"The MGMT Solution," Vocabulary from Chapter 8

Another way to appreciate the impact of global business is by considering direct foreign investment.

Governments have used two general kinds of trade barriers: tariff and nontariff barriers. A tariff is a direct tax on imported goods. Tariffs increase the cost of imported goods relative to that of domestic goods.

There are five types of nontariff barriers: quotas, voluntary export restraints, government import standards, government subsidies, and customs valuation/classification.

Like quotas, voluntary export restraints limit the amount of a product that can be imported annually. The difference is that the exporting country rather than the importing country imposes restraints.

In theory, government import standards are established to protect the health and safety of citizens. In reality, such standards are often used to restrict or ban imported goods.

Many nations also use subsidies, such as long-term, low-interest loans, cash grants, and tax deferments, to develop and protect companies in special industries.

Protection of intellectual property has become an increasingly important issue in global trade because of widespread product piracy.

Global consistency means that a multinational company with offices, manufacturing plants, and distribution facilities in different countries uses the same rules, guidelines, policies, and procedures to run all of those offices, plants, and facilities. Managers at company headquarters value global consistency because it simplifies decisions.

By contrast, a company following a policy of local adaptation modifies its standard operating procedures to adapt to differences in foreign customers, governments, and regulatory agencies. Local adaptation is typically preferred by local managers who are charged with making the international business successful in their countries.

Historically, companies have generally followed the phase model of globalization, in which a company makes the transition from a domestic company to a global company in the following sequential phases: exporting, cooperative contracts, strategic alliances, and wholly owned affiliates.

Exporting as a form of global business offers many advantages. It makes the company less dependent on sales in its home market and provides a greater degree of control over research, design, and production decisions.

Under a licensing agreement, a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce its product, sell its service, or use its brand name in a particular foreign market.

A franchise is a collection of networked firms in which the manufacturer or marketer of a product or service, the franchisor, licenses the entire business to another person or organization, the franchisee.

Companies forming strategic alliances combine key resources, costs, risks, technology, and people.

The most common strategic alliance is a joint venture, which occurs when two existing companies collaborate to form a third company. The two founding companies remain intact and unchanged, except that together they now own the newly created joint venture.

One of the advantages of global joint ventures is that, like licensing and franchising, they help companies avoid tariff and nontariff barriers to entry.

Managing global joint ventures can also be difficult because they represent a merging of four cultures: the country and the organizational culture of the first partner, and the country and the organizational culture of the second partner.

Although the payoff can be enormous if wholly owned affiliates succeed, the losses can be immense if they fail, because the parent company assumes all of the risk.

First, the company founders successfully develop and communicate the company’s global vision from inception.

An attractive global business climate positions the company for easy access to growing markets, is an effective but cost-efficient place to build an office or manufacturing facility, and minimizes the political risk to the company.

Purchasing power is measured by comparing the relative cost of a standard set of goods and services in different countries.

The second part of assessing the growth potential of global markets involves analyzing the degree of global competition, which is determined by the number and quality of companies that already compete in a foreign market.

Some foreign offices are established through global mergers and acquisitions, and some are established because of a commitment to grow in a new market.

Although a company must be legally incorporated in one place, some companies have anywhere from nine to twenty-three global hubs and don’t regard any one as more central than another.

Quantitative factors such as the kind of facility being built, tariff and nontariff barriers, exchange rates, and transportation and labor costs should also be considered when choosing an office/manufacturing location.

Policy uncertainty is the most common—and perhaps most frustrating—form of political risk in global business, especially when changes in laws and government policies directly undercut sizable investments made by foreign companies.

The following factors, which were used to compile these ratings, indicate greater political risk: government instability, poor socioeconomic conditions, internal or external conflict, military involvement in politics, religious and ethnic tensions, high foreign debt as a percentage of gross domestic product, exchange rate instability, and high inflation.

Firms using a control strategy lobby foreign governments or international trade agencies to change laws, regulations, or trade barriers that hurt their business in that country.

Another method for dealing with political risk is cooperation, which involves using joint ventures and collaborative contracts, such as franchising and licensing.

His research shows that there are five consistent cultural dimensions across countries: power distance, individualism, masculinity, uncertainty avoidance, and short-term versus long-term orientation.

The fact that something as simple as a safety policy can be perceived differently across cultures shows just how difficult it can be to standardize management practices across different countries and cultures.

The difficulty of adjusting to language, cultural, and social differences is the primary reason for expatriate failure in overseas assignments.

Predeparture language and cross-cultural training can reduce the uncertainty that expatriates feel, the misunderstandings that take place between expatriates and natives, and the inappropriate behaviors that expatriates unknowingly commit when they travel to a foreign country.

Documentary training focuses on identifying specific critical differences between cultures.

After learning specific critical differences through documentary training, trainees can participate in cultural simulations, in which they practice adapting to cultural differences.

Finally, field simulation training, a technique made popular by the U.S. Peace Corps, places trainees in an ethnic neighborhood for three to four hours to talk to residents about cultural differences.

Not all international assignments are difficult for expatriates and their families, but the evidence clearly shows that how well an expatriate’s spouse and family adjust to the foreign culture is the most important factor in determining the success or failure of an international assignment.

Adaptability screening is used to assess how well managers and their families are likely to adjust to foreign cultures.

In fact, it may be more important because, unlike expatriates, whose professional jobs often shield them from the full force of a country’s culture, spouses and children are fully immersed in foreign neighborhoods and schools.

In addition to helping families prepare for the cultural differences they will encounter, language and cross-cultural training can help reduce uncertainty about how to act and decrease misunderstandings between expatriates and their families and locals.