions for expatriates. As a result, they do not contribute to the development of host-country personnel.

Common Criticism of MNC Subsidiary Activities Cont.
4. 5. 6. 7. 8. MNCs do not adapt their technology to the conditions that exist in host countries. MNCs concentrate their research and development activities at home, restricting the transfer of modern technology and know-how to host countries. MNCs give rise to the demand for luxury goods in host countries at the expense of essential consumer goods. MNCs start their foreign operations by purchasing existing firms rather than by developing new productive facilities in host countries. MNCs dominate major industrial sectors, thus contributing to inflation, by stimulating demand for scarce resources and earning excessively high profits and fees. MNCs are not accountable to their host nations but only respond to home-country governments; they are not concerned with host-country plans for development.

9.

Managing Subsidiary—Host-Country Interdependence

Require managers to go beyond issues of CSR to deal with specific concerns of MNC and hostcountry relationship.
MNCs must learn to accommodate the needs of other organizations and countries.

MNCs Benefits and Costs to Host Countries
Benefits Access to outside capital Foreign-exchange earnings Access to technology Infrastructure development Creation of new jobs More humane employment standards Costs Competition for capital Increased interest rates Inappropriate technology Development investment exceeds benefits Limited skills development Few managerial jobs for locals

Managing the Interdependence
The Risks of Interdependence
Issues in Managing Environmental Interdependence

Nationalism Protectionism Governmentalism

Coca-Cola in Rajasthan BP in the Gulf of Mexico

Export of pesticides
Integrating goals of sustainability into strategic planning

Recommendations for MNCs Operating in and Doing Business with Developing Countries
1. Do no intentional harm. This includes respect for the integrity of the ecosystem and consumer safety. 2. Produce more good than harm for the host country. 3. Contribute by their activity to the host country’s development. 4. Respect the human rights of their employees. 5. To the extent that local culture does not violate ethical norms, respect the local culture and work with and not against it. 6. Pay their fare share of taxes. 7. Cooperate with the local government in developing and enforcing just background institutions.