University of Sunderland

Master of Business Administration (MBA)

International Business
Environment
Version 2.0
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The University of Sunderland

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International Business Environment

Contents

How to use this workbook

Preface

Unit 1
Introduction to International Business Environment
Introduction 1
What is Business? 2
Business Organisation 6
Business Strategy 15
Marketing Orientation 22
Corporate Governance 27
Summary 29
References 30

Unit 2
Globalisation and FDI
Introduction 33
What is Globalisation? 34
Internationalisation Theories 38
Transnational, Multinational and Global Corporations 41
FDI and Trends in Globalisation 46
Impact of Improvements in Industrial Production 48
Impact of Globalisation on Corporations 50
The Globalisation Debate 57
Summary 59
References 60

Unit 3
National Economic Systems
Introduction 63
Economic Fundamentals 64
Role of Governments 68
World Economic systems 70
Globalisation and Regionalisation 75
International Business Environment – Contents International Business Environment

Summary 77
References 78

Unit 4
The Cultural Environment
Introduction 81
Culture in the Context of Managing Business 82
National Cultures 83
Languages 85
Religions 86
Multicultural Societies 89
Cultural Theories 90
Organisational Culture 94
Cultural Globalisation 98
Summary 99
References 100

Unit 5
The Political Environment: National and International
Political Forces
Introduction 103
The Political State 104
Impact of Political Decision Making on International Business 108
International and Regional Regulation 109
Democracy and Transitional Democracies 111
Political Risk and Impact on International Business 112
Company Strengths in a Political Context 114
Summary 115
References 116

Unit 6
The Social Environment of Business
Introduction 117
Society 118
Changing Populations 120
Changing Role of Trade Unions 125
Gender and Work 126
Families 127
Summary 129
References 130
International Business Environment International Business Environment – Contents

Unit 7
World Trade and the International Competitive Environment
Introduction 131
International Trade Theories 132
Government Trade Policy 136
International Regulation of Trade 137
Regional Trade Agreements 140
Developing Countries and World Trade 141
Summary 143
References 144

Unit 8
The Technological Environment
Introduction 145
Concepts and Processes 146
Theory of Industrial Waves 147
National System of Innovation 147
Patents and Innovation 150
Channels for International Technology Transfer 151
Recent Advances in Technology 152
Globalisation Issues 156
Summary 158
References 159

Unit 9
International Financial Environment
Introduction 161
Development of International Monetary System 162
Stock Exchanges 162
Determination of Exchange Rates 163
The Bretton Woods Institutions 164
Asian Financial Crisis, 1997 165
Mergers and Acquisitions 168
Developing Countries and the International Financial Environment 170
Summary 172
References 172
How to use this workbook
This workbook has been designed to provide you with the course
material necessary to complete International Business Environment by
distance learning. At various stages throughout the module you will
encounter icons as outlined below which indicate what you are required
to do to help you learn.

This Activity icon refers to an activity where you are required to undertake a
specific task. These could include reading, questioning, writing, research,
analysing, evaluating, etc.

This Activity Feedback icon is used to provide you with the information
required to confirm and reinforce the learning outcomes of the activity.

This icon shows where the Virtual Campus could be useful as a medium for
discussion on the relevant topic.

This Key Point icon is included to stress the importance of a particular piece of
information.

It is important that you utilise these icons as together they will provide
you with the underpinning knowledge required to understand
concepts and theories and apply them to the business and management
environment. Try to use your own background knowledge when
completing the activities and draw the best ideas and solutions you can
from your work experience. If possible, discuss your ideas with other
students or your colleagues; this will make learning much more
stimulating. Remember, if in doubt, or you need answers to any
questions about this workbook or how to study, ask your tutor.

i
International Business Environment

Preface

Learning outcomes:
Upon successful completion of this module, you will have:

1. Critically appraised the different frameworks in which

organisational decisions are made.
2. Identified key forces of globalisation, including the role of
multinational enterprises, foreign direct investment and
regionalism.
3. Analysed the impact of economic, social, cultural and political
factors on business operations and structures in a variety of
national environments.
4. Related theories of internationalisation, innovation and
competitive advantage to differing industries and locations.
5. Drawn together material from a variety of sources into coherent
arguments illustrating the roles and policies of organisations in
diverse locations.

Content synopsis:
Organisations in their internal and external environments.
Multinational enterprises in global business networks: Foreign Direct
Investment (FDI); OLI paradigm. Dimensions of globalisation.

National economic environments: the extent of convergence and

economic integration: Models of capitalism; transition economies;
changes brought about by privatisation and liberalisation of the
business environment.

The social and cultural environment and its impact on business

activities and organisations: national and organisational culture.

Political and legal environment and political risk to businesses: national

political systems; political stability and the business environment; legal
and regulatory systems and legal risk.

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International Business Environment – Preface International Business Environment

World trade and the international competitive environment: trade

theories; regional trade agreements; regional economic integration,
with particular focus on the European Union.

Technological environment: Innovation; research & development;

technology transfer.

iv
Unit 1

Introduction to International
Business Environment

LEARNING OUTCOMES
Following the completion of this unit you should be able to:

· Analyse the international organisational environment.

· Evaluate the various aspects of business organisation: culture,

structure, hierarchies and networks.

· Analyse the process of strategy formulation, and apply the basic

strategic tools.

· Explain the criticality of marketing orientation.

· Assess the role corporate governance plays in international business.

Introduction
The international business environment is multi­dimensional,
including economic, political, cultural and technological facets.
Increasingly these facets are becoming inter­related for countries
through the globalisation phenomenon. However, globalisation has not
always led to convergence, and considerable diversity exists and should
be expected between nations and regions. Success in the international
context is dependent on formulating strategies to arrive at the right
balance between globalisation and the localisation push. It is therefore
essential for the international manager to appreciate the global drivers
as well as the importance of local and regional differences. This is
critical for strategy formulation in today’s global and rapidly changing
environment.

This unit introduces the international business environment. It sets the

scene for students to understand the framework within which
organisational decisions are made. It examines the definition of
business, its forms and structures, the role of culture, and the issues of
hierarchy and networking. We then look at the process of strategy

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Unit 1 – Introduction to International Business Environment International Business Environment

formulation, and the vital role of marketing orientation in today’s

business environment. Corporate governance is also covered.

READING ACTIVITY
Please read Chapter 1, ‘The internal business environment’, of your key text,
Morrison, J (2006), which is essential reading for this unit.

What is Business?
Business refers to the activity of producing goods and services
involving financial, commercial and industrial aspects. The activity
undertaken is commonly referred to as the business activity. It includes
manufacturing, agriculture, mining, tourism, banking, construction
and building, etc. In today’s economy, there is a heavy emphasis on
business in the services sector. The services sector includes activities
such as tourism, financial services, leisure, entertainment, IT
consulting/ support, retail, etc.

Businesses are generally profit­making enterprises. However, the

definition of business also includes not­for­profit organisations such as
charities, government bodies and educational establishments.

Businesses usually start small. Typically an entrepreneur will have a

good idea that he/she believes has the potential to capture interest and
meet a need in a market segment. The entrepreneur will then invest
money and time to develop the idea and commercialise the idea. The
idea may involve a product or service or a combination of both. The
entrepreneur may invest his own funds or borrow funds or obtain
venture capital. Success of small businesses is dependent on the validity
of the market concept, vision and enthusiasm of the entrepreneur, and a
lot of hard work.

Many of today’s large businesses and global corporations started off as

small businesses with visionary market ideas.

ACTIVITY
A contemporary example of a business that started really small and has grown
to be globally successful is Google (providers of the Google internet search
engine). Google was started in 1998 by two Stanford University graduates in
their 20s, Larry Page and Sergey Brin, working out of their home in Menlo Park,

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International Business Environment Unit 1 – Introduction to International Business Environment

California. Google is now floating its shares on the stock exchange. Estimates
value Google at anything between $15bn – $25bn.

Read about the history of Google, the role of its entrepreneurs and its early
challenges establishing itself as a small business in:

http://www.google.com/corporate/history.html

Although most large businesses evolve from small beginnings, this is

not always the case. With the proper vision, market proposition and
business plan, it is possible to get the backing of investors (and indeed
potential clients) to start big. This is especially true with Joint Venture
initiatives, which address a particular gap in the marketplace and
attract large­scale investment; an example being the Air Bus consortium
(Airbus Industrie). Airbus Industrie was formed in 1970 as a
multinational effort between Germany, England and France to create a
high­capacity twin­jet transport.

Forms of Business
There are essentially three forms of business ownership :

1. Sole Trader
2. Partnership
3. Company; companies may be private or public limited
companies, depending on whether they offer shares to the public.

Additionally there are state­owned enterprises. State­owned

enterprises are owned and controlled by the state – generally these
manage areas such as public transport, public roads, national assets
such as oil, power. Increasingly even these areas are being privatised, as
there is a view that these industries can be managed and operated more
efficiently within the private sector, but with government regulators.

To get a fuller description of the forms of business, students are required

to refer to p. 7­12 of your Key text, International Business Environment, J
Morrison

Classifications of Business
A commonly used classification system for businesses is as follows:

1. Small: 0­49 employees

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Unit 1 – Introduction to International Business Environment International Business Environment

2. Medium: 50­249 employees

3. Large; 250+ employees

To get a fuller description of the classifications of business, students are

required to refer to p. 11­12 of your Key text, International Business
Environment, J Morrison

SMEs
Small to Medium­size enterprises, abbreviated as SMEs, are significant
players in business. They account for over 95% of firms and 60­70% of
employment in OECD countries. The advent of e­commerce, in
particular, offers SMEs considerable opportunities to expand their
customer base and enter new markets. They have a new global reach
previously unafforded. Using new technologies, they are also able to
achieve supply­chain efficiencies by exploiting e­business. However,
there is still a high initial cost to establishing the infrastructure
necessary to exploit these new opportunities. Governments in the
OECD, wishing to promote SMEs because of the potential contribution
they make to the economy, are implementing programmes (e.g. tax
breaks) to assist SMEs.

ACTIVITY
Read the following OECD Brief: Small and Medium-sized Enterprises; Local
Strength, Global Reach

http://www1.oecd.org/publications/pol_brief/2000/2000_02.pdf

International Business
International business refers to business activities that straddle two or
more countries. At this stage it is pertinent to briefly introduce the
phenomenon of globalisation, and its impact on business. (We shall
revisit globalisation in more detail in Unit 2.)

A fundamental shift has been occurring in the world economy. There

has been a move away from a world in which national economies were
relatively isolated from each other by barriers to cross­border trade /
investment; by distance, time zones, language and by national
differences in government regulation, culture and business systems.

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International Business Environment Unit 1 – Introduction to International Business Environment

We have been moving towards a world in which national economies are

integrated into an interdependent global economic system. The rate at
which this shift is occurring has been accelerating and is set to continue.

Globalisation is the phenomenon by which industries transform

themselves from multi­national to global competitive structures. Global
companies operate in the main markets of the world, and do so in an
integrated and co­ordinated way.

Although globalisation has gathered pace in the last few decades,

globalisation is not new. Globalisation strategies have been in existence
from the 1960s, at least.

The globalisation phenomenon has led to a transformation of

international business. Where previously international business
referred mainly to the activities of multinational companies, it now
focuses on global businesses; businesses that have an active,
co­ordinated and integrated presence in the main regions of the world.
In the multi­national model, although the company has a presence in
many countries, it is not integrated in terms of organisational structure,
processes, knowledge sharing and exploitation of synergies. A truly
global company is a company that operates in the main markets of the
world in an integrated and co­ordinated way. This includes the
dimensions of globalisation of production, and globalisation of
marketing. Examples of global companies are Coca Cola, IBM, Citibank.

KEY POINT
· International Business has accelerated with globalisation.

· In the context of business, globalisation is the phenomenon by which

industries transform themselves from multi-national to global
competitive structures.

· Global companies, in contrast to multi-national companies, operate

in the main markets of the world and do so in an integrated and
co-ordinated way.

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Unit 1 – Introduction to International Business Environment International Business Environment

Business Organisation

Business Structure
There are a variety of organisational structures that have been adopted;
some better suited to supporting the international business
environment and the increasing need for cross­functional collaboration
than others. Traditionally, organisations structured themselves around
the specialisations of human resources within the organisation, e.g.
Engineering, Production, Marketing, Finance, etc. Such structures
supported the objectives of traditional forms of business, e.g. factories,
production environment. In such industries it was not necessary to have
the level cross­functional and cross­country collaboration that is
necessary in today’s global and knowledge­based economy. Thus
global players are adopting different structures. We shall look at this in
more detail later.

Whatever the structure, the organisation will have the constituent parts,
shown in Figure 1.1, resident somewhere within the organisation.

Top
level
management

Middle
management

Operating
core

Figure 1.1. The constituent parts of the organisation, based on Mintzberg(1989)

1. Top level management has overall responsibility for the

organisation. They formulate strategy, set out the mission,

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International Business Environment Unit 1 – Introduction to International Business Environment

objectives and aims of the organisation. They hold the vision of

the company.
2. Middle management consists of the senior managers to whom
authority is delegated from top level management. They direct
the day to day activities of the organisation and have
accountability for these activities.
3. Infrastructure staff support the core business by defining
processes and standards, and providing IT infrastructure
4. Support staff support the organisation in areas outside the core
business, typically HR, payroll and legal functions
5. The Operating core in many ways is the crux of the company. It
refers to those who perform the work relating to producing the
goods and services of the company.

ACTIVITY
Figure 1.1 is, in fact, based on the Mintzberg Organisational Configurations
model, Mintzberg (1989). Research Mintzberg’s publications to get a fuller
elaboration of the organisational model, as well as his thoughts on organisations
and how they are managed.

Essentially there are three broad types of organisation structures:

1. Functional organisations
2. Divisional organisations
3. Matrix organisations

Let us examine these in turn, but from the perspective of a global

organisation

Global functional organisation

In functional organisations staff are grouped by their specialty, e.g.
product development, marketing, operations, etc. Within the
organisation, each employee will report to a single individual, their
superior or manager. In a global organisation, there may be country or
regional subsidiaries (with local functional managers) reporting to the
Global General Manager/Vice President of the particular function. All
strategic decisions and operational policies will be made at corporate
headquarters. The only local decisions will relate to implementation of
policies (e.g. HR) and legal issues, which are country dependent.

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Unit 1 – Introduction to International Business Environment International Business Environment

Please refer to Figure 1.2 for a representation of the Global functional

organisation.

The weakness of functional organisations is that the Functional

Manager and staff within these organisations can be dedicated to their
own objectives, at the expense of corporate objectives. They do not
necessarily take the broader view of the company or customer
objectives or international differences – which invariably will require
interdisciplinary collaboration, worldwide. Communication across
organisations can also be stifled. Each functional department can be
competing rather than collaborating to achieve business objectives.
Another important weakness is that human resources cannot be shifted
(re­deployed) easily within the organisation. Today’s global
competitive environment requires mobility and flexibility in the
workforce, which is hard to achieve in a functional organisation.

Functional organisations are therefore not particularly suited to

facilitating inter­relationship of functions, or to the execution of
multi­disciplinary projects. They tend to operate as functional silos with
collaboration only at the management (Functional Head) level. The
problems are clearly compounded with global organisations. Global
functional organisations are also at a disadvantage, even within the
function, when the markets and business environments in the countries
it operates in are vastly different.

Chief
Executive
(Corporate HQ)

Global Global Global Global

Functional Head 1 Functional Head 2 Functional Head 3 Functional Head N
Product Development R&D Marketing Other

Country 1 Country 1 Country 1 Country 1 Country 1

Subsidiary Product Development R&D Marketing Other

Country 2
Subsidiary

Country 3
Subsidiary

Region N Region N Region N Region N

Product Development R&D Marketing Other
Region N
Subsidiary

Figure 1.2: Global Functional Organisation Structure

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International Business Environment Unit 1 – Introduction to International Business Environment

Global divisional model

In this model the global organisation is structured along product or
services lines. The organisation is split into divisions (or business units)
each with responsibility for a particular market offering (product,
services or both). Refer to Figure 1.3. Each division General Manager or
Vice President is responsible for the global performance of his business
unit. The sales, production, marketing and, sometimes even, R&D
functions relating to that market offering will report into the division.
So, in contrast to the functional model, the particular functions relating
to the business division will be contained in that division.

In such a model the corporate headquarters role is limited to overall

strategic planning and finance. Where synergies exist between divisions
the corporate headquarters may play a more proactive role and provide
support in the form of education and training, R&D, legal advice and
financing.

The disadvantage with this model is that there is little coordination

between the business units. Particularly with large IT services projects
or engineering projects, coordination between business divisions is
vital. Poor signals can be sent to the customer who may have to deal
with more than one sales person from each business division.
Furthermore the global divisional model although strong on global
efficiency, achieves this often at the expense of local responsiveness.
Thus the success of this model is very much dependent on how
standardised the products/services can be for the worldwide market.

Chief Executive
(Corporate HQ)

Global Business Global Business Global Business Global Business

Division 1 Division 2 Division 3 Division N

Sales

Marketing

Finance

Production

Figure 1.3: Global Divisional Structure

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Unit 1 – Introduction to International Business Environment International Business Environment

Global matrix organisations

Matrix organisations are between functional organisations and
divisional organisations. Many global organisations adopt a matrix
model with responsibilities shared between the product/services
divisions and geographical units. The global matrix organisation was
devised to balance globally efficiencies with local responsiveness.
Global efficiencies include shared infrastructure, processes, synergies
and leverage.

Please refer to Figure 1.4 for a representation of a global matrix

organisation. Staff in the matrix model will report to at least two bosses
– the global business division General Manager/Vice President as well
as the Country or Region General Manager/Vice President. It is quite
common in such organisations to operate projects across many
divisions, e.g. for IT services delivery. In these cases the Project
Manager will report to the region/country manager as well as to the
divisional managers. Project Managers/Project Executives have a high
profile in this structure. They play a key role in managing the conflicts
and tensions between the various divisions and country management,
thus optimising the trade­off between global efficiencies and local
responsiveness. This gives Project Managers/Project Executives a high
degree of authority on how the work is carried out on the project.

Chief Executive
(Corporate HQ)

Global Business Global Business Global Business Global Business

Division 1 Division 2 Division 3 Division N

Region Europe,
Middle East, Africa

Region North
America

Region South
America

Region Asia
Pacific

Figure 1.4: Global Matrix Organisation

Although matrix organisations are designed to achieve global

efficiencies with local responsiveness, there are problems associated
with this model also. In particular, there are often conflicts between the
various ‘bosses’, and decision making can be protracted because of the

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International Business Environment Unit 1 – Introduction to International Business Environment

need to get agreement from the country as well as divisional heads in

the matrix. But perhaps the biggest danger is that project managers may
adopt compromise and mediocre solutions in order to satisfy all parties
in the matrix.

To successfully implement a matrix structure, a collaborative and

inter­working culture needs to be encouraged and rewarded. Incentives
should be based on cross­functional team­working, and similarly
internal accounting procedures should reward managers for
collaboration as well as achieving their own narrow objectives.

ACTIVITY
Coca Cola is one of the most successful global organisations with a presence in
almost every country. It maintains a standard level of quality associated with its
strong global brand. Indeed, its global branding strategy is to offer a
standardised product, which is highly consistent across the world. (Coke in the
USA is the same as Coke in India or Coke in China).

One of the advantages of global branding is that, from an organisational

perspective, it reinforces corporate identity, and facilitates transfer of human
resources and best practices across the organisation.

Carry out some research to analyse the Coca Cola organisational structure.
Identify why its organisational structure is so successful for its global strategy.

KEY POINT
Organisations adopt one of three organisational models:

1. Functional organisations

2. Divisional organisations

3. Matrix organisations

Global organisations tend to adopt a matrix model with responsibilities shared

between the product/services divisions and geographical units.

The global matrix organisation aims to balance globally efficiencies with local
responsiveness.

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Unit 1 – Introduction to International Business Environment International Business Environment

Culture
The culture of any organisation is unique. It is strongly moulded by
top­level management, and aspects of culture may be reflected in
mission statements. Culture affects working relationships between
peers, managers, customers, sub­contractors, competitors, etc.

Organisational culture is reflected in many ways, but some typical areas

are as follows:

· Shared values, beliefs and expectations of the

organisation.

· View of authority relationships and management

style/culture.

· Attitude to inter­relationship of functions and

cross­collaboration.

· Attitude to the value of people management and

investment in people, e.g. training, education.

· Level of influence by core operational staff on the

business.

· Policies and procedures.

· Decision making time.

Organisational culture strongly influences the way business decisions

are made, and how efficiently business is executed. This is particularly
important for a global organisation. For example, a marketing team, in
one geography, proposing a high­risk revolutionary product approach
is more likely to succeed in an aggressive entrepreneurial organisation
than in a rigidly hierarchical organisation. Similarly an entrepreneurial
and ‘flexible’ organisation is likely to prove to be challenging to a project
manager who is highly authoritarian in style and process­oriented.

Changes in culture are rarely achieved bottom­up. For there to be true

and effective change of culture it must start at the top and cascade down
the organisation.

Bringing about culture change is a long­term activity and has to be

planned. For instance, an organisation may decide that to achieve a
definite culture change, they need to embark on a strategic recruitment
drive to attract staff from competitors who have already made this
culture change. A well­positioned and dynamic set of new recruits can
act as catalysts and mentors.

In this Introductory Unit, we have briefly introduced organisational

culture because of its criticality in the context of international business.
A corporation engaged in international business strives to achieve the
‘right’ corporate culture across its operations. Without an appropriate

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International Business Environment Unit 1 – Introduction to International Business Environment

organisational culture, all other efforts towards international business

can fail abysmally. Should then a multinational corporation aspire to
create a uniform corporate culture throughout the countries it operates
in? Or, at the other end of the spectrum, should it adopt a model, which
accommodates considerable cultural differentiation? Most companies
realise that neither end of the spectrum is an ideal, but that it is
necessary to invest in the development of uniform attitudes, skills and
behaviour, whilst recognising that there are very real cultural variations
between countries. These are some of the issues that will be dealt with
more fully in Unit 4 on Cultural Environment, which looks at culture
theories (Hofstede, Trompenaars) and revisits organisational culture in
the context of international business.

Hierarchy and networks

All organisations have lines of authority and flows of information. In
traditional and functional organisations this has been through the
hierarchical organisational structure. Larger hierarchical firms have
several levels of management. Communication must go from one level
to the next according to specific rules. In such structures, each employee
has a definite position in the bureaucracy of the hierarchy. Decision
making is carried out at the top of the hierarchy with little input from
employees who are not at a management level.

Increasingly, there is a recognition, even by companies adopting

hierarchical structures, that they are overly bureaucratic. Thus there
have been attempts to flatten their structures, with fewer layers of
middle management. Organisations are also recognising the need to
empower employees at all levels, encouraging employees to take
responsibility for their own work and make decisions about their work.

Empowerment works best in, what is termed, network organisations.

Network organisations generally adopt a matrix organisational
structure promoting cross­functional working and team working. There
is an emphasis on information and knowledge sharing by informal and
formal means. Good ideas (coming from any employee) are rewarded,
and employees are generally positive about the organisation. Such
organisations tend to be more flexible and adopt shared values than
rules. There is usually a high degree of trust in management.

Organisations of the future are engendering a mindset change in

attitudes to roles, status and position, so that these factors become
secondary to work objectives. For instance, on one assignment, a senior
employee might be in the commanding role of Project Executive
managing a large project, and on another occasion the same individual
may be reporting to one of his former team members on a different
project. Thus employees need to develop open and flexible attitudes to
roles and positions, appreciating that roles and position are transitional
and decided purely by matching knowledge, skills and experience
optimally to business needs. This is one of the most radical culture

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Unit 1 – Introduction to International Business Environment International Business Environment

changes necessary to move from hierarchical to networking mode. This

change in mindset is crucial for the business in order to achieve
flexibility, mobility and to maximise efficiency in the deployment of
human resources.

VIRTUAL CAMPUS
Would you say that the organisation you work for is:

· Functional?

· Divisional?

· Matrix?

· Hybrid (if so, elaborate)?

Is your organisation structure suitable for the work undertaken, and its
international dimension (if applicable). If not, which organisational structure
would you adopt and why? Compile a high-level plan of how you would bring
about this change.

Share your thoughts with others on the Virtual Campus. For the benefit of your
colleagues on the Virtual Campus, you will need to briefly describe the business
activity, and global extent of your organisation. If you are proposing a new
organisational model, get others to comment on it. Those commenting should
highlight the pros and cons.

ACTIVITY
As a follow-on, to the above Virtual Campus activity, now turn your attention
to your organisational culture.

Describe the culture of the organisation you work for. Identify the strengths
and weaknesses. Is your organisation hierarchical or network-based? – is this an
inhibitor to innovation? Creativity? Collaboration? Efficiency? Other?

If your company is engaged in international business, comment on whether its

organisational culture is suited to its international dimensions. Has it adopted a
corporatist approach of establishing a uniform culture throughout its
geographical locations, or has it adopted a more systemic approach where
there is considerable cultural differentiation? Or has it adopted something in
the middle? Elaborate.

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International Business Environment Unit 1 – Introduction to International Business Environment

Compare your organisational culture with that of your main competitor –

discuss the pros and cons for each.

What changes in culture can bring about a more productive environment in

your workplace, particularly in the context of international business?

How can this be achieved? (You may wish to address this as an extension of the
high-level plan referenced in the previous virtual campus activity).

Business Strategy

Strategy formulation
Strategy can be thought of as a long­term plan of action or execution
designed to achieve a particular goal, such as achieving competitive
advantage for an organisation. It reflects the values, expectations and
goals of those who are in power within the organisation. It directs
business in a changing and evolving environment. In other words,
strategy is planning and discerning patterns.

Strategy is often related to change management. To achieve strategic

goals it may be necessary to bring about changes in corporate focus and
changes in organisational attitudes.

Central to strategy is the concept of strategic thinking. Strategic

thinking takes into account the lessons of the past, changes in the
environment and new opportunities to define future strategic aims.
According to Mintzberg, a leading authority in strategy, ‘organisations
develop plans for the future and they also evolve patterns out of their
past’. In a nutshell strategic thinking is centred around the questions:
‘Where are we now?’, ‘Where do we want to be’, and ‘How do we get there?’.
Strategic thinking should not confined to management; it must
dominate the entire corporate culture.

Richard Whittington, in his book What is Strategy – and does it matter?,

identifies four facets to strategy:

· Classical: The classical approach is that strategy is a

rational and planned process of deliberate analysis.

· Evolutionary: An evolutionary approach, on the other

hand, recognises that strategy cannot always be
objectively designed, that there are too many variances in
the environmental parameters making future trends
impossible to predict. The approach focuses on finding
the strategy that makes the organisation best fit the

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environment. It can be thought of as a ‘survival of the

fittest strategy’.

· Processual: A processual approach again recognises that

the classical approach is too simplistic in thinking that the
future can be predicted by superior analysis. The
processual approach focuses on the processes adopted
and who is involved in the planning. A processual
approach is often adopted by external consultants
advising organisations on strategy.

· Systemic: A systemic approach focuses on the outlook of

the current environment and embedded social, economic
and cultural contexts.

It should be noted, however, that strategy is not a unified field, and

there are many other approaches which may include a combination of
classical, evolutionary, processual and systemic aspects. Whatever the
approach, strategy formulation generally consists of three distinct
phases:

1. Strategic Analysis: taking as its inputs the environment,

organisational expectations and purposes, and the organisation’s
skills, competences and capabilities.
2. Strategic Choice: sets out the basis or criteria for strategic choice,
uses this criteria to determine specific options and then evaluates
these options to select one (the strategic choice).
3. Strategic Implementation: includes organisational design and
structure, resourcing and control and management of strategic
change.

Not all methods of strategy formulation follow the above phases in

sequential order, as one might expect. A Deliberate Strategy does. It is
the result of adopting a classic planning approach, where analysis leads
choice and choice leads implementation. In certain situations
implementation (or experience) can lead choice and analysis – this is
Emergent Strategy. In other cases, analysis, choice and implementation
proceed together, with the preferred choices influencing
implementation and analysis; analysis influencing choice and
implementation influencing analysis and choice. This is known as
Incremental Strategy.

Basic strategic tools

External and internal environmental factors influence business strategy.
In formulating strategy the first step is to perform an environmental
scan, and the two basic tools used for this are:

1. PEST Analysis (external environmental factors)

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International Business Environment Unit 1 – Introduction to International Business Environment

2. SWOT Analysis (internal and external factors)

Let us briefly consider each.

PEST analysis
PEST is an abbreviation for Political, Economic, Sociocultural and
Technological. PEST Analysis focuses on the external,
macro­environment.

Political analysis clearly must consider whether the political climate is

stable and suitable for the business and its employees. It must also
consider the legislative and government regulatory framework within
which the business must operate. Examples for consideration include:

· Risk of major political upheaval.

· Risk of war, terrorism, sabotage.
· Employment laws.
· Government regulations governing business.
· Current and forthcoming legislation on mergers and
acquisitions.

· Anti­trust laws.
· Business taxation, and employee taxation.
· Mandatory employee benefits.

Economic analysis considers whether favourable economic conditions

and cost structure exists for the company. It also looks at the potential
purchasing power of the consumer.

Examples for consideration include:

· Type of economic system.

· General health of economy (recession, recovery,
prosperity?).

· Boom sectors, boom geographies.

· Level of government intervention on free market forces.
· Interest rate, exchange rate.
· Unemployment rate.
· Quality of infrastructure (e.g. transportation,
communications, internet bandwidth).

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Unit 1 – Introduction to International Business Environment International Business Environment

· Access to skilled resource pool, and resource costs.

Social analysis considers the demographic and cultural aspects. These

factors impact customer buying criteria.

Examples for consideration include:

· Age profile of population. Percentage retired?

· Class structure.
· Gender roles.
· Attitudes.
· Educational attainment.
· Proportion of professionals.
· Leisure interests.
· Family life structures – nuclear family, extended family,
proportion of single parents?

Technological environment analysis considers the potential impact of

technology and its availability on the market. For instance, a good
communication infrastructure can lower barriers to entry.

Examples for consideration include:

· Scientific and technological innovation.

· Technology incentives.
· Government funding for R&D activities.
· Access to technical resources.
· Quality.
· Product development cycle­time.
· Impact of technology on market offering.
· Impact of technology on value chain.

SWOT Analysis
Many of you will be familiar with SWOT analysis, a commonly used
tool in strategic planning. We shall briefly re­examine the key points
here. Students are also directed to the key text book, J Morrison, for
more information.

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International Business Environment Unit 1 – Introduction to International Business Environment

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and

Threats. SWOT Analysis considers both internal and external
environmental factors, and is usually presented diagrammatically as
shown in Figure 1.5. External factors are covered in Opportunities and
Threats, and an analysis of these may interlock with PEST analysis. The
internal factors are strengths and opportunities.

STRENGTHS WEAKNESSES

· ·
· ·
· ·

OPPORTUNITIES THREATS

· ·
· ·
· ·

Figure 1.5: SWOT presentation

Strengths refer to all factors that contribute to its competitive

advantage. Examples could include:

· Distinctive skills and competencies.

· Intellectual Property and patents.
· Knowledge­based organisation.
· Flexible and mobile workforce.
· Strong brand image.
· Strong customer satisfaction image.

Weaknesses can be thought of as the exact opposite to strengths. They

are the factors that inhibit competitiveness. Examples include:

· Bureaucratic organisational structure.

· Outdated and inefficient mode of working.

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Unit 1 – Introduction to International Business Environment International Business Environment

· Poor motivation amongst staff.

· Weak brand image.
· Poor customer reputation.
· High cost structure.

Opportunities are those external factors that present potential for

growth and greater profits. Examples include:

· Introduction of a new technology that could enhance

your market offering.

· Access to new markets (e.g. former Soviet Union).

· Some event or threat that increases demand for your
products (e.g. terrorist threat and increased demand for
biometric analysis).

· A struggling competitor or partner with a good product

that has a good match with your market portfolio. This
presents an opportunity for a merger or take­over.

· A new customer need.

Threats are events or changes in the external environment that threaten

the organisation’s business position. Examples include:

· A new market entrant.

· A merger or acquisition that has strengthened a
competitor.

· Increased trade barriers.

· A new generation product that will make your product
obsolete in time.

· Changes in consumer tastes.

· Emergence of industry standards that will require
compliance, thereby increasing your costs.

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International Business Environment Unit 1 – Introduction to International Business Environment

CASE STUDY
The Dutch, multi-national electronics company, Philips, has been in existence
for over a century and maintains an excellent brand image. It was founded in
Eindhoven in 1882, as a producer of light bulbs. Philips was one of the first
companies to ‘internationalise’, and as early as 1912 it had established
subsidiaries in the US, Canada and France. It also developed a very diverse
portfolio of products.

Philips’ early expansion into international markets, and its resulting

organisational structure, later proved to be a disadvantage as the forces of
globalisation and strong Japanese competition challenged its position.
Organisationally, something like fourteen product divisions in Holland were
nominally in charge of product development and global marketing, but country
subsidiaries had the real power of strategy making. Country subsidiaries
controlled the assets and reported directly to the Board. In fact, some of these
subsidiaries were so powerful that corporate headquarters had very little
influence over their direction. For example, in the area of VHR technology, the
US subsidiary adopted a competing system in preference to the V2000
technology developed by Philips Research Laboratories.

Today, Philips’ market offerings are still extremely diverse, ranging from
common light bulbs to TVs to high-tech plasma screens and medical imaging
equipment. Philips has nearly 165,000 employees in 60 countries.

Cynics have described Philips as a car with one or two cylinders misfiring, and a
company lacking market focus. Philips until recently had a reputation and
tradition for home-grown management. However, due to shareholder
pressure and seeing their market dominance eroded, a few outside senior
executives have been brought in to turn the company around and give it greater
customer focus. For example, in January 2003, Andrea Ragnetti from Telcom
Italia, with a reputation for fast and successful turnaround of companies, was
named as head of global marketing and brands.

Now assume that you are one of the senior executives brought in. Do some
research on the company.

1. Perform a PEST and SWOT analysis on the company.

2. What will be the cornerstone of your new strategy – divestments?,

acquisitions?, strategic alliances?, increased product development?
Address this from the context of international business.

3. What measures will you recommend across organisational boundaries

(geographical, functional) to achieve greater efficiencies, leverage and
better market focus?

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Unit 1 – Introduction to International Business Environment International Business Environment

VIRTUAL CAMPUS
Post your above case study work on the Virtual Campus and study the
submissions of your colleagues. Critically review their work, where
appropriate, and comment.

Marketing Orientation
Any study of the international business environment would be
incomplete without consideration of marketing orientation, as it plays
such a critical role in business strategy. A company that is
marketing­oriented is more likely to succeed in the global marketplace
than one that is not.

In today’s global competitive environment, to be successful, companies

have no option but to be customer­centric in their strategic thinking.
This is known as marketing orientation. A marketing oriented
organisation is client­led rather than product­led.

A company that adopts marketing orientation and focuses on customer

preferences rather than its own ideas about a product/service can gain
major competitive advantage over its more product­oriented
competitors. It can also increase its share of the cake in the customer’s
business.

ACTIVITY
Think of an example, perhaps from your own business context, of how
marketing orientation as a strategy has led to competitive advantage and
increased business.

ACTIVITY FEEDBACK
There are many examples from differing sectors. A good example is from the IT
sector, where a contrast can be made between the product-oriented and
marketing-oriented approaches.

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International Business Environment Unit 1 – Introduction to International Business Environment

A product-oriented company in the IT sector typically delivers to the client a

set of disparate hardware and/or software systems. The client then configures
the system, including selection of relevant applications to support their
business. A marketing oriented company, on the other hand, will seek to
understand the total customer problem and empathise with the customer
pains. It will seek to carry out a situational assessment and propose a total
solution. It is likely to help the client analyse their business needs, evaluate their
business processes and then select the most suitable hardware, storage
systems, software, business applications and configure the system to the
satisfaction of the client. It may even help the client with the day-to-day running
and maintenance of the system.

If conducted well, the customer will have made huge cost savings (as this
approach is usually more efficient). In return, the vendor would have carved out
a very lucrative revenue stream, with high profit margins – a ‘win-win’ scenario.
Profit margins are generally much higher for integrated services than individual
products. Many IT services companies (e.g. EDS, IBM, Accenture) take this
approach in their business strategy. Marketing orientation helps companies get
up the value chain.

Philip Kotler, a leading writer on marketing, suggests that there are four
main aspects to market­oriented organisations:

1. Market Focus
No organisation, no matter how big, is able to satisfy every need
in the best possible way in its sector. The basis of marketing is to
focus on those segments of the market that a company can serve
to a very high standard, and offer distinctive business value. In
the international business context market focus may vary from
geography to geography.
2. Customer Orientation
The company has to meet customer needs from the customer’s
point of view; ‘the customer is king’. It is easy to identify and
focus on a market but still not satisfy customer needs.
Researching customers to ascertain their needs and wants is the
role of market research. Marketing oriented companies will place
a high emphasis on customer feedback and seek to continually
improve customer satisfaction. Many successful companies enlist
key customers as strategic partners, to ensure that their business
strategy is aligned with the customer and market place.
3. Co­ordinated Marketing
To quote David Packard of Hewlett Packard, “Marketing is too
important to be left to the Marketing Department!” To be
successful, the entire organisational culture must be geared to be
marketing orientation. The organisation as a whole must be

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Unit 1 – Introduction to International Business Environment International Business Environment

co­ordinated and collaborative in its marketing function, and

present a single, positive image to the customer.
4. Profitability
One of the aims of marketing­orientation is increased
profitability. However, marketing orientation is not just for
profit­making commercial organisations. Marketing orientation is
for any organisation that has customers, and that includes
charities and government bodies.

Strategy formulation must therefore be highly influenced by the market

it aims to serve. An organisation’s strategy must consider how the
business can make best use of its competencies, assets and strengths to
serve customers needs and wants effectively and efficiently.

Market management
Global marketing oriented organisations place a high emphasis on
market management. This is because, in the international business
context, it is vital to understand commonalities in worldwide markets
giving opportunities for efficiencies, but it is also crucial to be sensitive
to local variations. Most market offerings will require a different value
proposition in different markets. Coca Cola and Swatch are exceptions,
where a standard value proposition serves different market segments.
However, their conclusions to offer a standard value proposition will
also have been reached by stringent market management.

S t ep 1 S t ep 2
Understand Carry out market
the marketplace segmentation

Marketplace
S t ep 6 and S t ep 3
Manage market Customer Carry out portfolio
segment wants and needs analysis

S t ep 5 S t ep 4
Align business Develop market segment
plans strategies and plans

Figure 1.6: Market management

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International Business Environment Unit 1 – Introduction to International Business Environment

So what is market management? Market management is the broad

discipline that continually analyses the marketplace in order to
influence business strategy, and respond to new market needs. It is an
on­going process carried out throughout the development and lifetime
of the market offering to ensure that the company strategy is in tune
with the marketplace. Refer to Figure 1.6.

At the heart of market management is the marketplace and customer

needs and wants. It consists of six steps as follows:

· Step 1: Understand the marketplace.

· Step 2: Carry out market segmentation.
· Step 3: Carry out portfolio analysis.
· Step 4: Develop market segment strategies and plans
· Step 5: Align business plans.
· Step 6: Manage market segment.

Let us briefly consider steps in market management:

Understanding the marketplace

The vital input to understanding the marketplace is market research.
The questions typically addressed in this phase, and before an
organisation commits to entering and investing in a market segment,
are:

· What are the customer needs and wants?

· Is there a demand “pull” for the offering that is
envisioned?

· Who are the competitors in this market space? What are

their strengths and weaknesses?

· What is the expected spend of the customer in this

market space?

· Who are our potential customers?

· What changes (technological, business, political) are
taking place in this market? How does it affect the
customer?

Market segmentation
Market segmentation arises from the recognition that today’s markets
can be highly fractured. It is unlikely that one product or service

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Unit 1 – Introduction to International Business Environment International Business Environment

offering will satisfy the needs of all customers in that market place. This
is especially pertinent in the international business environment, where
some products may warrant greater localisation than a global
standardised offering could afford.

An obvious example is the car market. There are huge differences in the
basic car vs. luxury car markets. For example, the basic car market
segments include small car, urban car, SUV and luxury saloon. But even
within the basic car market, there are further variations between
geographies. Apart from the obvious one of right hand vs. left hand
drive, the North American market segment demands air conditioning,
seat belt checks with alarms, superior music centres, etc. Whereas the
demands in another geography might be efficient fuel consumption and
build quality. These are all different market segments.

So market segmentation is all about recognising the types of customers

there are, and then deciding which market segment(s) to operate in. It
enables organisations to select and deselect markets and customers.

Portfolio analysis
Portfolio analysis is identifying the range of products and services that
the organisation will need to bring to market to serve the needs of the
selected market segment.

Market segment strategies and plans

Having identified the portfolio of products and services relevant for the
market sector, concrete strategies and plans need to be developed. The
attractiveness of the market should be considered, as should the
competitive position of the envisaged product/services or solution.

This step also involves the evaluation of alternatives for the

development of the portfolio. For example, is it more profitable to form
a strategic partnership with a company that already has a leading
product that has been identified in the portfolio? Would this alternative
be more profitable and bring the product to the market more quickly
than developing it from scratch?

Aligning business plans

For cross­functional collaboration to work properly, all the relevant
functional departments and/or business units need to align and
optimise their business plans, and specifically those parts of the plan
that impact the chosen market segment and the portfolio of
products/services.

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International Business Environment Unit 1 – Introduction to International Business Environment

Managing the market segment

This step is a recognition that once a decision has been made to enter a
particular market segment, the organisation constantly needs to
manage that part of its organisation (which may consist of many
functional departments and business units) that serves the market
segment. Performance should be constantly monitored and assessed.
Customer satisfaction should be checked, variations in geographies be
considered, and the balance of localisation vs. global standardisation
constantly assessed.

KEY POINT
A company that is marketing-oriented is more likely to succeed in international
business, because of the considerable variations in geographical markets.

There are four aspects to marketing orientation

· Market Focus.

· Customer Orientation.

· Co-ordinated Marketing.

· Profitability.

Market management is a critical discipline in international business.

Market management continually analyses the marketplace in order to influence

business strategy, and respond to new market needs. It is an on-going process
to ensure that company strategy is in tune with the international marketplace.

Corporate Governance
Corporate governance is increasingly under the spotlight in the
international business environment. Recent high­profile corporate
scandals, such as Enron, Worldcom and Parmalat, have led to an
increased focus on corporate governance. However, corporate
governance came to be highlighted in the early 1980s in the United
States during extensive corporate take­over activity. Perceiving little
support from their institutional shareholders, numerous company
boards began to introduce protective practices to ward off undesirable
take­over bids. These measures were seen by some shareholders,
especially public pension funds, as acting against their best interest.

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Unit 1 – Introduction to International Business Environment International Business Environment

Accordingly, shareholders began to take a greater interest in their

investments. Out of this, shareholder activism was born.

The term ‘corporate governance’ has been used in a variety of contexts,

particularly in relation to the boards of public­limited companies listed
on a stock exchange. Governance is at the heart of the role that all boards
of directors play. The range of issues is varied, e.g. company
performance, individual performance, role of directors, roles of
shareholders. Essentially corporate governance addresses the question
‘Who guards the guardians?’

What is clear is that companies can no longer just play lip­service to

good corporate governance. Protection and control must take into
account the interests of shareholders and stakeholders. Profitability
cannot be the sole corporate driver. Profitability will always be driven
by the shareholder view, and guided by value management principles.
But stakeholder responsibility must also be a part of organisational
purpose. Stakeholder responsibility is not just responsibility to the
shareholders, but to the stakeholders (including employees, suppliers,
customers and the community) at large.

ACTIVITY
The recent Enron scandal has highlighted shortcomings in corporate
governance legislation, particularly in the US. Read about the issues and
proposals in the following article on the Web:

‘The Post Enron Corporate Governance Environment: Where Are We Now?’

http://www.ffhsj.com/cmemos/031017_post_enron.pdf

A related issue in the international business context is ‘flags of

convenience’ in the shipping business, where ship­owners register
ships in countries with very little regulatory framework, such as Liberia
and Panama. In this way ship­owners circumvent safety and
employment practices to improve their margins. This use of ‘flags of
convenience’ is also being exploited in the general business context,
where well known international corporations register subsidiaries in
countries such as British Virgin Islands, with the sole aim of avoiding
corporate responsibility. The main driver for these schemes is tax
avoidance. However, this has a general corporate governance impact. A
good example is that of BCCI – even though it operated in the UK, it was
registered in Liechtenstein. The UK regulators were thus
dis­empowered from taking any action to protect the investors.
Following these types of scandals, governments are being forced to take
action. The country (or countries) of operation now bear more weight,

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International Business Environment Unit 1 – Introduction to International Business Environment

with regard to the enforcement of law and regulations, than the nominal
country of registration. Thus, returning to the shipping business, if a
ship arrives at a French port but is registered in Liberia, and is obviously
not sea­worthy, then it will have to abide by French law and will not be
allowed to operate.

CASE STUDY
Read and answer the questions contained in the case study: ‘Has restructuring
paid off at Procter & Gamble?’ on p. 17 of your key text, J Morrison.

Also consult the Procter & Gamble website at http://www.pg.com, and read
about its history.

VIRTUAL CAMPUS
Post your answers on the Virtual Campus. Learn from the feedback of your
colleagues. Challenge points where appropriate.

Summary
This unit has been an introduction to the international business
environment. We have considered the organisational environment, the
process of strategy formulation and criticality of market orientation. We
have also looked at the two basic strategic tools, PEST and SWOT, for
assessing the business environment and its political, economic, social,
technological, legal and financial dimensions.

Finally, we examined the role of corporate governance.

To gain maximum benefit from this module, students are encouraged to

apply the lessons learnt to their own work environment.

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Unit 1 – Introduction to International Business Environment International Business Environment

REVIEW ACTIVITY
Consider your own organisation and its business sector.

1. Describe your business sector, activities, international distribution of

activities (e.g. operations, development, production, marketing) and
market segments. Identify the market segments that you operate in,
and your portfolio that serves this market segment. Comment on
whether your market segments (and portfolio) have a geographical
correlation.

2. Justify why, strategically, you operate in the market segments that you
do, i.e. what gives you competitive advantage. Carry out a SWOT
analysis.

3. Now consider your main competitor. Carry out a SWOT analysis for
the competitor.

(Given the confidential nature of this information, you may wish to anonymise it. )

References
The following are the references for your key text and other
recommended reading:

1. Daniels, J (2000) International Business, 9th Edition , Addison

Wesley
2. Dicken, P (1998) Global Shift, 4th edition (London:Sage)
3. Dunning, J (1993) The Globalization of Business (London:
Routledge)
4. Hirst, P and Thompson, G. (1999) Globalization in Question, 2nd
edition (Cambridge: Polity Press)
5. Hill, C. (2000) International Business (McGraw­Hill)
6. Mintzberg, H. (1989) Mintzberg on Management, John Wiley &
Sons
7. Morrison, J. (2006) The International Business Environment,
Basingstoke, Palgrave Macmillan (key textbook)
8. Rugman, A., and Hodgetts, R., (2000) International Business, 2nd
edition, FT Prentice Hall

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International Business Environment Unit 1 – Introduction to International Business Environment

9. Tayeb, M (2000) International Business: Theories, Policies and

Practices, 3rd edition, FT Prentice Hall
10. Waters, M (1995) Globalization (London: Routledge)

31
Unit 2

Globalisation and FDI

LEARNING OUTCOMES
Following the completion of this unit you should be able to:

· Evaluate the key forces of globalisation.

· Assess the motives for internationalisation and the theoretical

approaches to internationalisation, in particular Dunning’s OLI
paradigm.

· Describe the characteristics of a truly Global Company.

· Explain the role of foreign direct investment, multinational

enterprises and regionalism in globalisation.

· Analyse the impact of globalisation on corporations.

Introduction
The development of international business has gathered significant
pace because of the impact of foreign direct investment (FDI) through
increased globalisation. Today in the UK, for instance, FDI is the fastest
increasing productive unit of the economy. In the financial year
2002/2003, a total of 709 investment projects from 35 countries were
reported in the UK. This trend is echoed elsewhere, and is having a
significant impact on the economies of many developing countries (e.g.
India). The share of developing countries with global FDI inflows rose
by 8 percentage points, to 31% in 2003, with countries in Asia Pacific, in
particular, showing a significant rise. Thus globalisation and FDI is not
only increasing the level of international business, but it is also altering
the patterns and distribution of international business.

In this unit we shall focus on the process of globalisation, the impetus it

has gained through FDI and the changes it is bringing about in
international business.

We shall follow the historical development of internationalisation

leading to globalisation, the rise in power of Transnational
Corporations (TNCs) and recent trends in globalisation. We shall

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Unit 2 – Globalisation and FDI International Business Environment

examine the difference between the process of internationalisation and

globalisation, and the distinction between transnational and global
companies. We shall look at some of the theoretical approaches to
internationalisation, and, in particular, John Dunning’s
Ownership­Location­Internationalisation (OLI) paradigm. We shall
then consider the impact of globalisation for corporations, and the
factors that have driven globalisation as well as the localisation factors
that have restrained it.

No study of globalisation would be complete without a consideration of

the globalisation debate, and we shall end this unit by looking at the
pros and cons of globalisation.

READING ACTIVITY
Please read Chapter 5, ‘The global economy and globalization processes’ of
your key text, Morrison, J (2006), which is essential reading for this unit.

What is Globalisation?
The term ‘Globalisation’ has become a buzz word and is frequently used
loosely to refer to different aspects of internationalisation and world
trade. For some globalisation, in the business context, means having an
international presence. For others it means a highly centralised
management approach from corporate headquarters. For others it
means marketing a standardised product globally. So what is
globalisation?

The origin of the term ‘Globalisation’ is often attributed to Marshall

McLuhan’s concept of the ‘global village’. McLuhan (1962) observed
that advances in electronic mass media were collapsing space and time
barriers to enable people to communicate on a global scale. But this is
just one aspect of globalisation, albeit an important aspect of
globalisation, where the term ‘global village’ is used as a metaphor to
describe the interconnectedness of the world through the Internet and
Web. Other researchers attribute the globalisation phenomenon to
historical, social, political and technological changes, which have
enabled the free flow of people, investment, products/services,
information and knowledge across the globe. This has led to a
fundamental shift in the world economy, where national economies are
no longer isolated from each other by barriers to cross­border trade /
investment; by distance, time zones, language and by national
differences in government regulation, culture, and business systems.
National economies are merging into an interdependent global
economic system.

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International Business Environment Unit 2 – Globalisation and FDI

So we return to the question what is globalisation. In broad terms, it is

the process of integration of countries and people; politically,
economically and culturally, into global communities. In the context of
business, globalisation is the phenomenon by which industries
transform themselves from multi­national to global competitive
structures. Multi­national companies have an international presence of
some form or other, whereas global companies operate in the main
markets of the world, and do so in an integrated and co­ordinated
way. (We shall consider the definitions of multi­national and global
companies in more detail later in this unit).

READING ACTIVITY
As we have noted globalisation impacts social and political dimensions.

Read the views of Anthony Giddens (2000) on the social and political issues
surrounding globalisation by referring to the 1999 Reith Lectures, ‘Runaway
World’ at:

http://www.bbc.co.uk/radio4/reith1999/

ACTIVITY
We have noted that global companies operate in the main markets of the
world, and do so in an integrated and co-ordinated way.

In your view, in practice, how do global companies operate in an integrated and

co-ordinated way?

ACTIVITY FEEDBACK
You will have come up with a number of points – perhaps standardised
production, standardised products, unified marketing, organisational
structures, etc.

The remainder of this unit will develop your thoughts.

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Unit 2 – Globalisation and FDI International Business Environment

Views of Globalisation
There are differing views on the impact of globalisation. Enthusiasts
and proponents of globalisation foresee the emergence of a borderless
global marketplace, with the demise of nation states and rise of large,
powerful global entities. This is the extreme hyperglobalisation view.

Sceptics, on the other hand, fundamentally question the whole premise

of globalisation and challenge the practicalities and so­called merits of
globalisation. They view globalisation as an oversimplification of the
present, and see the forces of local empowerment eventually
dominating that of globalisation.

There is then the middle and less extreme view; the transformational
view. The transformational view acknowledges globalisation as a
driving force, but takes a more moderate and tentative stance on its
impact and outcome. It takes the view that, in practice, international
business will always be about reaching a balance between global drivers
and the localisation push; balancing integration with differentiation.
The transformational view is widely recognised as a realistic approach
to globalisation.

Students are directed to p. 138­139 of your key text, International

Business Environment, J Morrison, for further information.

Internationalisation vs. Globalisation

Economic ‘globalisation’ is not a new phenomenon. People have been
trading across borders since the beginning of history. The Phoenicians,
Egyptians and Romans traded with each other in the seventh century
BC. Trading between countries in the Orient has carried on for
centuries. In the Middle Ages, the Europeans engaged in the spice trade.
Perhaps the most famous early multi­national corporation was the East
India Corporation, which was established in 1600. So international
trade is no new concept.

Today, Internationalisation has come to be associated with

Globalisation. Internationalisation, in the context of business
enterprises, can lead to eventual Globalisation. For this reason, the
terms are sometimes used interchangeably, but they are different
phenomena. Let us examine the differences.

Broadly speaking, the process of Internationalisation refers to the

growth of international trade, international relations, country/regional
alliances, etc. Internationalisation has been greatly aided by
industrialization and improvements in transport in the late nineteenth
century. Internationalisation in the context of business, refers to the
expansion of commercial organisations outside the borders of their own
countries. Globalisation, on the other hand, is a much tighter
integration. Whilst Internationalisation preserves the autonomy of

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International Business Environment Unit 2 – Globalisation and FDI

nation states, Globalisation refers to global economic integration of

national economies into one global economy, mainly by free trade and
free capital mobility, but also by easier migration. Globalisation has
been largely driven by foreign direct investment (FDI). We shall discuss
this in more detail later in this unit.

Now turning our attention to globalisation in the context of business

enterprises, we have already noted that global companies are
companies that operate in the main markets of the world in an
integrated and co­ordinated way. But what does integrated and
co­ordinated mean in practice? Truly global companies are integrated
and co­ordinated in, at least, the following ways:

1. Global organisational structure: that is the organisational

architecture and management processes by which the activities of
the corporation are made inter­dependent. This would include
common processes and business infrastructure wherever
possible. Information and knowledge sharing across geographies
would be actively promoted and facilitated by the organisational
structure and culture.
2. Global production: the organisation would use specialised
factories with a cost advantage from anywhere in the world for
the production of components. Assembly of products may be
elsewhere and there will be cross­shipment between the various
manufacturing and assembly sites.
3. Global marketing: In this context global marketing includes
product development. Product development will be initiated on
the basis of co­ordinated marketing input from all geographies.
R&D and product development centres may be located anywhere
in the world where there is access to appropriate skills,
competencies and knowledge. These centres will however be
co­ordinated, and the exploitation and application of knowledge
from one area to another will be facilitate and encouraged. Much
of the actual marketing function will be local. However, there
will be centralised co­ordination of the market management
process across the geographies. Based on market input, product
standardisation will be adopted where appropriate.
4. Global Account Management: A centrally negotiated plan for
country/key account management will be adopted.

KEY POINT
· Internationalisation refers to the numerical extension of economic
activities (e.g. international trade, international relations, country/
regional alliances) across geographies.

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Unit 2 – Globalisation and FDI International Business Environment

· Globalisation refers to both geographical extension as well as

the level of integration and coordination of geographically
distributed activities.

Internationalisation Theories
There are two broad theoretical approaches to internationalisation. The
first category, known as country theories, focuses on the macro picture;
examining why countries trade with each other and the economic
advantages of countries. Country theories have been in existence for a
very long time. It originated for historical reasons, during the colonial
period, when international trade was dominated by trading blocks
between countries. The best known country theories are the Theories of
Absolute advantage and Comparative advantage. The second category
of theoretical approaches to internationalisation focus on the enterprise
(or firm). These theories emerged after the Second World War when the
focus of trade shifted from the country to the firm. We shall look at these
in more detail.

ACTIVITY
If you are not familiar with country theories to internationalisation, research
these: in particular, the theory of Absolute Advantage and Theory of
Comparative Advantage.

Globalisation of the firm

As we noted earlier internationalisation is often used interchangeably
with globalisation. Strictly they are different. In the business context,
however, globalisation is often viewed as the ultimate point in
internationalisation. In this sense the terms are sometimes used
interchangeably.

There are many theories relating to the globalisation of firms. One of the
earliest is that of Alfred Weber, known as the Least Cost Location
theory. As the name indicates, it suggests that firms choose low labour
and transport cost locations, but it also make the observation that there
is a natural clustering of producers from particular industries in certain
locations; perhaps because of supply chain efficiencies.

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International Business Environment Unit 2 – Globalisation and FDI

Stages theories of internationalisation

The globalisation of firms is considered by some (idealists) as a
sequential or staged process, evolving as follows:

1. Exporting
2. Contractual arrangements with foreign companies (e.g. licensing
arrangements)
3. Joint ventures
4. FDI
5. Globalisation

This sequential and evolutionary approach is dealt with by a class of

theories known as the stages theories of internationalisation. The best
known of stages theories is the Ohmae approach. Kenichi Ohmae, the
leading Japanese management guru and author of The Mind of the
Strategist (1991), The Borderless World (1994), and The Evolving Global
economy (1998), has suggested five stages of internationalisation leading
to true globalisation. Refer to Figure 2.1.

S t age 5:
Globalisation

S t age 4:
Insiderisation
Global Mindshift

S t age 3:
Establishing
foreign production

S t age 2:
Establishing overseas
sales subsidiaries

S t age 1:
Exporting (via
distribution channels)

Time

Figure 2.1: Ohmae Stages Model of Internationalisation

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Unit 2 – Globalisation and FDI International Business Environment

In Figure 2.1, stages 1­3 need no explanation and, in fact, build upon
previous stages theory work, in particular, Johanson and
Wiedersheim­Paul’s model, commonly referred to as the Uppsala
model. In going from stage 3 to stage 4 (insiderization) Ohmae suggests
that the company needs to go through a process of mental
re­adjustment, described as nothing short of a global mind­shift. This
mind shift involves the adoption of a totally customer­centric global
viewpoint, and is termed the insiderization stage. Insiderization
overturns traditional notions of management and delegates authority to
the lowest appropriate local level in the organisation. This can result in
different units within the organisation competing for the same
customer. This is justified on the basis that this internal competition can
be healthy, resulting in better service to the customer, and eventually
leading to increased world­wide profitability for the company. The
theory recognises that the insiderization phase can lead to geographical
and functional spread with loss of corporate identity. The final phase,
the globalisation phase, addresses this shortcoming in the
insiderization phase by directing certain core functions back to the
centre. The motivation for this, however, is world­wide consistency
rather than control. Operating authority continues at the local level to
retain the razor sharp customer focus.

The criticism of this and other stages models is that very few
organisations actually expand their international operations in this
idealised, staged and systematic way. Indeed, the experience of many
global firms suggest that there are different paths for
internationalisation.

OLI Paradigm
Perhaps the best known theory on the globalisation of firms is the OLI
paradigm. John Dunning first proposed this approach, also known as
eclectic paradigm, in 1976. OLI represents Ownership­Location­
Internalisation.

Dunning suggests that if a firm is to internationalize, then there must be

three sets of advantages to the firm doing so in a particular country.

1. Ownership Advantage: Firstly, the firm must have ownership

advantage. This may translate to property rights over assets
(tangible and intangible), and includes items such as capital,
natural resources, technology, intellectual capital (knowledge),
entrepreneurial skills, managerial skills, etc.
2. Location Advantage: Secondly, the firm must have clear location
advantages from the host country. These may arise from the
cultural, political and social environment of the country, and
would include competitive labour rates, better taxation rates,
government funding and incentives, etc.

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International Business Environment Unit 2 – Globalisation and FDI

3. Internalisation (economic) Advantage: The final point is that the

firm must have a clear economic advantage from producing the
product/service outside its own borders.

According to Dunning, the decision to internationalize must be

dependent on there being clear advantages from ownership, location
and internalisation.

Transnational, Multinational and Global

Corporations

Definitions and characteristics

At this point, it is pertinent to define terminology; specifically the
meaning and use of the terms ‘global’, ‘multinational’, ‘transnational’ in
the context of international business.

The term ‘global company’ has come to be used only in the last
two­three decades. Prior to the 1970s the term used to describe
companies operating in different parts of the world, was ‘multinational’
or sometimes ‘transnational’.

Multinational corporations have been in existence for many years.

Indeed, the world’s first multinational corporation, the East India
Company, was founded in 1600. By the end of the nineteenth century,
modern corporations, such as Unilever and Nestle, were operating as
multinationals.

The terms transnational and multinational are often used

interchangeably. In the strictest sense, a transnational corporation,
TNC, is one that operates in many countries, whilst a multinational
company, MNC, not only operates in many countries, but is located in
many countries. The term ‘Multinational Enterprise’ is also used to
describe a multinational corporation. It should be noted that the terms
‘transnational’ and ‘multinational’ and ‘multi­enterprise’ are not agreed
universally, and are often used interchangeably. Unless the context
clearly states otherwise, we shall use the abbreviation TNC for the
remainder of this unit and use it in the broadest sense of encompassing
transnational or multinational corporations. We shall adopt the
definition of Dicken (1998) “a Transnational corporation (TNC) is a firm
which has the power to co­ordinate and control operations in more than one
country (even if it does not own them)”.

TNCs do not always set out with global strategies or global ambitions.
They often start off as national companies, and expand by
internationalising their operations when opportunities present

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Unit 2 – Globalisation and FDI International Business Environment

themselves. Over time, TNCs can acquire considerable investments in

foreign companies.

TNCs are not necessarily tied to a ‘country of origin’. They are

frequently structured as a confederation of country divisions.
Operations are often self­contained in each country, and business
results would be evaluated on a country by country basis. TNCs try to
adopt a country specific approach, catering for local taste, in their
market offerings, but are increasingly adopting standardised
production methods.

Global companies compete in the global marketplace, and are,

organisationally, tightly integrated worldwide. Market offerings are
managed on a global basis. However, this is not to say that the global
model does not accommodate local character and variations. Global
companies would aim to achieve global efficiencies by standardising
processes and products/services where possible. However, it would be
a mistake to think that they always market a standard product globally
(in fact, few global companies do). Based on thorough market
management (as per Unit 1), they would make such decisions by
balancing the forces of standardisation with localisation, and
integration with differentiation.

ACTIVITY
Identify an example of a TNC and another example of a global company that is
prominent in your country/geography.

Read the company literature of your two chosen companies to identify their
history and how they became players in the international business
environment.

Noting that global companies operate in the main markets of the world in an
integrated and co-ordinated way, identify in what ways your chosen global
company is globalised? Consider its Organisation, Operations, Marketing,
Production/Development, and Account Management. Contrast its level of
global integration and coordination with that of your chosen TNC.

Summarise your findings.

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International Business Environment Unit 2 – Globalisation and FDI

KEY POINT
The definition of a Transnational corporation is as follows:

“a Transnational corporation (TNC) is a firm which has the power to

co-ordinate and control operations in more than one country (even if it
does not own them)’’.

Dicken (1998)

Global companies are much more tightly integrated organisationally, and:

· Compete in the global marketplace.

· Manage market offerings on a global basis.

· Aim to achieve global efficiencies by standardising processes and

products/services where possible.

· Face challenges in balancing the forces of standardisation with

localisation, and integration with differentiation.

The growth of TNCs

The growth in international trade in the late nineteenth and early
twentieth centuries is attributed to the rising power of TNCs. The
United Nations Conference on Trade and Development (abbreviated as
UNCTAD) in 1994 reported that there were around 37,000 TNCs across
the world. These companies control 1/3rd of world output, and control
2/3rd of world trade.

It should be noted that not all TNCs are mega corporations. Today
many SMEs are global players, due to the opportunities presented
through the Internet and e­commerce. This has led to the rise in TNCs.

Many TNCs start off as national companies operating solely in their

home markets. Later they internationalise their operations for
competitive regions; perhaps to exploit capabilities or technologies in a
particular location, or, in certain industries, e.g. oil and gas, proximity to
natural resources may be crucial. In other cases, entry to foreign
markets may necessitate a presence in that geography.

Let us now examine the historical context that led to the rising power of
TNCs.

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Unit 2 – Globalisation and FDI International Business Environment

Historical context
Following the end of the Second World War, significant shifts in power
occurred on the world stage. The war resulted in severe damage or
destruction for much of the industrialised world, excepting America.
Japan and Germany were worst affected with the very core of their
industrial infrastructure having to be rebuilt.

In response to this, and the major economic difficulties facing Europe,

the United States suggested a sweeping program to restore the
economies of Europe, the Marshall Plan. It offered American
investment to any European nation that wished to participate. This
presented massive opportunities for American TNCs, that were already
taking a dominant position on the world stage.

The re­industrialisation of Germany and Japan had a profound effect on

trade, especially in the areas of production management and quality
control. Japanese industry, in particular, adopted new management
thinking with respect to total quality control; a holistic approach to
quality. In Germany, the Social Contract was adopted which promoted
pro­active collaboration between workers and employers for the benefit
of the nation. These developments had a profound effect not only on
quality and increased in productivity at the time, but later facilitated the
global distribution of development/production. In the European
countries, excepting Germany of course, the war had brought a level of
destruction, but it was in no way comparable to the devastation of
infrastructure in Germany and Japan. Thus countries such as the UK
and France did not have the ‘privilege’ of rebuilding infrastructure from
scratch and developing and adopting new management
methodologies. All these post­war factors catapulted Germany and
Japan to being world leaders economically. Although the US managed
to retain its dominance in the world market, some industries such as car
manufacturing, electronics and communication were decimated by
these highly competitive new entrants. This period thus led to the rise in
prominence of many Japanese and German TNCs, e.g. Mitsubishi,
Mazda, Siemens, Sony, BMW, Volkswagen, Mercedes.

From a different perspective, the cold war led to a polarisation between

the market economies of the West and the state planned economies of
the communist bloc. Powerful economic power blocs developed in
parallel in the East (e.g. COMECON) and West (e.g. EEC). TNCs found
further scope for international expansion of their business activities
within their respective blocs.

The disintegration of the Soviet Union in the 1990s led to the markets of
the former Soviet Union being opened up, albeit at great social cost and
corruption. Countries such as Poland were transforming from State
Planned economies to full market economies, referred to as transition
economies. This gave further market opportunity for the major TNCs to
‘carve out’ these transition economies. Prime examples being the
take­over of Skoda by VW, and the joint venture between BP and
Sibneft/Slavneft.

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International Business Environment Unit 2 – Globalisation and FDI

In parallel with the collapse of communism in Eastern Europe, major

changes have been taking place in China and Latin America. Their
implications for international business may be just as profound as the
collapse of the Soviet Union. The opportunities for TNCs and global
corporations are enormous. With a population of 1.2 billion people,
China represents an enormous, and still largely untapped, market. Its
economy is booming, with growth figures of 9.7% for the first half of
2004. Many foreign companies are exploiting the opportunities,
especially in cheap factory production. Half of China’s exports to the US
are made in factories owned by foreigners.

Thus, in the last decade no country has been left untouched by the forces
of globalisation. Some would argue that the divide between the
industrialised and developing nations is broadening as a result of
globalisation. Others would take the opposing viewpoint that
globalisation, through the activities of global companies and TNCs, is a
great leveller and is presenting new opportunities for developing
countries, e.g. explosion in IT outsourcing in India. Developing
countries themselves are giving rise to influential TNCs (e.g. TATA in
India and Proton in Malaysia), and the growth of global players from
developing countries is set to grow. There are strong indications that
global Chinese companies will soon emerge; and that may well be the
biggest piece of the global competitive game to come.

ACTIVITY
Select 10 well-known global brands (e.g. Swatch, IBM, Toyota), ensuring there
is sufficient geographical representation (across US, Europe, Asia Pacific) of the
companies behind the brands.

Research the organisations behind the brands. Gain access to their last Annual
Report. Identify the organisation’s geographical spread, international
production operations, global marketing approach and branding, organisational
structure, management style and business culture. Now deduce whether the
company is transnational or global (according to the definitions we defined in
the above section). Explain why you have come to the conclusions you have.

FDI and Trends in Globalisation

What is FDI
There has been much reference to foreign direct investment,
abbreviated as FDI, as being at the heart of globalisation (FDI). So what
is FDI?

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Unit 2 – Globalisation and FDI International Business Environment

FDI mainly consists of funds invested directly abroad by TNCs, or as

reinvested earnings of a foreign affiliate or as funds borrowed from the
parent company. FDI accelerated in the late 1980s, with new FDI
growing at a rate four times faster than domestic output and 2.2 times
faster than exports in the 1980s (United Nations World Investment
Report,1993).

FDI can take the form of the purchase of a controlling interest in a

foreign company (minimum 10% equity capital) or the establishment of
an entirely new foreign company. In the context of globalisation it is
important to understand that FDI is much more than the mere transfer
of funds from one country to another. The FDI investor usually takes a
proactive role in the management and control of the company. Transfer
of funds is usually coupled with transfer of management,
organisational skills, know­how and technology. Ownership can be
30% or more of equity, giving substantial control over the foreign
company.

FDI has been a prime enabler of globalisation through investments not

only in commercial enterprises, but also in the enabling business
infrastructure. FDI investment has poured into transport and
communications operations/infrastructure and national and regional
utilities of many developing countries.

Trends in globalisation
We have noted that FDI has been the key enabler for corporations to
move their money, production facilities and final products around the
globe in search of cheaper raw materials, labour and operations. Let us
now examine the trends in FDI and globalisation.

Historically, outward FDI has been primarily from the triad bloc
consisting of the US, EU (principally UK, Germany, France and Italy)
and Japan, and the recipients have been developing countries. Today
about 100 TNCs control about 1/5th of global foreign assets. 90% of
these TNCs are from the triad block.

Since 1970 the US share of outward FDI has dropped from 2/3rd to
1/3rd by 1990. However, inward investment in the US has grown
phenomenally (from $13billion in 1970 to $550.7 billion in 1994). Inward
investment is not only from Europe and Japan, but also from the newly
industrialised economies of South East Asia (in particular, Korea).

The 1990s saw a gradual increase in the percentage of total FDI flowing
to developing countries. However, in 1998 there was a reversal of the
trend with an increase in FDI to developed countries. Please refer to
Figure 5.1, on p. 149, of your key text, J Morrison. This reversal in trend
can be attributed to the changing nature of FDI resulting from the
emerging importance of the new economy, which led to many TNCs
engaging in global strategic partnerships (particularly relating to

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International Business Environment Unit 2 – Globalisation and FDI

information technology). Many of these arrangements were non­equity

arrangements.

Globalisation has also been greatly enhanced by trade liberalisation,

and international agreements on trade. GATT (General Agreement on
Tariffs and Trade) saw the dismantlement of many barriers to free trade.
Founded in 1946 by 23 nations, it initiated a series of negotiations aimed
at reducing tariff concessions to liberalise trade. GATT was replaced by
the World Trade Organisation, WTO, in 1995, in recognition that an
institution needed to be established to deal with the increasing issues of
free trade as a result of globalisation. Regionalism in the form of
regional groupings with historical, cultural and economic ties, such as
EU, NAFTA, ASEAN, APEC, ECOWAS, etc, has also facilitated
cross­border trade and investment. It is also enabling the transfer of
skills within regions (e.g. EU).

In addition to the trends discussed above, it should be noted that the

nature of global trade is changing, and there has been a substantial rise
in FDI in the services sector. Of the leading industries in the world, most
are now service industries (e.g. retail and wholesale, banking and
finance, leisure and entertainment, IT and business services, tourism).
Many developing countries are attracting substantial FDI in the services
sector. Perhaps the best example is that of India, attracting much foreign
investment in IT outsourcing and call centres.

Today, partly as a result of the payoff from FDI in business

infrastructure (e.g. transport, communication, internet), companies are
increasingly able to switch production from one part of the globe to
another. So as the economic environment and competitive landscape
changes, companies are able to relocate to new geographies to take
advantage of their benefits. Global companies are increasingly
integrated across countries, and international competition is a constant
threat to national players.

ACTIVITY
UNCTAD, founded in 1964, is the focal point within the United Nations for the
integrated treatment of trade and development.

Browse their website on: http://www.unctad.org to get an overview of the

range of co-ordinating trade and development activities ranging from finance,
investment, and technology to sustained development.

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Unit 2 – Globalisation and FDI International Business Environment

Impact of Improvements in Industrial

Production
In this section we shall trace the historical developments in industrial
production that have now led to the practical reality of distributed
global production. In particular, we shall look at the developments in
quality practices and management thinking that have significantly
contributed to today’s reality of globalised production.

Fordism
Henry Ford, the founder of the Ford Motor Corporation, is associated
with the transformation of economies to industrial, mass production,
mass consumption economies. He made a major contribution in the area
of process engineering, by emphasising standardisation.
Standardisation spanned from standards for design, to standardisation
of components, to standardised manufacturing processes to standard
products. He promoted the continuous assembly line, in which each
assembler performed a single, repetitive task. This helped to create
markets based on economies of scale, and gave rise to giant
organisations built upon functional specialisation and minute divisions
of labour. The period between 1950 and1970 saw an explosion in mass
production, particularly of cars, with production matched by mass
consumption. Major car manufacturers came to dominate the US
economy. Some of the American giants were successful as TNCs with a
world­wide presence. Although production was mainly in Detroit,
there were some attempts to distribute production overseas.

Ford was one of the first to recognise the need to embrace quality at all
levels of the organisation – from management right down to the
operational workers. Many of Ford’s ideas were later embraced by
Japanese car manufacturers with great success. Henry Ford’s approach
to quality, and, in particular, to mass production and assembly lines, is
termed ‘Fordism’. The term was, in fact, coined by Frederick Taylor who
was critical of Ford’s work. Fordism came to be characterised by large
factories operated by semi­skilled workers, standardised products with
long runs, hierarchical management and internalised processes. During
this period the industry­wide collective bargaining powers of trade
unions also came to be recognised.

In the context of quality, Quality products were achieved, but often at

great cost – because defects were being encountered at the end of the
production process. Defects were removed by the process of inspection.
Manufacturing plants and factories employed hundreds of inspectors to
‘catch the defects’ by inspection. Quality was therefore achieved by
mass inspection.

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International Business Environment Unit 2 – Globalisation and FDI

Post-Fordist era
A major wave of quality developments came after the Second World
War. This followed a decline in quality, as mass production became a
top priority in the USA. At about the same time, W Edwards Deming
(initially of Bell Systems fame) and Joseph Juran were engaged by the
Japanese to provide consultancy in their post­war rebuilding efforts.
Deming and Juran began to focus their attention on the management of
quality, rather than just viewing quality as a technical speciality. They
recognised the high cost of inspection from their US experience, and
started to look at ways of preventing defects. This led to a focus on the
business processes themselves, and the question as to whether
processes could be improved to achieve better quality in the first
instance and avoid defects.

By the 1970s the Japanese had surpassed the Western world in quality,
and had achieved a step­change in quality. The Japanese model came to
be termed ‘flexible mass production’. Quality came to be synonymous
with the Japanese automobile industry, as the Japanese were able to
achieve near­flawless production to specification. Japan had been able
to leapfrog within a generation and the Japanese car industry was
threatening the US at its own doorstep. Figure 2.2 shows some
productivity statistics published by the OECD in the mid­1990s for the
automobile industry. The bar chart figures refer to labour productivity,
measured as the value added per employee (in 000s US$). The figure for
Europe is an average for Germany, UK, France, Italy and Spain. Japan
far surpasses the figures for the US and Europe in the automobile
industry.

JAPAN 164

US 125

EUROPE 84

Figure 2.2: Labour productivity in the automobile industry in the mid-1990s, source:
OECD (numbers are in 000s US$)

Post 1970, the United States and Europe began to learn some of the
lessons from Japanese industry (particularly from car manufacturing
companies like Toyota). Quality received an unprecedented focus, as a
result of consumer pressure, lack of competitiveness, and the potential
from new technologies. US and European companies began to modify
their management practices and adopt Japanese quality methods, such
as:

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Unit 2 – Globalisation and FDI International Business Environment

· Kaizen: a continuous improvement approach by making

small improvements every time a process is repeated.

· Just in Time production (JIT): manufacture of products or

delivery of materials as near as possible to the time of
demand, thereby reducing work in progress and capital
tied up in inventories.

· Kanban: A technique to help control the flow of material.

Using tags, status display boards, dedicated containers
etc, it reinforces JIT by limiting the quantity of material
that may be held to the amount calculated as appropriate
for JIT processing.

· Total Quality Management: a focus on quality

throughout the product lifecycle; from design to
manufacture.

The Japanese philosophy of worker involvement and contribution to

quality was embraced, as was people­centred management promoting
teamwork and collaboration between employees. Companies came to
be customer­centric, and customer satisfaction synonymous with
quality.

The post­Fordist era and Japan’s economic miracle led to efficient and
reliable flexible mass customisation. It gave rise to new management
thinking and decentralised management. A paradigm shift occurred in
quality. The wide­scale use of standards was promoted. All of these
factors have been crucial in making globalised production and overseas
outsourcing a practical reality today.

Impact of Globalisation on Corporations

The push for globalisation has come from a mixture of four forces:

1. Political: As we noted in previous sections, the main political

factor has been the liberalisation of trade between nations.
2. Technological: Technological factors have included the lower
cost of transport, developments in communication and Internet,
and, of course, the lowering of unit costs of production through
economies of scale and the localisation of production. The
localisation and distribution of production globally has been
made possible through advances in production technology and
adoption of new quality methodologies – Japan.
3. Social: There have also been social ‘push’ factors. The media,
Internet, cheap air travel, etc, have led to a melting of lifestyles
across the globe, with greater awareness of global brands, e.g.
Coca Cola, Sony, Levi. There is an increasing convergence of
world­wide customer behaviour and tastes in many sectors (but

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International Business Environment Unit 2 – Globalisation and FDI

by no means all), presenting opportunities for product

standardisation. In particular, technological products (e.g. iPods,
mobile phones, etc) are amenable to a greater level of
standardisation.
4. Competitive: Perhaps the most significant global factor, has been
the competitive push. Competitive pressures have largely pushed
American and European firms to globalise. Japanese firms, and
later Korean firms, adopted a global approach right at the outset
of their international expansion, partly because they
internationalised at the time when trade barriers were being
lifted. Thus they designed products for the world market with
global brands right from the beginning, e.g. Sony. Their highly
efficient global production systems (e.g. Sony producing from
locations such as Singapore, Swindon, Seoul) gave them cost
advantage, particularly in electronics and automotive parts. US
and European companies have had to emulate their strategic
stance to survive. Furthermore, in the last few decades another
competitive force has pushed corporations to globalise, and that
is the globalisation of customers.

Globalisation and local strategies

As we noted at the beginning of this unit, balancing the forces of
globalisation and localisation, is now at the core of strategy in the
international business context.

Globalisation is associated with some degree of standardisation of a

corporation’s market offerings. However, it would be naïve to think
that a standardised offering is the ultimate goal, or indeed that it is
viable in the global marketplace. It would also be a mistake to think that
efficiencies can always be achieved through globalised production. It is
also the case that the organisational framework of a global corporation
must allow for country differences and cater for fast responsiveness to
local market changes.

For a corporation to be successful in today’s international business

arena, there has to be the recognition that there are very real local push
factors that require local strategies. Many market offerings are highly
sensitive to cultural factors such as attitudes, taste, social code. e.g.
Tastes in coffee in US, for example, is very different from Europe. Then
there are technical factors, e.g. communication standards for mobile
phones are different in the US and the rest of the world (CDMA vs.
GSM). There are also legal factors that limit the free flow of resources
and impose localisation constraints. For example, in countries such as
China and India, governments impose controls on some sectors such as
banking, insurance and telecoms. Then there are commercial factors
that limit globalisation. Distribution, pricing and packaging almost
always require a local strategy. A differentiated approach to sales and
marketing is crucial in the different geographies.

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Unit 2 – Globalisation and FDI International Business Environment

CASE STUDY
The SONY corporation is one of the world’s most successful global
corporations. Sony, initially known as Tokyo Tsushin Kogyo KK (abbreviated as
TTKKK), was founded in 1953 by Akio Morita. It changed its name to Sony to
appeal to the American market, and branded its products under this name.
Today, Sony is one of the best known global brands. Very early in its history,
Morita recognised the importance of the American market to Sony. He felt that
Sony had to succeed first in the US in order to have a chance elsewhere, even in
Japan. Thus the US market became the key ‘win’ target for Sony. In 1960 Morita
opened the first office in the US. By 1971 he opened his first US plant for
manufacturing colour TVs. Later further plants followed. After having
established success in the US, Morita moved outwards to other geographies.
By 1990 Sony was manufacturing out of 17 countries. Today its components are
manufactured in Thailand, Singapore, Korea, Malaysia with product assembly in
many European countries, the US, Australia and Brazil.

Much of Sony’s success can be attributed to it having struck the right balance
between the globalisation and localisation drivers. Sony’s management coined
the phrase ‘global localisation’ in 1988 to define the balancing act of sales and
production across the main geographies.

Now carry out some research into the Sony corporation from its inception to
the current day. Describe its globalisation strategy, and identify, in particular,
how it has balanced the forces of globalisation and localisation.

CASE STUDY FEEDBACK
· Sony set out with global ambitions right from the beginning.
However, within the worldwide market it recognised the US
market as its key battlefield. Its early focus was thus on the US
market (over that even of its local home market). The
globalisation process was progressive moving from the US
outwards.

· Sony was not inhibited by its own cultural ‘bag and baggage’.
Indeed to counter this issue it deliberately set out to woo the
American consumer. It established a global brand, with the
name ‘Sony’ chosen to appeal to its key battlefield, the US.
Sony realised that to succeed in the world market it needed a
global name, and its brand is a competitive asset on the world
stage.

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International Business Environment Unit 2 – Globalisation and FDI

· Sony also had a global management team. By 1989 there were many
foreigners on the main board. As early as 1972, the Head of Sony in
the US was an American.

· It adopted local strategies within its overall global strategy. To

achieve a balance between sales and production across its key
markets, it established the localisation of production and marketing.
The location of production facilities was selected on the basis of the
comparative advantage of the country. Thus much of its component
production is based in the low-cost countries of South East Asia.
However, for its sales push it located product assembly sites in its
main sales markets, in order to be close to the customer. Note that
although Sony achieved huge efficiencies through standardised
production, it does not necessarily offer standard market offerings
worldwide. Based on local market intelligence, different value
propositions were adopted in different countries. There is also a
level of differentiation in many of their product range, to cater for
local/regional differences.

· Sony later established R&D centres worldwide. Location was partly

on the basis of its main markets and partly on the basis of access to
relevant skills, competencies and knowledge.

· Sony‘s global positioning was also based on having a clear

differentiating factor from its major competitors. It prides itself on
superior quality and functionality, and this is well accepted
throughout the world-wide market.

Organisational changes
The globalisation of companies inevitably requires wide­ranging
organisational changes – changes in the organisation’s structure to
support its global ambition and global positioning, changes in who
carries out the work of the corporation’s business, and fundamental
changes for supply­chain integration and efficiencies.

The organisational structure of a global corporation to a large extent

determines its success in the global marketplace. Organisational
structure is a key contributory factor to a global corporation’s ability to
achieve the right balance between the forces of globalisation vs.
localisation, and integration vs. differentiation, and for maximum
responsiveness to the marketplace across all geographies.

We have already discussed some of the organisational models adopted

by global companies in Unit 1. Students are also required to refer to the
key text, J Morrison (158­159) for a discussion on organisational

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Unit 2 – Globalisation and FDI International Business Environment

changes, and, in particular, an outline of the work by Bartlett and

Ghoshal (1998) on the four types of transnational organisation.

Another organisational change is that companies are increasingly

outsourcing activities to specialist organisations to gain price
competitiveness. Outsourcing can affect a range of activities from
production to logistics to services. In this regard, a point often made
about the global corporation, Nike, is that Nike in reality is now only a
design, marketing and sales organisation, having outsourced
production and distribution to specialist companies world­wide. Thus
many global corporations are outsourcing HR services, procurement,
financial services, IT support to specialist companies. Recently, Procter
and Gamble outsourced all its financial services to HP. This is an
increasing trend, as global corporations focus on core activities and
outsource other business activities to specialists. Specialist outsourcing
companies, especially in IT services, are now highly influential global
corporations.

Externalisation is another trend in the global marketplace. Companies

are now looking beyond traditional suppliers with whom they may
have had long­standing and binding agreements in the past.
Supplier­switching is common place today, and supply­chain
integration is becoming critical for fast responsiveness to the global
marketplace. Competitors are often collaborating in marketplaces, and
with the might of their collective purchasing power they are able to
push down prices and are in constant search of the most competitive
suppliers; competitive suppliers from anywhere in the world.
e­Commerce and the establishment of B2B electronic marketplaces,
termed e­Marketplaces, provide this opportunity. An e­Marketplace is
essentially a many­to­many (many sellers and many buyers),
web­based trading network, that enables business to more efficiently
buy, sell and collaborate across their supply chain. It is often said that in
today’s global marketplace the battle for market supremacy will not be
between enterprises but between supply chains.

VIRTUAL CAMPUS
Research e-marketplaces in the automobile, and aerospace and defence
industries.

Now address the following issues:

1. What safeguards are necessary to ensure that products/services

procured (perhaps from a hitherto unknown supplier from another
country) are to specification and quality?

2. In the global marketplace you can no longer assume a long-term

relationship with the customer. New, more price-competitive sellers

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International Business Environment Unit 2 – Globalisation and FDI

from anywhere in the world can threaten your position. In this new
paradigm, then, are suppliers to a global marketplace always in a level
playing field, or is it still possible to gain competitive advantage? How?

Post your answers to the above on the Virtual Campus. Where, appropriate
challenge or extend the views of others. Engage in a discussion using the Virtual
Campus.

KEY POINT
· The push for globalisation arises from political, technological, social
and competitive forces.

· The challenge for global corporations is to balance globalisation

efficiencies with the localisation push. Few market offerings can be
totally standardised across the globe.

· The globalisation of companies inevitably requires organisational

change; changes spanning from outsourcing to externalisation to
international strategic alliances.

Myth or reality?
Undoubtedly globalisation is impacting every aspect of international
business. However, the extent of the globalisation of corporations is
questionable. Corporations, however global in their ambitions,
continue to be influenced by their own national environment and this
can be an inhibitor to the growth of the business internationally. Many
American corporations, for example, are unable to shed their particular
brand of culture which often clashes with local practices.

An indicator of the extent of the globalisation of a company is the

transnationality index. Compiled by UNCTAD, it is made up of three
ratios:

· Foreign Assets/Total Assets

· Foreign Sales/Total Sales
· Foreign Employment/Total Employment

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Unit 2 – Globalisation and FDI International Business Environment

Refer to p 161­163 of your key text, J Morrison, for further information

on the transnationality index. In particular, refer to Table 5.3 (on p. 162
of your key text) the ranking by Transnationality index of the top TNCs;
the absence of any US or Japanese company is particularly noticeable.
The picture of transnationality is worse in the services sector. In work
conducted by Professor Alan Rugman , he found that recent statistics of
major TNCs in the retail sector indicate that only one of the 49 retail
TNCs can be considered as being close to global. The definition he used
for global being ‘operating with at least 20% foreign sales in each region
of the US, EU, Asia’.

Thus many argue that there has been more hype about the globalisation
of corporations than there is reality.

Regionalisation

Region Economic Agreement Countries:

Europe European Union (EU) Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Holland, Ireland, Italy, Luxembourg, Spain, Sweden,
United Kingdom, Portugal, Cyprus, Czech republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland, Slovakia,
Slovenia.

North America North American Free Canada, Mexico, US

Trade Association
(NAFTA)

Latin America Mercado Common del Argentina, Bolivia, Brazil, Chile, Paraguay, Uruguay
Sur (MERCOSUR)

South East Asia Association of South Brunei, Indonesia, Laos, Malaysia, Mynamar, Philippines,
East Nations (ASEAN) Thailand, Vietnam

Asia Pacific Asia Pacific Economic 21 countries from Asia, North and South America and
Co-operation (APEC) Australia, New Zealand.

North Africa Maghreb Arab Union Algeria, Libya, Mauritania, Morocco, Tunisia
(MAU)

Southern Southern African Angola, Botswana, Democratic Republic of Congo, Lesotho,

Africa Development Malawi, Mauritius, Mozambique, Namibia, South Africa,
Community (SADC) Seychelles, Swaziland, Tanzania, Zambia, Zimbabwe

Table 2.1: Regional agreements across the world

Many predict that regionalisation, rather than globalisation, will

emerge as the dominant form of economic structure of the future.
Professor Alan Rugman is one of the proponents of this view. He makes
the point that recent research (over the last 20 years) indicates that
globalisation with a geographical spread of manufacturing and
production leading to standardised goods and services and the

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International Business Environment Unit 2 – Globalisation and FDI

convergence of countries is misguided. He forecasts that economic

activity will be conducted by business within their home regions.
Indeed, we are seeing many powerful regional agreements (see Table
2.1) dominating business in the main geographies of the world.

The Globalisation Debate

Does globalisation benefit a handful of global companies, or is it really
the great leveller presenting opportunities for the world as a whole? The
arguments for and against are many, and the debate is a hot and
emotive one.

Refer to your key text, J Morrison, p 163­164 for a brief discussion on the
subject.

The anti­globalisation viewpoint has been quite vocal, and cannot be

discarded as being confined to extremist fringe groupings. There have
always been deep concerns about the social, political, ethical and
environmental consequences from globalisation. However,
increasingly, dissenting voices are being expressed by countries that
have benefited most from globalisation; the OECD countries. Thus,
based on experience and practical reality, the anti­globalisation view is
gaining support from unexpected quarters.

A few of the pros and cons cited for globalisation are:

PROS:

· Improves national economies.

· Encourages international stability.
· Spreads technologies.
· Provides quality goods.

CONS:

· Damages national economies.

· Commercially driven and benefits the large global
corporations.

· Environmentally damaging.
· Growing inequality of nations.
· Global corporations more powerful than some states.

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Unit 2 – Globalisation and FDI International Business Environment

ACTIVITY
Read more about the arguments for and against globalisation, by referring to
the following websites:

The website of the World Trade Organisation (WTO) for pro-globalisation

viewpoints:

www.wto.org

For anti-globalisation viewpoints refer to the following websites:

www.southcentre.org

www.wtowatch.org

ACTIVITY
Now turn your attention to your own organisation and the country you live in.

What opportunities/benefits does globalisation pose for your company and

country. What threats does it pose? Does regionalisation have more impact
than globalisation? In answering these questions consider the following factors:

· Access to new markets.

· Outsourcing, e-marketplace opportunities.

· Price competitiveness.

· Impact on jobs.

· Labour practices.

· Environmental issues.

· Corruption.

· Human Rights.

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International Business Environment Unit 2 – Globalisation and FDI

ACTIVITY
Of course, in reality the globalisation debate is more sophisticated than just a
simple bi-polar (pro vs. anti) debate. For example, there is the free market view
that believes that globalisation is uncontrollable, and then the characteristically
European view that Globalisation needs to be and can be managed.

Research and evaluate these views in the globalisation debate, and summarise
your own viewpoint.

CASE STUDY
Read and answer the question contained in the case study: Case study 5.1 ‘FDI
bonanza in China’ on p. 142-144 of your key text, J Morrison.

VIRTUAL CAMPUS
Post your answers on the Virtual Campus. Learn from the feedback of your
colleagues.

Summary
In this unit we have considered the impact of globalisation on the
international business environment. We have looked at the definition of
globalisation, the various views on its impact, and have briefly
considered theoretical approaches to internationalisation; in particular
the OLI paradigm.

We have examined the key drivers of globalisation and in particular the

role of FDI, and have traced the contribution of TNCs to international
business. We have also looked at the historical developments in
industrial production that facilitated globalisation, especially in the
areas of flexible mass production, quality management and new
management thinking. We then looked at the impact of globalisation on
corporations, noting the criticality of adopting local strategies to

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Unit 2 – Globalisation and FDI International Business Environment

balance the forces of globalisation with local push factors, and balance
standardisation with differentiation.

We have also noted that globalisation hasn’t had the far­reaching

impact in international business that was forecast by many proponents
of globalisation. In this context, we examined the rise of regionalisation
and questioned whether regionalisation is the more realistic growth
pattern for international business.

Finally, we considered the globalisation debate.

REVIEW ACTIVITY
Identify/analyse the level of globalisation in your own company, and consider its
global ambitions for the future?

1. How would you define your company – national, TNC, global

company. If you believe your company is a truly global company,
justify/elaborate (on the basis of what you have learned in this unit).

2. Use the Transnationality Index to get an indication of its global extent.

You may need to liaise with senior management and Sales/Marketing
staff to identify this.

3. Who are your main competitors – national companies or global

companies? How does this impact your company – in terms of
credibility, price-competitiveness, other factors?

4. Talk to your senior management, to better understand your company’s

global ambitions and the drivers. Summarise your understanding. If
your company has global ambitions, is it well positioned to achieving
this? What organisational changes would be necessary to achieve these
ambitions?

References
The following are the references for your key text and other
recommended reading:

1. Daniels, J (2000) International Business, 9th Edition , Addison

Wesley

2. Dicken, P (1998) Global Shift, 3rd edition (London:Paul Chapman

Publishing)

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International Business Environment Unit 2 – Globalisation and FDI

3. Dunning, J (1993) The Globalisation of Business (London:

Routledge)
4. Giddens, A (2000), Runaway World: How Globalisation is Reshaping
our Lives, (Andover: Routledge)
5. Hirst, P and Thompson, G. (1999) Globalisation in Question, 2nd
edition (Cambridge: Polity Press)
6. Hill, C. (2000) International Business (McGraw­Hill)
7. Morrison, J. (2006) The International Business Environment,
Basingstoke, Palgrave Macmillan (key textbook)
8. Ohmae, K. (1995), Evolving Global Economy, (Harvard Business
School Press)
9. Ohmae, K. (1994), Borderless World, (Profile Business)
10. Ohmae, K. (1991), Mind of the Strategist, (McGraw­Hill)
11. Rugman, A., and Hodgetts, R., (2000) International Business, 2nd
edition, FT Prentice Hall
12. Tayeb, M (2000) International Business: Theories, Policies and
Practices, 3rd edition, FT Prentice Hall
13. Waters, M (1995) Globalisation (London: Routledge)
14. Zysman, J (1996), The Myth of “global” economy: enduring
national foundations and emerging regional realities, New
Political Economy, 1(2): 157­84

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Unit 3

National Economic Systems

LEARNING OUTCOMES
Following the completion of this unit you should be able to:

· Compare and contrast the models of capitalism, including free

market, social market and Asian models of capitalism.

· Analyse the challenges faced by transition economies and the issues

of privatisation, liberalisation and economic development.

· Describe the nature and extent of economic convergence and

integration, through globalisation and regionalisation.

· Assess international market attractiveness on the basis of economic

indicators.

Introduction
Historically, differing economic systems, ranging from free­market
capitalism to socialist systems and, at the far extreme, communist
command economies, have played a crucial role in economic
development paths. How is this view changing in the global economy?
What is the role of the state in business? To what extent do governments
intervene in the running of business activities? What impact are moves
towards regional economic integration, such as EU, NAFTA, ASEAN,
having on international business? These are some of the issues we shall
consider.

Transitional economies present huge growth opportunities in

international business. The transitional economies of Central and
Eastern Europe and, importantly, China, are examined. Privatisation of
formerly state­owned industries is also a key aspect of this
development, and is an area we shall consider.

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Unit 3 – National Economic Systems International Business Environment

READING ACTIVITY
Please read Chapters 3 (‘The national economic environment’) and 4 (‘Major
economic systems’) of your key text, Morrison, J (2006), which is essential
reading for this unit.

Economic Fundamentals
Many of you will undoubtedly have an in­depth understanding of
economic issues relating to business. The purpose of this first section is
to revisit the fundamentals (and terminology) in order to establish a
common baseline for all students. We shall therefore briefly consider
some of the fundamentals. Students who are less familiar with the
topics in this section, should pay particular attention to Chapter 3 of
your key text, Morrison, J.

Macroeconomic environment
Macroeconomics is the study of national economies. The flow of
economic resources in the economy, such as imports, exports,
government spending and taxes, can be depicted as a model of circular
flows. Please refer to Figure 3.1 on p. 67 of your key text, Morrison, J.

In the context of international business, the following terms relating to

the macroeconomic environment are used widely:

1. Gross National Product (abbreviated as GNP): Total Income

from all final products and services
2. Gross Domestic Product (abbreviated as GDP): Total annual
economic activity in a country
3. Purchasing Power Parity (abbreviated as PPP): Number of units
required to buy a product equivalent to US$ in the USA.

Economic sectors
Economic activity can be divided into the following sectors:

1. Primary Sector: The primary sector is concerned with the

harnessing of natural resources. It includes:

· Agriculture and fisheries.

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International Business Environment Unit 3 – National Economic Systems

· Mining, oil exploration.

2. Secondary Sector: The secondary sector includes:

· Manufacturing.
· Processing of primary products (e.g. foodstuffs).
3. Tertiary Sector: Refers to the services sector and is very diverse in
its scope. It ranges from the high­end knowledge and
information­intensive services (e.g. Information and Business
consulting services) to Banking and Financial services to Education
to Healthcare to Tourism. It also includes very basic services such
as domestic cleaning, machinery servicing, maintenance etc.

Industrialisation has led to the transition of economies from the primary

sector, principally agricultural economies, to industrial ones.
Furthermore, as industrialisation has progressed, employment in
manufacturing has declined. This is due to the efficiencies in the
manufacturing process achieved largely by use of high­tech operations.

A significant trend, particularly in the economies of the West, is the

phenomenal rise of employment in the services sector. Refer to Figure 3.3
in your key text, Morrison, J. This rise, particularly in the US, is attributed
to the growth in high­tech areas and the pervasive nature of Information
Technology in all sectors of the economy. Both the public sector and the
private sector view Information Technology as crucial in improving the
efficiency of their business processes and in achieving competitiveness.
There is thus an enormous focus on this aspect of the services sector,
which is having a significant impact on international business generally.

Inflation
Inflation is defined as the continuing general rise in prices in the
economy. Inflation rate is percentage pegged to a fixed time reference.

Rises and falls in inflation are tracked in the consumer price index for
every country, and these are key economic indicators. In the UK, for
example, The Retail Price Index (RPI) is tracked monthly and represents
the cost of a “basket” of goods and services purchased by an average
consumer. It includes mortgage payments.

The causes of inflation are two­fold:

Demand­pull: Increased consumer buying power leading to an

increase in prices, which can, in turn, lead to rises in wage demands.

Cost­push: Increased costs leading to increased prices and leading to a

rise in wage demands.

Cost­push and Demand­pull are often linked.

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Unit 3 – National Economic Systems International Business Environment

Unemployment
Unemployment refers to the percentage of people in the workforce who
are willing to work but are without jobs. The official International
Labour Organization (ILO) definition is as follows:

It consists of people who fall into two categories:

1. Are without a job, and have been in active search in the last 4
weeks, and are able to start in the next 2 weeks.
2. Are out of job, have found a job and are waiting to start in 2
weeks.

Unemployment can be classified as structural or frictional

unemployment. Structural unemployment results from changes in
technology or relocation of industries. Frictional unemployment is due
to normal turnover that occurs naturally.

In many countries there are regional differences in the levels of

unemployment. For example, in Italy, there is a ‘North­South’ divide
with levels of unemployment being much lower in the prosperous
North (centred around cities like Milan) than in the South. The same is
true of the UK, where unemployment is much lower in the South. Many
transition economies such as Albania, which are transforming to market
economies, are experiencing serious regional differences.

ACTIVITY
Select a transition economy – perhaps one of the former Soviet Union or
ex-COMECON states. Investigate their patterns of employment distribution.

1. Have employment patterns changed since democratisation? Why?

2. Are there regional differences in employment distribution? What

reasons can be attributed to this?

3. What impact is international business having on employment

distribution? Are there structural changes in employment patterns?

Balance of Payments
The Balance of Payments is an annual record of all transactions between
a country and the rest of the world. It is the net outcome of international
payments. Credits include items such as exports, incoming

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International Business Environment Unit 3 – National Economic Systems

investments, government borrowing, etc. Debits include imports,

outward investments, government lending, repayment of loans, etc.

Transactions are classified as:

· Current account: trade in good and services.

· Capital account: transactions in capital assets.

Governments have two primary levers on the control of balance of

payments:

· Interest rates.
· Trade barriers.

Economic growth
Economic growth refers to the increase in national income from an
expansion in production and increases in services provision.

Rapid growth follows periods of industrialisation and investment, as

experienced by Europe in the 1950s and 1960s, and by the Tiger
economies (South East Asia) in the 1980s and 1990s. The Tiger
economies, however, experienced a sharp downturn as a result of the
financial crisis of 1997. Today the Tiger economies, and in particular
that of China, are growing again at a faster pace than any other
geographic area.

CASE STUDY
Ireland is the fastest growing European economy. Many American electronic
and IT companies (e.g. Dell) have set up major operations in Ireland, with the
Irish operation often serving as the hub for Europe.

On the one hand, investigate the motivation for American investors choosing
Ireland, and, on the other hand, identify what the Irish Government is offering
to incentivise investment in Ireland (e.g. tax breaks, co-operation between
business technology units and universities etc.).

Economic growth is slow in economies based on primary commodities.

Many African states are experiencing slow economic growth for this
reason, and are unable to attract foreign investment because of issues
relating to political and social instability.

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Unit 3 – National Economic Systems International Business Environment

Business cycle
All economies experience economic fluctuations. Prosperity is often
followed by a downturn. Increasingly the cycles are global, as the
economies of the world are so inter­connected. However, there are still
regional and country differences.

The phases in the business cycle are:

· Prosperity.
· Recession.
· Depression.
· Recovery.

Refer to your key text, Morrison, J for further details.

Governments, using monetary and fiscal policy, can and do intervene to

prevent ‘boom and bust’. There is far more regulatory control following
the Second World War.

The US economy has a strong bearing on the direction of the world

economy as a whole, and the Chairman of the US Federal Reserve Board
is highly influential.

Role of Governments
The role of government and the extent of its involvement in business
activities, clearly influences international business in a country.

Governments clearly play a significant role in managing

macro­economic activity. The level of intervention would depend on
the philosophy of the government. However, most governments today
are tending towards market­oriented policies, with the focus of
economic management being stability. The areas of management
include:

1. Fiscal Policy: budgetary policies to balance spending with

taxation.
2. Monetary policy: management of money supply, interest rates
and exchange rates.
3. Central Banks: control of external transactions and national
banking systems.

Governments also intervene in trade and business activities, and the

level of intervention influences the decisions of global corporations on

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International Business Environment Unit 3 – National Economic Systems

whether to operate there or not. There are huge variations in the degree
of intervention. In the US, and to a large extent in the UK, there is a
hands­off policy. In Japan, France and many of the Nordic countries,
governments play a more active role. In many of the fast growing
economies like China and India, which previously exercised a
protectionist centralised approach, there is rapid decentralisation.
Today, the burgeoning Guangdong province of China is practically run
on a market economy model.

Impact on international business

The role of government and its management of the economy plays a
crucial role in determining a country’s attractiveness to foreign
investors. The macro­economic indicators we considered in the
previous section are used in assessing the attractiveness of international
markets. Specifically the following key indicators:

· GDP.
· GDP per capita.
· Disposable income.
· Income distribution.
· Exports/Imports.
· Saving rate.
· Investment rates.

Macro­economic indicators when used with other factors, such as the

degree of urbanisation, middle class percentage, life­style, give insight
into the size of potential markets.

ACTIVITY
Assume you work for a household appliance (white goods) manufacturer. For
your product, compare the market attractiveness of the following countries:

· Argentina.

· China.

· Hungary.

· Italy.

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Unit 3 – National Economic Systems International Business Environment

World Economic systems

Prior to the cold war, the economic systems of the world were classified
broadly as capitalist or socialist. Although states with state­planned and
collectivist influences are still in existence, most countries are
converging towards the capitalist and free­market model.

The three distinguishing elements of free market economies are:

1. Freedom of enterprise: the right to pursue your own choice of

business activity
2. Competitive markets: Competition based on the ‘natural’ forces
of supply and demand.
3. Private property: Private ownership of property – capital, goods
and intellectual property. Intellectual property rights and patents
are of particular significance today.

Market structures
Markets can be classified by their degree of competition as follows:

· Monopoly: A monopoly is when a single firm is the sole

supplier in the market.

· Oligopoly: A few large players dominate the market.

· Pure competition.

Oligopolies, and monopolies, in particular, are not in the interest of the

consumer. In a monopoly, a firm, due to its dominant position and lack
of competition, is able to set prices at unfair levels. There is legislation in
most countries to curtail monopolies. In the US this is known as
anti­trust law, and the most contemporary case of violation of anti­trust
law has been Microsoft in its attempt to block out competition by
bundling its own browser, Internet Explorer, with the Windows
operating system.

Public utilities, such as power supplies and natural resource

management, are sometimes managed as state­owned monopolies on
the grounds that there are economies of scale to be achieved from their
large infrastructural requirements, and that this is eventually in the
public interest. Even in this area there is a trend away from monopolies.

In today’s market economies, oligopolies are more common than

monopolies. Sometimes there are attempts by a group of dominant
players to collude and ‘carve out’ lucrative sections of the market. This
is commonly referred to as a cartel, and there is legislation to protect the
interest of the consumer against the anti­competitive nature of cartels.

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International Business Environment Unit 3 – National Economic Systems

ACTIVITY
Read some of the papers on the Competition Policy of the European Union at
http://europa.eu.int/comm/competition/index_en.html

Regional types of capitalism

National culture, the social environment and political history have led
to distinct styles of capitalism in the main economic regions of the
world.

Social market capitalism

The Social Market model, often referred to as the mixed economy, is
prevalent in Europe and emphasises social welfare together with the
safe­guarding of national assets in key sectors (e.g. oil). By social
welfare provision countries aim to reduce social inequalities, whilst the
motivation for state control of key assets is to protect the long­term
interests of the nation.

Within the Social Market model itself there are variations due to
different emphases. For example, in many of the Scandinavian
countries (in particular Sweden and Norway) there is an emphasis on
strong welfare provision – these countries enjoy some of the best
welfare systems in the world. The French Government plays a more
interventionist role in economic activities, and is sometimes described
as a ‘statist’ model. The German model is often termed ‘corporatist’
based on strong co­operation between state, business and labour.

CASE STUDY
Norway is a prosperous model of welfare capitalism with a mix of free market
activity and government intervention (particularly with regard to its natural
resources – petroleum, fishery, agriculture). It places a strong emphasis on the
stewardship of natural assets for future generations. It was the first country to
set up a Petroleum Fund (1990). The purpose of the fund is to separate the
extraction of petroleum from the use of revenues. By setting aside a large share
of revenues when the cash flow from the extraction of non-renewable
resources is high, Norway has tried to meet two policy challenges. Firstly, to
protect the domestic economy from the negative impact of sharp and
unpredictable variations in the oil price and revenues, and secondly to
distribute its petroleum wealth fairly among generations.

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Norway’s Petroleum Fund is large (approx. $120 billion in 2003), and is

expected to grow substantially in the next years. The fund is administered by
the Norwegian Central Bank.

Norwegian officials believe that if such a large amount of money directed to the
Petroleum Fund were invested domestically, it would overheat the economy.
Therefore, successive governments have followed a policy of investing the
revenues in the fund in stable foreign securities markets.

What are the pros and cons of such an approach?

Asian capitalism
Many analysts refer to a distinctly Asian model of capitalism shared by
countries of South East and East Asia. In very simplistic terms the Asian
model, in contrast to the American or European models, is characterised
by less openness, stronger state intervention in economic controls.

As with Social Market capitalism, there are country differences that

have arisen due to the historic stages of development in Asia – Japan
first, then the Tiger economies in the 1980s and 1990s, and now China.
The first two are mixed economies combining market forces with
varying state intervention.

Let us briefly consider the Japanese model, sometimes referred to as

Alliance Capitalism or Keiretsu. The model is based on strong
networking – groups of corporations served by a main bank and
possible other service providers. As an alliance of interlocking
corporate structures, they collectively wield significant power and
influence. They can maintain their market dominance by warding off
hostile takeovers and new market entrants.

Other characteristics of Japanese capitalism, some shared by the other

Asian Tiger economies, include strong state intervention, strong
loyalties in corporate culture (akin to family loyalties) bureaucracy and
weak welfare state provision.

VIRTUAL CAMPUS
Investigate the particular characteristics of the Tiger economies of South East
Asia (except China).

Identify the pros and cons of their approach in relation to attracting

international business and fulfilling their economic development aspirations.
Share your view with your colleagues on the Virtual Campus.

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Planned economies and their transition

The Soviet Union and China, the two leading communist states of the
time, were based on planned or command economies. Aspects of the
economy in China are still state controlled, although, more recently,
rapid changes are occurring in moves towards a more liberalised and
mixed economy model. Planned economies are characterised by state
ownership of production with targets (production, price) set by the
state, rather than characterised by free market forces.

Prior to the collapse of the Soviet Union, modest attempts were made to
liberalise markets and introduce reforms to modernise the economy, the
most notable being Perestroika in 1987­89. These attempts were largely
unsuccessful. However, the end of the cold war, and the breakup of the
former Soviet Union into separate states has led to these economies
being in transition. These economies, and that of ex­COMECON
countries, are often referred to as transition economies – because of their
state of transition from state­planned economies (with a high
dependence on the Soviet Union) to market economies. Their success is
dependent on four inter­related processes:

· Stabilisation.
· Liberalisation.
· Internationalisation.
· Privatisation.

Please refer to your key text, Morrison J (p 117­119) for further details.

These countries with transition economies face enormous challenges,

economic and social, ranging from ethnic strife, social unrest to
inflation, unemployment. Much of their infrastructure is out­dated and
highly inefficient, and is a serious inhibitor to the growth of
international business. Privatisation (e.g. sell off or Joint Venture with a
foreign investor with expertise in the particular area) may seem the
obvious answer – but this too has huge challenges. Many large
enterprises, including those with responsibility for infrastructure, were
previously under state ownership and their managers were stalwarts of
the communist party. Because of the complexities of these systems,
there is a dependence on the former managers/staff for expertise of the
legacy systems (even if they are to be restructured or totally shutdown).
Retaining these staff, particularly in senior roles, has political
sensitivities. Management of public opinion is crucial in this regard.
Thus the challenges of privatisation are many, and economic success is
very much dependent on it.

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CASE STUDY
Read the following case study relating to a successful privatisation in Poland
involving foreign investors:

Case study 4.4: ‘IKEA branches out in Russia’ on p. 119-121 of your key text, J
Morrison.

Carry out the SWOT analysis as outlined in the Case Question at the end.

VIRTUAL CAMPUS
Now post your SWOT analysis, for the above case study question, on the
Virtual Campus. Review the SWOT analysis of your colleagues, and learn from
their input.

Future prospects for the transition economies are uncertain, although

certainly dependent on integration with the Western economies.
Perhaps regional integration, through membership of the EU, offers the
best and fastest path to improved prospects.

China
China warrants special attention as it is the fastest growing economy in
the world. It is attracting significant new international business,
particularly in areas such as the Guangdong province. Its attraction is
mainly cheap labour.

China’s leadership is now committed to economic reforms and is keen

to open up its economy to market forces. Although it presents huge
opportunities for international business, it also has huge challenges for
business. Its infrastructure is highly inefficient and is in need of urgent
restructuring. Political interference is another inhibitor.

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ACTIVITY
Identify the economic reforms and other developments that have led to China’s
attractiveness for international business today.

ACTIVITY FEEDBACK
Here are some of the key developments/factors:

1. China’s accession to the WTO in Dec 2001

2. Programme of planned tariff cuts and market liberalisation measures

following WTO entry – over a period of 6-8 years

3. The significant Mainland/Hong Kong Closer Economic Partnership

Agreement in June 2003, which has made Hong Kong the logical
gateway for China’s business. Particularly regions adjoining Hong
Kong, such as the Guangdong province, have access to Hong Kong’s
excellent business infrastructure and business expertise and
experience.

4. Further co-operation on major cross-border infrastructural projects,

e.g. Hong Kong – Zhuhai-Macau Bridge.

Globalisation and Regionalisation

Globalisation has led to the rise of regional and global organisations to
foster co­operation in development, finance and infrastructure. Global
organisations include OECD, World Bank, IMF, UNCTAD, ILO, WHO,
FAO, etc. Regional organisations, in particular, have become highly
influential over the activities of business enterprises in regions.
Regionalisation, at its highest level, can include political and economic
integration.

The European Union is the most advanced of the regional groupings

with both political and economic aspirations and concrete schedules for
achieving integration milestones. Other powerful regional groupings
include NAFTA and ASEAN. However, the extent of integration in
NAFTA and ASEAN is confined to regional free trade agreements.

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The rise of regionalisation may well lead to trading partnerships

between economic blocs, as opposed to countries.

European Union
In 1994, following the ratification of the Maastricht Treaty, the then 12
member states of the European Community became known as the
European Union (EU). Today membership has grown to include states
encompassing Poland, the Czech Republic, Slovakia, Hungary, Estonia,
Lithuania, Latvia and Slovenia.

Please refer to your key text, Morrison J, for further details.

In contrast to other regional groupings, such as NAFTA and ASEAN,

EU integration is much more extensive including plans for political and
economic integration. Of particular significance is the European
Monetary Union (EMU) established after the Maastricht Treaty of 1992.
The aim of the EMU is to achieve economic convergence of the member
states, with each government meeting the ‘Maastricht Convergence
Criteria’. (Refer to p. 87 of your key text). The Euro was introduces as the
common currency of the EMU in January 1999. Not all EU states have
joined the euro­zone. In the UK, for example, the timing of entry to the
euro­zone is dependent on the following five criteria:

· Sustainable convergence.
· Flexibility.
· Impact on investment prospects in the UK.
· Impact on financial services industry in the UK.
· Impact on growth and employment in the UK.

KEY POINT
· Economic activity can be broadly classified into primary,
secondary or tertiary sectors. An important trend in recent
years has been the significant rise in services industries,
especially relating to high-tech areas.

· There is no single model of capitalism. Different flavours of

capitalism have developed across different geographies, e.g.
Asian capitalism, social market capitalism in Europe. The
transition economies face different challenges and their
succesful transition to free market economies is dependent on
stabilisation, liberalisation, internationalisation and privatisation.

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· As regional and global integration increases, governments find

themselves with less room to manoeuvre in economic policies.

· The rise of regionalisation is an important trend (perhaps overtaking

globalisation). The EU being the most successful and advanced in
regional integration (both economic and political).

CASE STUDY
Read and answer the question contained in the case study: ‘Changing global
demand for Mobile Phones’ on p. 99-100 of your key text, J Morrison.

VIRTUAL CAMPUS
Post your answers on the Virtual Campus. Learn from the feedback of your
colleagues.

Summary
At the start of this unit, we briefly examined macro­economic
fundamentals in relation to business. We looked at the role of
government in business and noted how macro­economic indicators
enable corporations to assess international market attractiveness.

We examined the different economic systems of the world, and their

regional flavours – from socialist market capitalism in Europe to Asian
capitalism. We considered the transition economies and the
opportunities they present, as well as the huge challenges they pose.

We have also looked at the burgeoning economy of China, and the

factors that have led to its attractiveness for global corporations (see last
activity).

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Finally, we have looked at regionalisation, the EU in particular, and

how regionalisation is accelerating integration within the main
economic regions of the world.

REVIEW ACTIVITY
Now turn your attention to your own organisation and its market offerings.
Assume that your senior management are considering expanding into new
emerging markets overseas – countries in the following regions only: Asia,
Africa, Latin America, the former Soviet Union and ex-COMECON states.

Identify the key economic criteria that, you believe, should be used to assess
market attractiveness of the countries in the regions identified. On the basis of
these criteria, as well as other demographic factors (middle-class profile, age,
lifestyle, etc), name the top three countries your organisation should target.
Depending on the particular market offering, demographic factors should also
be considered (e.g. age, size of middle class population, lifestyle, etc.).
However, your main focus for this activity should be on the national economic
indicators.

Now prepare a summary on market attractiveness for the top three countries
you have chosen. Briefly identify any economic risks and disadvantages relating
to the countries also.

References
The following are the references for your key text and other
recommended reading:

1. Daniels, J (2000) International Business, 9th Edition , Addison

Wesley
2. Dicken, P (1998) Global Shift, 3rd edition (London:Paul Chapman
Publishing)
3. Dunning, J (1993) The Globalisation of Business (London:
Routledge)
4. Dunning, J (ed.) (1997) Governments, Globalization and International
Business (Oxford: Oxford University Press)
5. Eijffinger, S and deHaan, J (2000) European Monetary and Fiscal
Policy (Oxford: Oxford University Press)
6. Hirst, P and Thompson, G. (1999) Globalisation in Question, 2nd
edition (Cambridge: Polity Press)

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7. Hill, C. (2000) International Business (McGraw­Hill)

8. Morrison, J. (2006) The International Business Environment,
Basingstoke, Palgrave Macmillan (key textbook)
9. Rugman, A., and Hodgetts, R., (2000) International Business, 2nd
edition, FT Prentice Hall
10. Schnitzer, M (2000), Comparative Economic Systems, 8th edn
(Cincinnati: South­Western)
11. Tayeb, M (2000) International Business: Theories, Policies and
Practices, 3rd edition, FT Prentice Hall
12. Waters, M (1995) Globalisation (London: Routledge)

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Unit 4

The Cultural Environment

LEARNING OUTCOMES
Following the completion of this unit you should be able to:

· Evaluate the impact of culture on business structures and operations.

· Assess the importance of national culture and cultural differences in

international business.

· Evaluate differences in organisational culture.

· Apply culture theories in relation to national differences.

Introduction
Managers working in a multi­cultural environment or in international
business often misunderstand behavioural and cultural differences, and
underestimate their role. This reduces their inter­personal effectiveness
in cross­cultural business contexts. This unit is devoted to the cultural
environment, and its impact on economic development and business
operations.

It is widely accepted that the more individualistic cultures of northern

European countries and the US were at the forefront of industrialisation
and capitalist development. But in today’s globalised world, we need to
look beyond these cultures and appreciate some of the profound
differences across countries and ethnic groupings. In the context of
business, we ask ourselves, what is the role of differing cultures and
identities, as well as regional cultures in economic development?

The above are some of the issues we shall be focusing on, as it is clear
that today’s International Managers need to be sensitive to cultural
differences and appreciate how they impact on business.

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READING ACTIVITY
Please read Chapter 6, ‘The cultural environment: diversity and globalization’
of your key text, Morrison, J (2006), which is essential reading for this unit.

Culture in the Context of Managing

Business

What is culture?
We start off by asking ourselves ‘What is culture?’ In broad terms,
culture can be described as the distinctive way of life of a grouping in
society. Such groupings include nations, regions and ethnic
communities.

Terpstra & David (1991) defined culture as ‘... a learned, shared,

interrelated set of symbols which unite and identify members of a society’.
Culture is defined by a number of factors including:

· Values and beliefs – moral and religious.

· Language and communication.
· Behaviour, e.g. eating, drinking, dress.
· Customs.
· Art, dance, music and sport.

Culture is holistic and permeates every aspect of the way things are
done.

Within a culture, its distinctive values, attitudes, beliefs, resulting

behavioural patterns and impact on group thinking are well
understood and taken for granted. However, for a person entering the
cultural context from the outside (i.e. from another culture), it can pose
some unexpected and surprising challenges. It is therefore prudent for
the International Manager to be cogniscent of cultural differences in
order to be sensitive to local culture and be more effective in their role.

We shall look at some of the above factors and their impact on business
later in this unit.

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Cultural orientation
All people view and interpret the world through their own cultural
‘filters’. This cultural orientation can be categorised as:

Ethnocentrism: view of the world through the benchmark of their own

culture. This ‘blinkered’ approach is inflexible, arrogant and clearly
detrimental to international business. Nevertheless, some international
companies have adopted this approach of cultural imperialism. But in
today’s world it is doubtful as to whether this approach in business can
ever succeed.

Polycentrism: this approach makes a deliberate attempt to overcome

one’s own cultural background and limitations, and tries to understand
other cultures. It displays ‘openness’ and attributes value in
understanding other cultures. Needless to say, this approach is one that
should be adopted in international business.

National Cultures
Working in international business requires a deep understanding of
why people from different backgrounds behave the way they do. It is
therefore critical for the International Manager to have an
understanding of national cultures, their distinguishing characteristics
and how national culture impacts behaviour.

Nations are distinguished by:

· Language; not always one. For example, in Canada,

English and French are both spoken and bi­linguality is
common.

· Religion: again, as in language, not always one. For

example, in Sri Lanka the main religion is Buddhism.
However regions within the country are dominated by
Hinduism, and there is also a small Christian and Muslim
presence throughout the country.

· Ethnic and racial identity: again, as in the previous

characteristics, there is often more than one ethnic/racial
grouping. Take for example, Malaysia, where there are
Malay, Chinese and Tamil racial groupings. Within these,
there may be further sub­groupings of ethnicity.

· Shared cultural history.

These distinguishing characteristics define national culture. National

culture influences family life, education, economic and political
structures, and, of course, business practices and organisation.

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But as the above list indicates, national characteristics are not always
straightforward, and undertaking business across national boundaries
requires an appreciation of the complexities of multiple cultural
identities and religions.

ACTIVITY
Refresh your understanding of the differences between nations, states and
nation states by re-reading p. 172-174 of your key text, Morrison, J.

Cultural Differences
We shall now turn our attention to two contrasting national cultures.
We shall consider Japan and then the Balkan states.

Japan
Japan has historically had a strong sense of national identity, partly
because it has an almost one­to­one fit between nation and state.
Furthermore, the post war efforts at re­construction further united the
country, and established a strong Japanese management culture; one
which has now been adapted and then adopted by Western countries.

Japan’s unique cultural identity stems from:

· Language: unique to Japan.

· Religion: Shintoism, again unique to Japan.
· Strong sense of national identity and tradition.

National culture, together with the adoption and extension of American

management techniques (e.g. quality practices and Demming) during
post­war reconstruction, has led to a distinctive form of business culture
in Japan. Firstly the Japanese place a high value on group norms.
Teamwork, brain­storming, co­operation between workers and
consensus­based decision making are givens. There is also a high level
of acceptance of authority, when contrasted with the US and European
countries. Japanese also have a strong sense of corporate pride and
strive for perfectionism, as demonstrated by their prominence in quality
improvement practices today.

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The Balkan states

The Balkan states, especially the former Yugoslavia, Albania, Bulgaria,
Romania, by contrast with Japan, have not enjoyed constancy and a
unifying sense of national history. The historical rise and fall of empires
and, more recently, the carving out of nation states (post the collapse of
the Berlin Wall), ethnic conflict, fragmentation and the Balkan war have
not helped in establishing a sense of national identity.

Historically, the culture of these states has had a strong Russian

influence, with Orthodox Christianity being a dominant religion. But
equally dominant is Islam in certain ethnic communities.

In contrast to Japan, the identity of these states can more accurately be

described as identities in transition. Thus, unlike Japan, there is not a
distinctive business culture. Each state may have its own distinctive
character and approach to business, and these in themselves may be
changing quite rapidly.

Languages
Language is the fundamental means of communication between
individuals. It facilitates social interaction. It facilitates business.
Language is the most fundamental difference between cultures.

An important distinction between cultures is not just the precise

language used (e.g. Japanese, German, English) but the way language is
used. Hall & Hall (1960) differentiate between high­context and
low­context languages as follows:

High­context languages are characterised by:

· Implicit speech: ambiguity is common (e.g. ‘reading

between the lines’) and directness is avoided (may be
considered rude).

· Body language is important to interpret speech.

· Precise wording of speech will take into account the
relationship between participants, the context, and the
knowledge of recipient.

· Collective group orientation: the speaker will use

collective ‘we’ more than an individualistic ‘I’.

Examples of high­context languages are Japanese, Arabic, Chinese.

Low­context languages are characterised by:

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· Explicit speech: aim is to be clearly understood whatever

the context and whoever the recipient.

· Individual orientation: There will be more references to

‘I’ to indicate individualism and specific responsibilities.

Examples of low­context languages are German, French, English,

Nordic languages.

It is undoubtedly the case that anyone embarking on a cross­border

relationship should learn the relevant language. Even if, at the
management level, English is spoken, managers will soon have to deal
with people who do not speak English. It is also a matter of cultural
sensitivity to make an attempt to learn the national language.

It should, however, be noted that English is increasingly emerging as

the dominant language of business. Even though only about 5.4% of the
world’s people speak English as their mother tongue, the Internet,
global media, colonial factors (e.g. use of English as language of
business in India) and trends in globalisation have given English
(including American English) a dominant position in business.

Despite the dominance of English, there are many parts of the world
where business cannot be carried out without knowledge of the local
language. China, being a case in point.

In most countries and economic regions one or more dominant

languages exist. Canada has English and French, the EU has 20 official
languages, NAFTA has English and Spanish. Then there is the language
of separatists. To promote their own strong sense of identity, the
separatist movements of Canada, Corsica and the Basque region in
Spain have their own language/dialect.

Many of the developing countries have adopted as their business

language the language of their former colonial powers. Thus English,
French, Spanish and Portuguese is used in much of the developing
world. Certain countries, particularly in Africa, have a cultural heritage
of tribal loyalties, fostered by many different languages. In these
situations, English may be a ‘neutral’ language to adopt for business.
However, the situation can be complex and the International Manager
must be highly sensitive to the cultural issues relating to language.

Religions
The main religions of the world are:

· Christianity.
· Islam.

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International Business Environment Unit 4 – The Cultural Environment

· Hinduism.
· Buddhism.
· Confucianism.
· Judaism.

Within the religions there may be different sects or denominations.

Christianity includes the Roman Catholic, Protestant and Eastern
Orthodox denominations. In Islam there are the Sunni and Shi’ite sects.
One has to be aware not only of the different religions but also of the
tensions between the different religious sects, e.g. Sunni and Shi’ite sects.

Impact on business life

Religion clearly plays an important role in business and business
practices. Here are some examples to illustrate its impact:

· Dietary laws dictate foods especially in Jewish, Muslim

and Hindu cultures. If entertaining a customer from
India, one should be careful to choose a restaurant which
does not serve beef. One should also tactfully ascertain
whether the individual is a vegetarian.

· In many Muslim countries, Friday is a non­working day

as it is a holy day. International Managers should plan
not to have meetings, or arrange conference calls that
involve colleagues for whom Friday is a holy day.

· The business should respect prayer times (make

provision for daily prayers), holy days and festivals. In
many Islamic countries, during the Ramadan period the
working day has restricted hours.

· International Business Managers should be familiar with

religious laws (e.g. sharia) and should ensure they are
observed. In some strict Muslim countries it is forbidden
for a woman to travel in the same car as a male colleague.

· Gender segregation practices should be observed by

offices.

· One should be sensitive to dress code and clothing

practices. In Muslim countries, women are required to
wear long clothing. This practice applies to those from
outside the culture also.

· There can also be restrictions on media (e.g. newspapers,

magazines, TV programmes) deemed to conflict with the
religion of the country. Business and company
publications should also comply with this.

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· Islamic law prohibits the payment of interest on loans,

and this can have a profound effect on banking systems.
There are moves to accommodate Islamic beliefs through
alternative financing.

Impact on work values

Although new political and religious realities have overtaken the
Protestant Work Ethic, the basis of many Western systems has its roots
in the Protestant Work ethic.

The term ‘Protestant work ethic’ was coined by the sociologist Max
Weber and as the name suggests stems from Protestant roots.
Protestantism emphasises an individual, direct and personal
relationship with God. This concept of individualism was extrapolated
into the work ethic. Weber made a correlation between working hard
and a sense of religious duty. The protestant work ethic has now come
to be associated with the ‘spirit of capitalism’ and individual freedom.
In fact, the modern, secularised view of the work ethic, and, in
particular, that of America, which stresses individualism and
individual entrepreneurship can be traced back to the Protestant work
ethic. It has also been influenced by the changes brought about by
developments in capitalism and industrialisation.

In contrast to the Protestant work ethic, which stresses individualism,

there is the Confucian ethic which has had a strong influence on work
values in Asia. Although not directly embraced by Asian countries due
to their wide religious and cultural diversity, it undoubtedly has had an
implicit impact on business values. The success of Asian economic
development, in particular Japan, is attributed in part to the influence of
the Confucian ethic. It places a high emphasis on loyalty and hierarchy.
In contrast to the Western value system, the individual is always
subordinate to the group. There is thus an emphasis on ‘collectivism’ as
opposed to ‘individualism’. This has led to employee collaboration and
teamwork as a natural part of work life.

KEY POINT
Culture is the distinctive way of life of a grouping in society. Such groupings
include nations, regions and ethnic communities. Its characteristics include:

· Values and beliefs – moral and religious.

· Language and communication.

· Behaviour.

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International Business Environment Unit 4 – The Cultural Environment

· Customs.

· Art, dance, music and sport.

To successfully engage in international business, it is necessary to have a clear

understanding of national cultures, their distinguishing characteristics and how
national culture (e.g. religion) impacts business behaviour.

Multicultural Societies
In modern society, international business is increasingly conducted in a
multicultural environment. This multicultural dimension arises not
only from operating and integrating activities across multiple countries,
but also because of the diversity of racial, ethnic and religious groupings
within one country. We shall briefly consider the impact of the latter;
multicultural diversity within one country.

It is unfortunately the case that tensions and conflicts can arise when
indigenous and migrant populations are brought together – whether
that be in a social context or in a business context. In some countries, this
can bring about enormous instability and disrupt every aspect of life,
including business. Sri Lanka is an example in point, where ethic
tensions have caused enormous instabilities in business and have led to
wild fluctuations in the stock exchange.

There are broadly three approaches to ethnic minorities:

Assimilation: In this model, the minority adapts to the majority. This

was an approach adopted in the UK in the 1950s and 1960s. It has now
been abandoned as it was causing further tensions. It is hardly practiced
in today’s world.

Melting Pot: This approach was adopted by the ‘newer’ countries of the
world, where waves of immigrants contributed to a blend of cultural
values. The US was a classic example. But against this backdrop of
‘blending’ in the US, the white, Anglo­Saxon culture emerged as the
dominant, mainstream culture and other immigrants were
discriminated against. As a result, the third approach, cultural
pluralism has evolved.

Cultural Pluralism: Cultural pluralism recognises the right of social

subcultures to remain distinct, but unite under a national identity.
Cultural diversity is recognised as an aspect of today’s modern­day,
multicultural society. In the context of business, cultural pluralism has
led to the promotion of workforce diversity in many international
corporations.

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Cultural Theories
Thus far we have considered how cultural theories can affect business.
We shall now consider two theories that contribute to the systematic
understanding of the differences.

Geert Hofstede
The Dutch social scientist, Geert Hofstede, carried out research amongst
sales and services employees of IBM to understand differences in
work­related attitudes across the world. Although confining the remit
of his study to just the IBM Corporation was not entirely representative
(although IBM probably has one of the widest spreads of operations
across the world), it is the most detailed study of its kind covering some
40 national cultures. He carried out his work by conducting a number of
surveys, with versions of the questionnaires in 20 languages. The first
survey and analysis was carried out in 1980. The surveys were repeated
with consistent results, and led him to conclude that there are four
dimensions to the differences between national cultures:

Dimension 1: Power Distance: the extent of the acceptance of hierarchy

and power structures. In a large power distance culture, employees
accept that they are unequal and know who is the ‘boss’. In small power
distance cultures, such as Israel, all levels of staff consider themselves to
be colleagues and equals. Organisations in these countries tend to be
flatter with a consultative style of management.

Dimension 2: Uncertainty Avoidance: This dimension relates to risk

taking, attitudes to change and the adoption of new initiatives; areas
that encompass uncertainty. In high­uncertainty avoidance countries
(Latin America, Japan, Latin Europe and the Mediterranean) people feel
threatened by uncertainties. They generally tend to be more emotional
and exhibit high levels of stress and anxiety in situations of uncertainty.
In weak­uncertainty avoidance countries (most of the Nordic
countries), uncertainty is more readily accepted as a part and parcel of
life, and less stress is apparently experienced.

Dimension 3: Individualism: the extent to which people operate as

individuals, as opposed to acting collectively and representing group
values. English­speaking countries tend to be high in individualism,
whereas low individualism is prevalent in many Asian countries and in
Latin America. The emphases in low­individualist, or collectivist
cultures, are on group decisions, belonging, and contribution as a team
player, whereas in an individualistic culture the ultimate goal is to be a
good leader.

Dimension 4: Masculinity­Femininity: The naming of this dimension

is rather unfortunate as it stereotypes gender roles. ‘Masculinity’, in this
context, emphasises performance. It includes characteristics such as

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assertiveness and toughness to achieve tasks at any ‘cost’. It is

associated with winning rather than losing. At the other end is
‘femininity’ which denotes sensitivity, a high value on quality of life,
with an emphasis on the people involved (and their needs). Service is
the motivation. India and Japan score at the ‘masculinity’ end of the
spectrum, whilst the Nordic countries and Holland are at the
‘femininity’ end.

Hofstede added a further dimension, called ‘long­term vs. short­term

orientation’ following the work of Michael Harris Bond. As the name
suggests, this dimension refers to time orientation. Western countries
favour a short­term orientation ( the ‘here and now’), whereas Eastern
cultures take a longer­term orientation and stress characteristics such as
persistence.

Based on the four initial dimensions, Hofstede then set out to interpret
the findings of his survey amongst the 40 cultures represented within
IBM. Refer to Table 6.4 in your key text, Morrison, J, for the ranking of
selected countries against the four dimensions.

ACTIVITY
From the description given above, how would you rate employees in your
particular country/geography against the original four Hofstede dimensions.
List the characteristics that led to your actual rating.

Now repeat the above analysis for employees in two other geographies (that
you are familiar with) that your organisation operates in. If your organisation is
not a global operation, find out about the workplace cultures (in relation to the
Hofstede dimensions) of the following countries: Argentina, China, Iran.

What conclusions can you draw about workplace cultural differences?

Fons Trompenaars
More recent research on cultural differences was carried out by Fons
Trompenaars in 1994 and involved 15,000 managers across 28 countries.
Trompenaars identified five relationship orientations, which are
summarised below:

· Universalism vs. Particularism: looks at emphasis on

formal rules vs. relationships.

· Individualism vs. Collectivism: identical to the 2nd

dimension of Hofstede. However, findings following
analysis were somewhat different. For example, Mexico

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scored more highly on individualism than collectivism, as

compared with Hofstede’s results. This could be
explained by the greater American influence and the
impact of NAFTA, for example.

· Neutral vs. Emotional: refers to expression of feelings.

· Specific vs. Diffuse: relationship between work and
private life. In a specific culture, work and private lives
are more likely to be compartmentalised. However, in
diffuse cultures, such as Japan, South Korea, Philippines,
there is a strong emphasis on relationship building and
this blurs the boundary between work and private life.

· Achievement vs. Ascription: This orientation relates to

how status is achieved. As the name suggests in an
achievement culture, it is purely by personal
achievement. Whereas, in an ascription culture, status
stems from birth and family roots, and sometimes gender
and age. China, for example, is ascription­based. The US
is achievement­based.

Students are required to read p.192­194 of your key text, Morrison, J for
further details.

ACTIVITY
Repeat the previous activity against the Trompenaars relationship orientations.

Cultural change
Culture is never static. Although the assertion that cultural differences
have an overwhelming impact on how organisations function is
certainly true, one should exercise caution in ‘pigeon­holing’ national
cultures or extrapolating too much about specific cultures from the
analysis carried out (noting that this work was carried out several years
ago). Nor should we make assumptions about cultural pre­dispositions.
As we noted in the last section, the studies of Hofstede and
Trompenaars found that Mexico rated very differently on the
Individualism dimension. This is due to the time­lapse between the two
studies and resulted, almost certainly, from a change in the workplace
culture, probably resulting from stronger American business ties. This
highlights the point that the country scores of the Hofstede dimensions
or the Trompenaars relationships should be used only as indicative
guidance, and should be cross­checked by talking to people ‘on the
ground’ and with recent experience of working in that country. This is

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particularly true of many developing countries where there is constant

change as a result of the impact of globalisation.

So we emphasis again that culture is never static. This is true not only in
the business context, but more widely as well. Increased prosperity,
education, changes in political structures, movements from agricultural
to industrial society have all contributed to change.

Some business cultures are changing faster than others, but all are in
transition (albeit slowly in the case of some countries). In many cases
cultural change comes about because of foreign influence and the
operation of foreign global corporations. But international competition,
economic deregulation and Information Technology also play a key
role. Today, Information Technology, the Internet and e­business is
transforming the workplace culture at a rapid pace.

Conclusions from theories

The theories shed an important light on the cultural differences in the
workplace. They are a useful framework to aid International Managers
classify cultures and understand country differences with the goal of
adopting appropriate management behaviour in the different cultural
contexts.

The key conclusion is one that Hofstede reaches. One cannot expect
convergence in workplace culture. Due to the diversity of
organisational functioning across different cultures, no universal
leadership style or management practices can be adopted. Just as there
are big challenges with standardised global products, there are huge
issues with imposing a standardised corporate culture across nations.

The International Manager should also note that although the theories
provide a valuable framework for understanding cultural differences,
the reality is much more complex and contains many more variations
than the cultural dimensions and relationship orientations espoused by
Hofstede and Trompenaars.

KEY POINT
Two theories that contribute to the systematic understanding of cultural
differences, as they affect the workplace, are that of:

· Hofstede.

· Trompenaars.

The theories are based on assessing certain cultural dimensions or relationship

orientations.

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The conclusions of the theories are that one cannot expect convergence in
workplace culture when operating across different national cultures.

Organisational Culture
Organisational culture embodies the unifying values, norms and
behavioural patterns of the organisation. In practical terms it defines
‘how things get done in an organisation’. Aspects of culture are defined
and consist of written statements or procedures. For example, many
organisations have a business code and practices that all employees sign
up to (sometimes annually to reflect any changes). However, aspects of
culture may be deliberately unspecific and refer to management style,
preferred strategies and core values for judging outcomes which are not
set out in a rule book.

Students are also asked to refer back to Unit 1 where Organisational

Culture is first introduced.

Some of the factors that define organisational culture are:

· Language and terminology: both the language of local

communication and language of cross­border
communication (may be different in global companies).
But not just the language, but the communication style;
formal or informal – how you say what you say. Shared
terminology (sometimes terminology that is peculiar and
unique to a corporate culture) is also a defining factor.

· Formality vs. Informality: With respect to

communication (written and verbal) both to an internal
audience and to an external audience.

· Mission values of the organisation: e.g. emphasis on

customer focus, quality, etc.

· Norms of behaviour: Relations between management

and employees, empowerment of employees,
networking, etc.

· Leadership style: led by Authority?, Role?, Charisma?,

Expertise?

· Formal or informal rule book.

· Company stories.
· Teamwork and collaboration: is it actively promoted and
rewarded.

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International Business Environment Unit 4 – The Cultural Environment

· Meeting culture: adherence to time­keeping, agenda,

decision making – consensus driven or not?

· Education and training: high focus on personal

development of employees?

· Working practices: For example, attitudes to information

technology and its impact on new ways of working,
e­working, mobile­working, hot­desking.

William E Schneider in his book The Reengineering Alternative: A Plan for

Making Your Current Culture Work, 1994, suggests that there are four
basic cultures as follows:

1. Control Culture: A culture that is constantly in pursuit of

operational excellence. It imposes a planning discipline and
values the power and security gained from achieving planned
outcomes.
2. Collaboration Culture: Places a high value on collaboration not
just internally, but with its customers and partners. It emphasises
the power of teamwork. By collaboration it seeks to be closely in
‘touch and in tune’ with the customer and the market at large.
HP­Compaq would consider itself to be in this class.
3. Competence Culture: a culture that is in pursuit of leadership (in
products/services) at any cost. It cherishes achievement.
Business realities (e.g. adherence to budget and time­scale, profit
margins, etc ) are often compromised in the pursuit of
achievement.
4. Cultivation Culture: often associated with start­ups and
entrepreneurial organisations in innovative organisations.
Rewards the creative individual, and recruits individuals for
brilliance. Leadership is by charisma. Many of the Silicon Valley
entrepreneurs and founders of dot.coms are of this culture.

In reality cultures cannot be pigeon­holed, but the above classification is

a useful one for modern corporations.

VIRTUAL CAMPUS
Below are pairs of statements relating to aspects of organisational culture.

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A B
1 The reward system is based primarily on team The reward system is based primarily on an
performance individual’s performance

2 Managers are participative and listen Managers are tough and decisive

3 A manager’s responsibility is to get the team to A manager’s responsibility is to set clear goals
agree on goals

4 Decisions are made by those who will be Decisions are made by those who have
affected by it responsibility for it

5 Procedures are followed only if they add value Procedures are always followed

6 Procedures are adapted to suit the particular Procedures are revised only after careful
circumstances analysis

7 The reality of how the organisation works is not The organisation chart describes how the
really reflected in the organisation chart organisation works

8 Terms of reference are not written. Each Each employee has clear, written terms of
employee knows what he is required to do reference

9 Annual appraisals include the feedback of Annual appraisals are conducted purely by the
managers, peers and sub-ordinates (360 manager
degree)

10 Major decisions are made outside meetings in Major decisions are made at meetings
private

11 Key personalities play a role in most issues Personalities are kept out of issues

12 Planning is not always adhered to. It is viewed Planning is always necessary as it is seen to
as a waste of time when circumstances are influence the future
constantly changing

13 People use initiative in work activities Work activities are precisely defined

14 You get assigned to a challenging work You get assigned to a challenging work
assignment, if you are the right person assignment, if you’ve performed well

15 Meetings are mainly for decision making Meetings are mainly for communication

16 Meetings are flexible and informal Meetings are run against established
procedures

17 The reward system uses customer satisfaction Customer satisfaction is important, but is not
ratings as a key performance criteria tied to the reward system

18 Leaders are charismatic Leaders are professionally competent

19 The best decisions are made by judgement and The best decisions are made after thorough
experience research and analysis

20 Appraisals of management includes customer Appraisals of management does not include

input customer input

For each statement pair, select the one (A or B) that is most appropriate to
your organisation’s culture. Choose just one (the closest), even if you think
both statements have some validity for your organisation. If neither statement

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International Business Environment Unit 4 – The Cultural Environment

is applicable (as may be the case for the statement pair 9, if no appraisals are
carried out in the organisation), then indicate ‘N/A’.

Capture your responses as follows:

Statement pair Selection

1 answer A or B

2 answer A or B

3 answer A or B

4 answer A or B

5 answer A or B

6 answer A or B

7 answer A or B

8 answer A or B

9 answer A or B or N/A

10 answer A or B

11 answer A or B

12 answer A or B

13 answer A or B

14 answer A or B

15 answer A or B

16 answer A or B

17 answer A or B

18 answer A or B

19 answer A or B

20 answer A or B

Now pair yourself with a colleague on the Virtual Campus (this will be
facilitated). As a pair you are required to analyse each other’s responses, and
deduce and summarise their organisational culture. Once you have completed
this, check with your colleague whether it reflects their organisational culture.

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Unit 4 – The Cultural Environment International Business Environment

CASE STUDY
In 1993, following very detailed negotiations, a planned merger between Volvo
and Renault failed. The merger would have considerably reduced
technology/development costs and increased their global market reach.
Discussions reached a mature stage, but stalled at the ‘eleventh’ hour due to,
what is widely believed to be a significant culture clash. The Swedish
corporation felt it would lose all control to the French car maker, and the
Swedish public felt it would be losing one of its national treasures.

The merger collapsed and both companies lost out from the potential of
building a world-leading company with a sharpened brand. Ironically, Volvo has
since been acquired by Ford, and Renault has merged with Nissan. The Volvo
acquisition by Ford is perceived as highly successful, and Ford retained the
Volvo brand intact.

Research the failed Renault-Volvo merger, and, in particular, the workplace

cultures of France and Sweden. What cultural factors may have contributed to
the failure of the merger.

ACTIVITY
In the above case study, it was noted that Renault subsequently merged with
Nissan.

Read about the cultural issues pertaining to the Renault-Nissan integration in an

International Business Masters thesis by P Clerc (University of Göteborg),
which may be found at:

http://www.handels.gu.se/epc/archive/00001319/01/Clerc_1999_32_inlaga.pdf

Chapter 3 discusses the cultural issues – in particular, differences between

French and Japanese culture, the business system in Japan and enterprise
co-ordination in a cross-cultural context.

Cultural Globalisation
There is a school of thought that globalisation is leading to a
convergence of cultures – a kind of cultural globalisation. The author of
the Borderless World, Ohmae, K (1995), perhaps the best known
proponent of the cultural globalisation view, foresees a future where

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International Business Environment Unit 4 – The Cultural Environment

cultural differences fade due to the rising power and influence of global
corporations.

The onslaught of the global media (radio, TV, film), and Internet has
undoubtedly had an influence in converging tastes, and there is
certainly an increasing similarity of culture amongst middle class
people world­wide. However, although there are indications that parts
of the world­wide population are exhibiting similarities in taste, it
would be a gross oversimplification to say that the world is moving
towards a single global culture. Cultural differences are a very real force
to be reckoned with, and it would be naive to underestimate their
impact on international business. The reality on the ground suggests
that localisation forces are very much alive and well, and have perhaps
achieved a greater impetus as a result of a backlash against
globalisation. Thus, despite the globalisation claims, it is still impossible
to design a global marketing campaign!

CASE STUDY
Read and answer the question contained in the case study: Case study 6.1
‘Image change at McDonald’s’ on p. 170-171 of your key text, J Morrison.

VIRTUAL CAMPUS
Post your answers on the Virtual Campus. Learn from the feedback of your
colleagues.

Summary
In this unit have we have focused on the impact of cultural differences
in business. We have looked at the factors that contribute to culture,
diversity in national cultures, the role of national culture in moulding
distinctive work cultures (e.g. Japan post­war), and the elements of
organisational culture. We have also considered the culture theories of
Hofstede and Trompenaars, and have noted the conclusion that there is
wide­scale diversity in workplace cultures arising from stark
differences in national cultures. Thus it would be a mistake to think that
a universal management style can be adopted globally across a
corporation.

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Students are encouraged to apply what they have learnt to their own
workplace context – whether that be in an internationally operating
corporation or in a multi­cultural context within a single country.

REVIEW ACTIVITY
Consider the following scenario:

Your organisation has acquired another company from a different geographical

location. (You may use any example, such as a German conglomerate acquiring a
Brazilian company – but make it as realistic as possible) The newly acquired
company has 300 staff and a large world-wide customer base. As one of the
International Managers of a business unit, you will now take on responsibility
for some of the staff from the new company, in addition to your existing staff.

1. From a personal point of view, what steps will you take to improve
your personal effectiveness in appreciating and overcoming cultural
issues?

2. From an organisational point of view, what organisational changes

would you propose, to your senior management, to successfully
integrate the new company? Focus just on the cultural issues.

References
The following are the references for your key text and other
recommended reading:

1. Bartlett, C and Ghoshal, S (1998), Managing Across Borders: A

Transnational Solution, 2nd edn (London: Random House)
2. Daniels, J (2000) International Business, 9th Edition , Addison
Wesley
3. Dicken, P (1998) Global Shift, 3rd edition (London:Paul Chapman
Publishing)
4. Dunning, J (1993) The Globalisation of Business (London:
Routledge)
5. Hirst, P and Thompson, G. (1999) Globalisation in Question, 2nd
edition (Cambridge: Polity Press)
6. Hill, C. (2000) International Business (McGraw­Hill)

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International Business Environment Unit 4 – The Cultural Environment

7. Hofstede, G (1994), Cultures and Organizations: Software of the

Mind (London: HarperCollins)
8. Morrison, J. (2006) The International Business Environment,
Basingstoke, Palgrave Macmillan (key textbook)
9. Ohmae, K. (1994), Borderless World, (Profile Business)
10. Rugman, A., and Hodgetts, R., (2000) International Business, 2nd
edition, FT Prentice Hall
11. Tayeb, M (2000) International Business: Theories, Policies and
Practices, 3rd edition, FT Prentice Hall
12. Usunier J C. (2000), Marketing Across Cultures (London: Prentice
Hall)
13. Waters, M (1995) Globalisation (London: Routledge)

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Unit 5

The Political Environment:

National and International
Political Forces

LEARNING OUTCOMES
Following the completion of this unit you should be able to:

· Contrast the differences in the political systems of the world. Assess

how they impact international business.

· Assess key political developments in the world today, and the impact
of national and international political forces on international business.

· Assess the impact of democratisation on international business in

diverse national environments, including developing and transitional
economies.

· Evaluate the impact of political instability and political risk factors in

the context of international business.

· Explain the role of legal systems; national, regional and international,

in the context of international business.

Introduction
National political systems are closely intertwined with economic
systems. A brief outline of national political systems will be examined,
before we go on to consider the key political developments impacting
international business.

Clearly political stability and predictablity are vital considerations for

corporations wishing to expand into overseas countries. It is therefore
vital that International Managers appreciate the political landscape of
today and the challenges it poses.

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However, politics is relevant to an organisation only to the extent that

its operations are affected by it. It is in this context that we shall be
looking at the political environment.

The most pronounced trend in political development in the last century

has been the expansion of democracy, by which governments are
accountable to citizens within the state. A variety of transitional
democracies, as well as established democracies, will be examined.
How have democratic reforms affected economic growth? Economic
liberalisation has gone hand in hand with democratisation in many
countries. On the other hand, political conflict and instability have held
back economic development in a number of regions, for example
sub­Saharan Africa. These are some of the issues we shall be
considering in this unit.

READING ACTIVITY
Please read Chapter 8, ‘The changing political environment: national, regional
and international forces’ of your key text, Morrison, J (2006),, which is essential
reading for this unit.

The Political State

Attributes of the State

We shall now briefly consider the key attributes that make up a state.
Most of you will already be familiar with this material, but it is stated
here to baseline the understanding of all students.

A state is firstly defined by its geographical territory, within which it

has jurisdiction. The drawing up of geographical borders has in many
cases, especially in Africa and Central and Eastern Europe, been
controversial. Territorial disputes are common and have led to many
wars. Border definitions, often dating back to the colonial period, were
frequently artificial (and arbitrary) and cut through ethnic groupings.
This has led to continuing ethnic strife and political instability in many
regions of the world.

Another important defining feature is sovereignty. There is internal

sovereignty and external sovereignty. Internal sovereignty relates to
supreme sovereignty within the state, whereas external sovereignty is
the mutual recognition by states of each other’s authority.

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Another attribute is the country’s monopoly of coercive power within

its borders. In many states the real power lies outside the formal
political structures and much power is vested in the army. Military
regimes are inherently unstable and pose a high risk for business.

Sources of Authority in Nation States

Every state has its legitimate source of authority, although the
governing principles of authority can be vastly different from country to
country. Here are the different sources of authority prevalent in nation
states today:

1. Traditional Monarchy: authority is derived from the royal

lineage. An example of such a model is Saudi Arabia.
2. Constitutional Monarchy: has a hereditary monarchy as head of
state, but the democratic institutions of government wield the
real authority. Examples of constitutional monarchy include the
UK, Belgium and the Netherlands.
3. Theocracy: Religious principles are the governing principles, and
religious leaders are the authoritative figures. The best known
example of theocracy is Iran following the revolution, with the
reign of Ayatollah Khomeini. Today, although Iran is still a
Muslim state, it has assumed a dual religious and secular
democratic model, and is slowly opening its doors to foreign
investment.
4. Constitutional Republic: Sovereignty is with the constitution.
The best examples are that of the US and France.
5. Communist State: Sovereignty is, in practice, with the
communist party. Such states are usually characterised by strong
leaders. Examples include China and North Korea.

Unitary and federal states

Countries adopt either a unitary system or a federal system in the
implementation of authority. The two systems impose significant
differences in their impact on business. In a unitary system authority
radiates out from the centre, whilst in a federal system authority is
shared between the centre and local or regional units. The best example
of a unitary system is that of France. Examples of federal systems
include the US and Germany. In the US each state has its own legal
standing and authority independent of the federal government. These
differences are often exploited by companies – for instance, many US
companies are incorporated in the state of Delaware to take advantage
of the lax legislation in corporate governance prevalent there in
comparison to their home states. Thus, when operating in federal states,
it is critical for the business to understand the different regulatory

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controls (e.g. taxation, environmental controls, quality, health and

safety) that operate across local states.

Federalism is often seen as a solution to political adaptation for regional

differences. It has been implemented in this respect in countries such as
Canada and Nigeria. Canada, for example, has successfully contained
French Canadian aspirations within the national state.

Federalism is proposed as a solution for the governance of the EU in the

context of political integration. In the light of serious misgivings about
national sovereignty, the Federal Europe approach is viewed by some
as preserving the autonomy of the individual nation states.

Functional View of Government

All governments in a democracy hold responsibility for the following
functions:

1. Legislative Function: is responsible for making law. Its role is

usually set out in the state’s constitution.
2. Executive Function: is responsible for administering the law
through various ministries. Appoints head of armed forces, head
of foreign relations.
3. Judiciary Function: the court system for enforcing the law and
settling disputes.

Political Parties
There are different flavours of party political systems operational
around the world today. They include:

1. Two major parties: Many countries such as the US and UK have

two major parties, and operate a ‘first past the post’ electoral
system. Although these countries have two dominant parties,
other parties are influential and can swing the results. In the UK
the Liberal Democrats are influential and in the US 2000
presidential election Ralph Nader from the Green party played a
role in the final outcome. However, the minor parties have no
realistic chance of winning general elections unless PR
(proportional representation) is adopted in these countries.
2. Multi­party system: Multi­party systems cover a wide range of
ideologies. The best example is that of Italy. Coalition
government is frequently the outcome of multi­party systems,
with minority parties often holding the balance of power.

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3. Single dominant party: Japan is the best example of a single

dominant party system. Here strong loyalties from the electorate
play a key role in maintaining the party’s dominance.
4. One party state: Undemocratic with no pluralist elections.
Adopted by communist states. Examples include China and
Cuba.

Political parties represent different ideologies, and these ideologies can

influence the attractiveness of the country to international business. In
some countries the differences in ideology are small. For example, in the
UK one can argue that in comparison to 20 years ago, the ideologies of
Labour and the Conservatives are converging and both parties are
coveting the middle ground. However, in many countries the ideologies
of the parties can be very different. These countries naturally pose a
higher risk to international business, because there can be huge shift in
government policies resulting from a change of government.

Systems of Government
We have noted that a democratic government comprises of three
functions – the legislative, executive and judicial. The separation of
powers between these functions describes its system of government.
Systems of government can be classified as:

· Presidential: The best example of a presidential system is

the US. The President is the head of state and head of the
executive branch. The president is elected and hence, is a
powerful figure because of the personal mandate gained
from the electorate. The presidential system is usually
associated with a congressional system of government as
oppose to a cabinet­style government (as in the
parliamentary system). The constitution acts as the focal
point for checks and balances on executive power. The
central principle of a presidential system is that the
legislative and executive functions are separate.

· Parliamentary: The parliamentary system is also referred

to as the Westminster model, as the leading example of
this system is that of the UK. Members of parliament are
elected by vote. Members of the Cabinet are collectively
seen as responsible for government policy. The head of
government, usually called the Prime Minister, must be
able to control a majority of seats within the elected
legislative chamber.

· Hybrid: Hybrid systems aim to achieve both a stable

executive and maximum representation with an
independently elected President and a Prime Minister to
head the cabinet. The best example of this is that of
France.

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ACTIVITY
Re-read p. 259-262 of your key text, Morrison, J (2006) for details about the
issues of stability and advantages/disadvantages of each system. Identify the
implications for business arising from the different legislative processes.

Impact of Political Decision Making on

International Business
Government policy has a strong influence on business activities, and
particularly on the decisions of global corporations on whether they
should operate in a country or not.

The following policy decisions are particularly important in the context

of business:

· Fiscal and monetary policy, e.g. taxation.

· Environmental policy.
· Regional development policy.
· Welfare state policy, e.g. health, social security, pensions,
education.

· Agriculture and food policy.

· Defence policies.
· Immigration policies.
· ‘Law and order’ issues in society.
· Health and Safety issues.
· Employment policies, e.g. minimum wage.

Let us take, for example, the impact of taxation which can have a
bearing on international business. It should be noted that global
corporations come under the jurisdiction of more than one tax
authority. They are subject to the tax regime of each country they
operate in. Also countries, depending on their political ideology, take
different positions with regard to foreign investment. Some use tax
incentives to attract foreign investment (e.g. Ireland). Others use high
taxes to discourage the repatriation of foreign companies’ profits.

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ACTIVITY
Assume that you are an International Manager working for a US-based software
development company. You are seriously considering transferring a major part
of your development activities to a country on the Asian continent. About 50 of
your US-based and Ireland-based staff will be re-located at the new location.

In what ways will Government policies (bulleted above and any others), impact
your planned expansion? How will it impact your US-based staff, and your
Ireland-based staff who will be transferring to the new location? What
incentives might you need to put in place to persuade them to move?

Changes in government, whether by constitutional means or by coups

d’etat or revolutions, can have serious consequences for foreign
companies. There may be significant shifts in policies towards foreign
companies, and in some cases, there are reversals of privatisation, i.e.
renationalisation. A consequence of the revolution in Iran was the hard
anti­US line taken in their foreign policy which led to the confiscation of
assets, without compensation, of many Western companies. Today, due
to the political issues in the Middle East and Iraq, anti­US (and to some
extent anti­Western) sentiment is rife and has to be factored in when
considering country attractiveness. This is especially true when
considering the Muslim countries of the world.

International and Regional Regulation

Today it is imperative for the International Manager to understand the
implications of international and regional regulation.

Globalisation has provided the impetus for harmonisation in regulatory

systems. International bodies such as the World Trade Organisation
(WTO) have regulatory and dispute settlement authority. Furthermore
regional groupings are already having a significant impact. As the most
advanced of the regional groupings, we shall examine the legislative
bodies of the EU in this context next.

READING ACTIVITY
It is recommended that students read Chapter 9, ‘The international legal
environment of business: moving towards harmonization’ of the key text,

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Morrison J (2006) for a discussion of the international legal environment and its
impact on business.

The political structure of the European Union

As we have already noted, regional groupings (e.g. the European Union
(EU), NAFTA and ASEAN) are becoming highly influential in
international trade. In the case of the EU, integration represents not just
economic integration but also political integration – with legal
implications for its member states.

The main EU political institutions can be summarised as follows:

Council of Ministers: the highest law­making authority in the EU with

executive authority and ministerial representation from each member
state.

European Commission: is the main legislative function. Headed by a

President with appointed commissioners from the member states.

European Parliament: is the main representative body, but with limited

law­making function. Membership of each state (through elected MEPs)
is in proportion to the state’s population.

European Court of Justice: is composed of one judge per member state

and its function is to ensure that EU legislation is interpreted and
applied in the same way in each member state. The Court is the ultimate
authority on EU law.

There are other institutions including Court of Auditors, European

Ombudsmen, and European Data Protection Body.

The enlargement process has already resulted in the admission of many

of the former Soviet Union and ex­COMECON countries. The
enlargement process continues with many countries currently with
transition economies such as Bulgaria and Romania hoping to join in
2007. Prerequisites of membership are a functioning market economy,
and a functioning democracy. Enlargement is one of the biggest
challenges faced by the EU and will shift the balance of power in
existing institutions.

VIRTUAL CAMPUS
Turkey is one of the candidate countries for entry to the EU. Read about its
country profile at the EU enlargement website:

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http://europa.eu.int/comm/enlargement/turkey/index.htm

What benefits might Turkey reap, from an international business perspective,

from EU membership. Also list any disadvantages.

Share your views with your colleagues on the Virtual Campus, and learn from
the submission of others.

Democracy and Transitional Democracies

We have noted that the countries of the former Soviet Union,
ex­COMECON, present some of the highest growth prospects for
international business. These countries are in transition – transition of
their political systems as well as transition of their economies. We have
considered the transitional nature of their economies and the final goal
of a fully functional market economy. Some of these countries have
successfully made the transition. In this section we shall look at the
issues relating to transition democracies.

Firstly we shall look at the basic premise of a democracy. Generally

speaking, countries that have a high level of accountability of
governments to citizens are called democracies. A democracy is
characterised by the following:

· Rule of law: the right of equality before the law is

fundamental to any democratic society. Whether rich or
poor, ethnic majority or religious minority, political ally
of the state or opponent—all are entitled to equal
protection before the law. In the US the rule of law is
embodied in its Constitution.

· Free and fair elections.

· Universal right to vote for all adults.
· Representative government with checks and balances on
executive power.

· An independent Judiciary.
· Freedom of expression, speech and association.

Transitional democracies
Countries that are still putting in place representative institutions are
referred to as transitional democracies. The key step in democratisation
involves electoral reform to phase in free and fair elections.

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There is much regional divergence in democratic transition. The

post­communist states of Eastern Europe are making a dual transition –
transition of economy and transition to democracy. The challenge for
these countries is the implementation of concurrent political and
economic reform. They also have to increase public confidence and
participation in democratic political institutions. After a period of
consolidation, most of these countries have adopted a multi­party
system.

Economic reforms can be implemented much faster than political

reforms. Yet in most emerging markets, political reforms are equally
vital to sustained, stable economic growth. Many emerging markets are
saddled with governments of questionable legitimacy – one­party
states, monarchies, or dictatorships.

East Asia is a region of enormous diversity and has achieved

unparalleled economic growth. In East Asia, state­led economic
development preceded democratic reforms in many countries. For this
reason, many of its economic success stories are democratic countries.
But it is also home to non­democratic regimes that have an enviable
record of economic growth as well as political stability. For this reason,
many question whether “Asian values” are incompatible with
Western­style democracy.

There is a general misconception about freedom, particularly in

right­wing circles, where there is a tendency to equate freedom with
market liberalisation. In fact, market liberalisation can be initiated by
anti­democratic forces. A good example being that of Chile in the 1970s
and 1980s.

Single party systems have been a feature of many Latin American

countries, but these countries have not had the economic success that
Asian economies have had. Then there is post­colonial Africa, which
has been plagued with cultural and religious divisions, and has had
limited success in the transition to democracy.

Political Risk and Impact on International

Business
You may be wondering what our discussion on the global political
environment has to do with international business. Why have we
examined the political climate across the globe, the issues of democracy,
transition economies and regionalisation? Essentially it is to do with
political risk to a business.

Any business enterprise wishing to operate, produce or market in an

overseas location must consider the country risk of the host country.
Country risk comprises of political, economic, competitive and
operational risks. By political risk we mean the probable disruption to

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business from internal or external events, regulations resulting from the

political actions of government or political developments of the region.

In countries where political power is shared, there are fewer tensions

within society and greater political stability. Political stability provides
the continuity that is necessary to attract foreign investment. Political
instability, on the other hand, can have serious consequences for
international business. Political instability can arise from factors such
as:

1. Divisions in society – ethnic differences, social injustice.

2. Threats from terrorism – internal or external (Al Qaeda).
3. Armed groups, such as sections of the military.
4. Strong regional units – separatist movements such as Tamil
Tigers in Sri Lanka, Kashmir separatists in India).
5. Military governments.
6. Factionalised political leadership.

So how do political risks impact business performance. Firstly there is a

risk to shareholder value, taking the form of loss of capital or inability to
repatriate dividends. This type of risk usually arises from revolutions,
riots and civil war, and is a particular risk in the Middle East and parts
of Africa. We have already noted how US (and many Western) firms
were impacted in this way during the Iranian revolution. Then there is
the risk of employee exposure to instabilities – terrorism, kidnapping,
general crime, etc. There is also the issue of operational exposure arising
from labour unrest, corruption, sabotage, supply­chain disruptions
from criminal activities, etc.

Understanding the political landscape and assessing political risk is

therefore a critical requirement for any International Manager.
Generally, countries where there are no established democratic
institutions to ensure the stable transition between governments, are
perceived as high risk for global corporations. Some countries may
seem politically stable but there are other political cultural issues such
as widespread corruption that must be taken into account when
considering risk.

Company Strengths in a Political Context

Finally, before we conclude this unit, it is important to note that political
challenges in countries also provide opportunities for companies.
International Managers should assess the particular strengths of their
companies in the political context of the planned host country. Some
companies are better suited to operating in some regions than others.
For example, in the Middle East, a French technology provider may be

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in an extremely strong position to win contracts simply because of the

anti­American sentiment, and generally good relations between France
and the Middle East.

A company’s competitive advantage in a host country can arise from a

combination of the following:

· The culture and adaptability of the company to the host

location and its business culture.

· Political relations between home country and host

country. Level of support from home country.

· The track record and reputation of the company

(particularly in other countries of the same region).

· The local ties of the company with the government,

influence of local allies.

· Size of the company – worldwide revenues and

geographical spread.

· Technological and management competence.

It should also be noted that the relationship between a company and a

government is not a one­way process whereby the host government
dictates terms. The relationship is one of mutual power and influence.
Countries, especially in the emerging markets, also covet international
business – because of revenue implications, job prospects for the local
population, technology transfer, etc. Therefore, global corporations are
in a strong position to negotiate and achieve a ‘win win’ outcome.

KEY POINT
Political factors strongly influence a country’s attractiveness for international
business. Political factors can provide opportunities as well as threats.

International Managers should assess the particular strengths of their

companies in the political context of the planned host country.

Some areas of political decision-making that have a bearing on international

business are:

· Fiscal and monetary policies (e.g. taxation).

· Immigration policies.

· Employment policies.

· Welfare policies (e.g. health, education).

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· Political instability.

· Law and order.

CASE STUDY
Read and answer the question contained in the case study: ‘Costa Rican
democracy reaps FDI rewards’ on p. 264-265 of your key text, J Morrison.

VIRTUAL CAMPUS
Post your answers on the Virtual Campus. Learn from the feedback of your
colleagues.

Summary
We have considered the political environment in the context of
international business. We have noted that much of the international
business spotlight today is on the countries of the transition
democracies and emerging world. These countries have enormous
prospects for growth, but at the same time they are facing a number of
political challenges. In the case of the ex­communist states of Eastern
Europe, their fortunes may well be dependent on how quickly they can
integrate with Western economies through the vehicle of the EU.

Political instability is associated with political risk, and we have seen

that an assessment of political risk is a pre­condition before a company
decides to operate (or produce) in a host country. International
Managers should also identify their particular company and home
country strengths in the political context of the host country.

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REVIEW ACTIVITY
This review activity interlocks with that from Unit 3, National Economic
Systems.

You will recall that you identified the top three countries, in the emerging
markets Asia, Africa, Latin America, the former Soviet Union and
ex-COMECON states, that your organisation should target for expansion
(based principally on economic criteria).

Now research the political environment of each of the three countries, and
assess the political risks (identifying each risk).

Finally, identify the strengths of your particular company/country in the context

of each of the possible host countries.

References
The following are the references for your key text and other
recommended reading:

1. Daniels, J (2000) International Business, 9th Edition , Addison

Wesley
2. Dicken, P (1998) Global Shift, 3rd edition (London:Paul Chapman
Publishing)
3. Dunning, J (1993) The Globalisation of Business (London:
Routledge)
4. Hague, R and Harrop, M (2001) Comparative Government and
Politics: An Introduction, 5th edn (Basingstoke: Palgrave)
5. Hirst, P and Thompson, G. (1999) Globalisation in Question, 2nd
edition (Cambridge: Polity Press)
6. Hill, C. (2000) International Business (McGraw­Hill)
7. Morrison, J. (2006) The International Business Environment,
Basingstoke, Palgrave Macmillan (key textbook)
8. Rugman, A., and Hodgetts, R., (2000) International Business, 2nd
edition, FT Prentice Hall
9. Tayeb, M (2000) International Business: Theories, Policies and
Practices, 3rd edition, FT Prentice Hall
10. Waters, M (1995) Globalisation (London: Routledge)

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Unit 6

The Social Environment of

Business

LEARNING OUTCOMES
Following the completion of this unit you should be able to:

· Explain the importance of social differences across the globe.

· Contrast the key social issues facing developed and developing

countries today.

· Assess the impact of social factors on business structures and

operations.

Introduction
In this unit we shall look at the impact of the social environment on
international business. The distinctive characteristics of every society
and its way of life impacts international business. For a global
corporation setting up operations across several countries, an
appreciation of the diversity in social environments is necessary.
Clearly understanding the diversity of lifestyles in social groupings is
also essential for the adoption of a successful marketing strategy.

Social stratification and inequalities are an aspect of all societies. Social

issues that are of importance to both developed and developing
countries are social exclusion, immigration and human development
(including education and healthcare provision). In the industrial
societies of Europe and Japan, in particular, the ageing population is
creating stresses in social welfare systems, while in developing
countries, growing populations and rapid urbanization are creating
pressures on welfare services which governments are struggling to
manage.

We shall consider some of the above issues and their impact on the
business environment.

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READING ACTIVITY
Please read Please read Chapter 7, ‘Society and business’ of your key text,
Morrison, J (2006), which is essential reading for this unit.

Society
Society has been described by Giddens (1997) as ‘a system of
interrelationships which connects individuals together’.

As we noted in an earlier unit, globalisation has not (as yet, anyway)

resulted in cultural globalisation. There is still great diversity in social
groupings impacting attitudes and behaviour. This naturally impinges
on international business.

Social groupings are derived from a variety of contexts. These contexts

can be grouped as:

1. Primary Group, that is the natural circumstances, the

circumstances over which individuals have little control.
Includes:

· National Society.
· Community.
· Race.
· Religion.
· Gender.
· Class.
· Age.
· Family.
2. Secondary Group, that is based on individual choice and
includes:

· Occupation.
· Workplace organisation.
· Trade Union membership.

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· Voluntary associations, e.g. health & leisure clubs,

political parties, charity groups, church membership
(Mosque, Temple, ...).

The term ‘society’ is also used in another context to refer to the

classification by means of subsistence. Thus most societies in the
developed world today are described as ‘industrial’ or ‘capitalist’
societies. Many societies in the developing world are in transition from
agricultural to industrial societies.

The transition to industrial society has brought about wide­scale social

changes such as urbanisation, changing work roles and changes in the
nature of work. It has also brought about changes in social stratification.
Rigid social systems include slavery and caste systems. In the caste
system in Hinduism, for example, a person is born into a caste and has
no means of changing it. Rigid social stratification systems are giving
way to systems based on social class. In the class system, although the
class of one’s parents does impact one’s own class (by means of the
education and opportunities we have access to), there is mobility across
classes.

Students are asked to refer to the key text, Morrison, J (2006) for further
details on social stratification and class structures.

Changes in capitalist society

Let us now focus on some of the changes that have impacted on
capitalist society.

Structure of Corporate Power: Where previously corporate power was

held in the hands of the owner­entrepreneur, today power is divested in
a wide range of stakeholders, especially the shareholder. In particular,
large financial institutions hold substantial shareholder stakes, and
wield an enormous amount of power and influence over a corporation.
Thus organisations are highly focused on managing for shareholder
value.

Changing nature of ‘white­collar’ work: Aspects of ‘white collar’ work,

such as administrative and clerical office work, are increasingly being
de­skilled with the wide­scale deployment of Information Technology.
Increased employment in the services sector (e.g. financial services), a
greater focus on business processes and clearer definitions of processes,
together with IT systems to support processes, has led to much office
work becoming process­oriented, repetitive and routine. These changes
have meant that such jobs now require less skill and initiative than in
the past. Also many such jobs have now been automated to a large
extent. Examples of de­skilled white collar work include call­centres,
ticket office and check­in staff for air travel and other forms of travel,
mortgage quotations, etc. The trend towards further automation is set to

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continue and will inevitably lead to job cuts in some areas and further
de­skilling in other areas.

Social mobility and the new middle class: Whilst there has been
de­skilling of ‘white­collar’ jobs, many manual jobs (e.g. in the
automotive industry) now require greater skill than ever before. There
has thus been an ‘up­skilling’ in the manufacturing industry. This is
largely due to the use of new technology in the manufacturing process
(e.g. CAD/CAM). Workers in manufacturing are far fewer in numbers
than even a decade ago (due to the decline in manufacturing industries
in many Western countries and also due to job cuts from automation
and more efficient processes). However, manual workers are now more
affluent than they were before, and have lifestyles that are not
dissimilar to the middle classes. They can no longer be considered as
working class, but form part of the ‘new middle class’. This is termed
social mobility.

Changing Populations
The term ‘demographic change’ is used to describe population changes.
There are significant population changes occurring in the world today,
with far­reaching consequences for the developing nations and for the
developed world. Changing demographics have a direct impact on
international business; particularly in the way international operators
segment markets and target products/services.

Variables that define worldwide population characteristics include:

· Age.
· Gender.
· Nationality.
· Religion.
· Education.
· Occupation.
· Income.
· Socio­economic class.
· Sexual orientation.
· Family life­cycle.
· Family size.

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Demographic change is highly pertinent to international business

because of its impact on countries as well as on corporations. For
example, at the country level, an ageing population has implications for
welfare provision, healthcare products and services, pension provision,
retirement housing, etc. At a company level, demographic change is a
key input in an organisation’s marketing strategy and to HRM.
Population characteristics are the principle means by which market
segmentation is carried out, and choices made on which markets to
operate in. For a global corporation, this is even more pertinent as
demographic variables can be vastly different across countries. The
success or failure of a global marketing strategy is dependent on how
well the company has understood the local demography.

Let us now look at the implications for business resulting from two
important demographic factors.

Changing age structures

In the last two centuries the world has experienced a population growth
explosion. Population changes in a country are determined by two
factors:

· Natural increase (or decrease); the difference between

birth rates and death rates.

· Migration; the net balance between migration out of a

country and migration into a country.

Today, there is rapid population growth in the countries of what is

termed ‘the South’ (mainly developing countries) and a population
slow­down (and in some cases decline) in the countries of ‘the North’
(mainly developed countries). The countries of ‘the North’ are
experiencing not only a population slow­down but, more importantly,
an ageing population. Life expectancy in the more affluent countries of
‘the North’ is increasing. It is estimated that by 2025 one­third of the
population in Europe will be pensioners.

Let us now look at the implications for international business of these

contrasting age structures.

Implications for developed countries

For the ageing populations of Europe and Japan there are enormous
challenges for the state. Firstly there is a direct impact on the proportion
of the population that can contribute to the workforce. There are thus
moves to increase the retirement age, and age at which early retirement
can be taken. There are then implications for welfare provision –
increased expenditure on pensions and health services. This is likely to
lead to spiralling public expenditure, particularly in countries like

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Germany where welfare provision is high. In the UK, where

occupational and private pensions are more common, there is a
corporate pensions crisis, also exacerbated by sharp falls in the stock
market.

There are also huge implications for businesses. With a declining

workforce, relative to the proportion of the population that is retired,
skills shortages are likely. This is likely to be particularly pronounced in
new economy and knowledge­based sectors. But there are also changes
in consumer markets, which will impact the marketing strategies of
businesses. The tastes and preferences of the middle­aged and old are
very different to the young. They constitute very different markets.
There will be a greater need for healthcare products and services, leisure
activities, changes in housing stock, financial services (for pensions,
etc).

Implications for developing countries

Slowing down population growth is a high priority in the poorest,
developing countries. There are immense economic, social, political and
environmental implications arising from an increasing population, and
a population whose age profile is changing. The proportion of the
population under 14 years can be anything between 20­50% in the
developing world. The challenges are many. High birth rates and very
young populations make it more difficult to reduce poverty and invest
in human resources. Clearly the need to provide a basic quality of life
(food, clean water, sanitation), increases the burden for many, already
struggling, developing countries. For countries with a very large
proportion of young people, the immediate problems are the cost and
provision of child welfare and education. There is then the longer­term
problem of a population bulge as its large percentage of young people
(0­14 years) move through the family life­cycle.

As with the developed countries, the implications for business are huge,
and arise from changing population characteristics and its impact on
market segmentation. For global corporations the sheer size of
populations in countries like China and India, also holds out the
opportunity for huge sales and new markets. However, it is of course
the case that it is not just population size, but also the income per capita
and size of the middle class population, that determines market
attractiveness in these countries.

Although we have looked in broad terms at the implications for

developed and developing countries, the specific issues for each
country are different. Country­specific strategies are necessary to
address the challenges, taking into account the unique country needs,
cultural values and financial and institutional constraints.

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VIRTUAL CAMPUS
Describe the changing age composition of your country and the implications for
the state and businesses.

Carry out some research, if necessary, to

1. Determine your country strategy and the specific initiatives your

government is implementing to address the population change issues.

2. Determine what changes businesses are implementing to address the

challenges they are facing with regard to changing age profile.

Summarise your findings and post on the Virtual Campus. Review the other
postings on the virtual campus. Contrast the implications, country-specific
strategies and country and business initiatives with dissimilar countries.

International migration
International migration occurs when a person changes his or her place
of residence beyond country boundaries. This often results in a break in
direct ties with family, work and community. Migration can be
permanent or semi­permanent.

International migration is regulated by national governments.

Economic regions (e.g. EU) also legislate with regard to the movement
of people across boundaries within their own economic region.

The underlying motives for migration can involve economic, social and
political factors. Whatever the reason, international migration can
create both benefits and costs for the receiving country, and indeed the
sending country. It can increase the national burden on welfare systems,
it can fill skill shortages, and it can create skill shortages.

In today’s highly competitive global environment, human resources are

viewed as the key competitive advantage. It is the knowledge and skills
of the population that dictates the success of business activities. Noting
the challenges of an ageing population and acute skills shortage in
many developed countries, governments are liberalising immigration
policies – particularly with regard to highly skilled individuals in
certain sectors of the economy.

Thus the worldwide population of today, particularly in the

professional classes, is far more ‘mobile’ than previously. Migration of
people between continents is growing, with most of the movement
being from developing to developed countries.

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READING ACTIVITY
Students are required to read p. 212-221, ‘Changing populations’, of their key
text, Morrison, J, for further information on changing populations.

Pay particular attention to the charts and tables highlighting population

differences, changes and projections.

ACTIVITY
Think of your own organisation and the skill challenges it is facing today.

1. Identify the key skill shortage areas.

2. Why is your organisation unable to fill these shortages? Is there a

shortage of these skills in the country?

3. Can the skill gap be filled by education and training? Can it be filled by
migration?

4. What are the main issues relating to international mobility in your

work-context?

KEY POINT
Demographic changes have a direct impact on international business;
particularly in the way international operators segment markets and target
products/services.

The changing age profile of the world is a particular issue today, with
implications for developed and developing countries.

· For developed countries: an ageing population is increasing the

welfare burden (health, pensions) and creating a skill shortage
issue.

· For developing countries: high birth rates and a very young

population is increasing pressure on child welfare and

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education provision. For the very poorest countries the biggest issue
is poverty.

International migration, due to economic, social or political factors, is another

factor that has a bearing on international business.

The challenges of an ageing population and acute skills shortage have led the
governments of many developed countries to liberalise immigration policies –
particularly with regard to highly skilled individuals.

Changing Role of Trade Unions

Workers in almost all countries today have worker organisations, such
as Trade Unions. Collective membership of such worker organisations
give employees better negotiation powers to improve wages, working
conditions and job security.

In some countries, however, trade unions have limited rights; the right
to strike, for example. International Managers should make themselves
fully aware of labour relations laws and the rights of worker
organisations, across all the countries for which they have
responsibility. There can be large variability even across countries in the
same region.

In the industrialised world, there has been declining membership of

trade unions. This is due mainly to the decline in manufacturing jobs.
However, changing work patterns, such as greater distribution of the
workforce across different locations, make employee collaboration on
trade union issues logistically more difficult. Thus trade union
membership, particularly in the private sector, is falling. In Britain it is
estimated that 19% of workers in the private sector are in union
membership. This contrasts with 60% in the public sector.

READING ACTIVITY
Students are required to read p. 225-227, ‘Labour relations’ of their key text,
Morrison, J, for further information on labour relations.

You should also browse the websites on p. 227 to get an appreciation of the
different country positions on labour relations.

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Gender and Work

In every society, including Western countries, women lag behind men
in pay and in the career opportunities accessible to them. The difference
is more pronounced in some countries than others. The Nordic
countries are at the top of the table in relation to equal opportunities for
women.

Even when women perform the same jobs as men, there is frequently a
disparity in compensation and in access to promotion opportunities.
Many countries (and economic regions such as the EU) are addressing
this issue by bringing in anti­discrimination legislation, e.g. UK Equal
Pay and Sex Discrimination Act. Particularly in countries with an
ageing population, women are seen as an important part of the
workforce and there are initiatives by governments (and private
companies) to encourage women to return to work after starting
families. There is thus a focus on increased childcare provision and
support, part­time work, flexible hours, and generally improvements to
achieve a better work­life balance.

It is still the case that there is a preponderance of women in part­time

and low paid work (e.g. teleworking), whilst very few women make it to
company boardrooms. In the UK only 5% of Directors of FTSE 100
companies are women.

Another important change in relation to work results from the new

economy or knowledge economy. The rise in dominance of the services
sector, in particular, is creating a requirement for a constantly ‘learning
workforce’. The ability to adapt and respond to changes in technology,
gain new knowledge and develop new skills, is becoming a key
requirement for professionals in the knowledge sector. Increasingly the
competitive edge of companies in the services sector comes from its
intellectual capital assets (e.g. people, knowledge, and knowledge
captured/structured in databases for reuse from anywhere), and this is
dependent on the success of its learning culture. This is an important
change and is affecting the workforce as a whole (both genders) in these
sectors. These changes present opportunities, especially for women;
opportunities in terms of flexible e­working, ‘work anytime, anywhere’,
improved work­life balance. However, it is unfortunately the case that
professional roles in the knowledge sector are still occupied mainly by
men.

Despite the world­wide gender inequalities in the context of work, the

percentage of women contributing to the workforce (a large percentage
in part­time work) is increasing. The measures taken by governments
and private corporations, as mentioned earlier, are contributing to this
increase. Refer to Figure 7.10 in your key text, Morrison, J.

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Families
Patterns of family life are different across cultural environments.
Furthermore, modern­day society is changing family patterns
throughout the world.

In most Western societies, the basic family unit is the ‘nuclear’ family,
whilst in many Asian societies there is the tradition of the ‘extended’
family. The nature of family relationships often influences business
organisational style in countries. The emphasis on hierarchy, loyalty
and strong figures of authority in many Asian organisations can be
attributed to the extended family. The strong sense of individualism is
western organisational cultures can similarly be attributed to the
nuclear family.

Modern day society and changing working patterns are impacting on

traditional family units. For example, the extended family is on the
decline in many Asian countries due to urbanisation and distribution of
work away from traditional home areas.

In Western countries, the traditional ‘nuclear’ family is on the decline.

Today only 23% of UK households are in traditional ‘2 parent +
children’ families.

There are wide­ranging consequences for international business as a

result of changes in family patterns. As an example, in the western
world today, single parent families are quite common due to divorce,
simply not having married or widowhood. Single parent families have
their own pattern of consumer requirements for products and services.
This is distinct from the traditional 2­parent family requirements.
Examples of differences include holiday preferences, entertainment
choices, childcare services, preference for convenience meals, etc. Thus,
understanding changing family patterns is an important requirement
for businesses, particularly in the retail and services sectors. In fact it is
crucial to accurately perform market segmentation and target the right
products at the right people.

ACTIVITY
Identify a product/service that can be segmented on the basis of family patterns.

1. Describe how they are differentiated for the different market

segments in your home market. Consider marketing, packaging,
pricing, etc.

2. Noting the differences in family patterns world-wide (Europe/US vs.

Asia), is it the case that there is further market segmentation (in

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relation to this product/service) for the global marketplace? If

applicable, how is the product/service further differentiated across the
world-wide market? Is it the case that the product/service has limited
appeal in the overseas market? Elaborate.

KEY POINT
· Family patterns can have significant variations across countries.

· Family patterns are changing worldwide.

· Understanding changing family patterns is a critical requirement

for proper market segmentation in international business;
especially those businesses operating in the retail and services
sectors.

CASE STUDY
Read and answer the question contained in the case study: Case study 7.3 ‘Call
centres jobs migrate to India’ on p. 229-230 of your key text, J Morrison.

VIRTUAL CAMPUS
Post your answers on the Virtual Campus. Learn from the feedback of your
colleagues.

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Summary
We have looked at the impact of various aspects of the social
environment on international business. We have noted the critical
importance of population distribution and its characteristics (e.g. age
profile) for the nations of the world. We have contrasted the challenges
for developing and developed countries from demographic change,
and the increased burden on welfare systems.

Human resources are now considered a key competitive advantage for

countries as well as businesses. We have looked at the issue of skill
shortages, and have noted the increased international mobility within
certain sectors of the world­wide workforce, such as the professional
classes.

We have also looked at the issues arising from changing family patterns,
gender inequalities and labour relations.

Students are encouraged to analyse the issues covered in the context of

their own country and organisation.

REVIEW ACTIVITY
Consider the following scenario:

You are the International Marketing Manager for a global clothing retailer. Your
corporate headquarters is in San Francisco. Your company markets exclusive
brands, catering for the top end of the market. The complete age range is
covered in clothing for men, women and children. Both contemporary and
classical designs are catered for.

Your company has plans to expand into India, because of the perceived market
potential in this burgeoning economy and its impact on people’s lifestyles and
tastes.

You have been asked to investigate and report to your Board on the following:

1. In which geographical areas should you be locating your retail outlets?

Justify your choice(s).

2. How will the market be segmented? Elaborate.

Your analysis should be based on social and economic factors. Include the
following in your consideration: geographical areas, age range likely to benefit,
social background and age range of those who have the buying power
(affordability issues), social sensitivities (e.g. religion, tradition), and any other
factors that you believe are pertinent.

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Prepare a short management presentation (no more than 15 charts) for the
Board.

VIRTUAL CAMPUS
Post your presentation on the Virtual Campus, and compare your analysis with
that of others.

References
The following are the references for your key text and other
recommended reading:

1. Castells, M (2000), The Rise of the Network Society, 2nd edn,

(Oxford: Blackwell)
2. Daniels, J (2000) International Business, 9th Edition , Addison
Wesley
3. Dicken, P (1998) Global Shift, 3rd edition (London:Paul Chapman
Publishing)
4. Dunning, J (1993) The Globalisation of Business (London:
Routledge)
5. Hirst, P and Thompson, G. (1999) Globalisation in Question, 2nd
edition (Cambridge: Polity Press)
6. Hill, C. (2000) International Business (McGraw­Hill)
7. Morrison, J. (2006) The International Business Environment,
Basingstoke, Palgrave Macmillan (key textbook)
8. Rugman, A., and Hodgetts, R., (2000) International Business, 2nd
edition, FT Prentice Hall
9. Tayeb, M (2000) International Business: Theories, Policies and
Practices, 3rd edition, FT Prentice Hall
10. Waters, M (1995) Globalisation (London: Routledge)

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Unit 7

World Trade and the International

Competitive Environment

LEARNING OUTCOMES
Following the completion of this unit you should be able to:

· Explain the major country and trade theories.

· Explain the role of the WTO and its principles.

· Identify the controversial issues faced by the WTO today.

· Explain the importance of regional groupings in the context of trade

liberalisation.

· Describe the types of trade intervention imposed by governments.

Introduction
International trade has been on the rise since industrialisation. Today it
has assumed new dimensions with globalisation. As economies have
become more open through globalisation, the degree of
interdependence between countries has increased. However, rarely is
free trade truly free trade. Country interventions to safeguard national
priorities frequently result in trade barriers and impede trade
liberalisation. In an interdependent world the actions of one country has
consequences for others.

In this unit we shall outline trade theories, including the theory of

comparative advantage and newer theories, such as Porter’s Theory of
Competitive Advantage.

As we have already noted in previous units, the World Trade

Organisation (WTO) has grown in importance as globalisation expands
and nations become inter­dependent. We shall consider the role of the
WTO, along with multilateral trade agreements generally.

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Another important trend is regional integration and this is becoming a

new force with regional economic blocs exercising significant power in
world trade. Trade liberalisation within regional groups, and
intra­regional co­operation is on the increase.

We shall consider regional trade agreements, including customs union,

common market and deepening economic and political integration. We
shall examine examples from Europe (EU), the Americas (NAFTA) and
Asia (ASEAN). Your key text, with which this course material
interlocks, also looks at the economic, political and social implications
of EU enlargement.

READING ACTIVITY
Please read Chapters 10, ‘World trade and the international competitive
environment’ of your key text, Morrison, J (2006), which is essential reading for
this unit.

International Trade Theories

Country theories relating to trade have prevailed for hundreds of years
(e.g. mercantilist theory from the early modern period). However, trade
theories relating to companies emerged only from the mid­1950s
onwards, as the activities of multinational companies rose.

Let us briefly examine the major developments (country and company

focused).

The first trade theories examined the benefits of trade from the
perspective of countries and consumers. Adam Smith was the first
major theorist. In his book the Wealth of Nations he put forward the case
of market forces, describing it as the ‘Invisible Hand’.

David Ricardo in 1817 developed the theory of Comparative

Advantage. He suggested that the Theory of Absolute Advantage was a
special case of a more general theory. The Theory of Absolute
Advantage put forward the view that it is better for countries to use
resources to invest and produce items for which it has specialist skills,
and purchase items from other countries for which those countries have
specialist skills. A country has specialist skills, an absolute advantage,
over trading partners, if it is able to produce more of a good or service
with the same amount of resources or the same amount of a good or
service with fewer resources.

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The Theory of Comparative Advantage expanded this view and

attributed the cause and benefits of international trade to the differences
among countries in the relative opportunity costs (costs in terms of
other goods given up). In other words, a country has a comparative
advantage in the production of a good or service if it produces at a lower
opportunity cost than its trading partners.

ACTIVITY
Those unfamiliar with the Theory of Comparative Advantage should re-read
p.316 of the key text, Morrison J, 2006.

With the rise in the activity of international firms operating across

boundaries, trade theories began to focus on the company. In an earlier
unit we looked at Dunning’s OLI Theory and Kenichi Ohmae’s Stages
model – both of which take a company perspective. More recently,
changes in the nature of trade with a greater emphasis on innovation
(often technical), led to the recognition of first­mover advantages to
early entrants in a market.

ACTIVITY
Identify a contemporary example of an early entrant to a market.

What first-mover advantages have they benefited from?

What impact has this had on the competition?

ACTIVITY FEEDBACK
You may have thought of a number of examples.

One contemporary example is that of Apple and the iPod (although strictly not
a new entrant, in that Sony was the incumbent with a music device). However,
Apple’s total market offering – imaginative, feature-rich and compact device,
coupled with its iTunes music store – was really the first of its kind on the
market.

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So what first-mover advantages did Apple gain? Their technical excellence

(quality) was established on the basis of their computer manufacturing
know-how and track record in quality and intuitive user-interface. However, as
an early entrant, they were able to establish the strong style brand and this gave
them the dominant position they enjoy today. By the time competitors came on
the market, they had established themselves as the benchmark standard against
which competitive products were judged. iPod had already come to be
synonymous with compact music devices. Apple’s early entry also enabled
them to achieve economies of scale – although this was also aided by their
computer manufacturing arm with which iPod manufacturing has many
synergies.

Vernon’s Product Life-Cycle Theory

The product life­cycle theory, relating to firms, was published by
Vernon in 1966. The product life­cycle theory identifies distinct stages
that a product typically passes through – such as from new product
stage to mature product and finally standardised product.

The model assumed that most new products (innovations) would

originate in the US – due in large part to the dominance of the US in
manufacturing at the time. Although the theory is US­centric, it can be
applied more generally. The new product stage is associated with
innovations and are most likely to occur where the per capita income is
high – as the motivation for innovation arises from high unit production
costs in the home country. As the product passes into the mature
product phase, it becomes more standardised and suitable for mass
production. Production then moves initially to high income countries
(e.g. Europe) where the demand pattern is not dissimilar to the US, but
labour costs are lower. But as the product becomes truly standardised
(uniform and undifferentiated) lowest cost production becomes the
prime focus and production moves to low­cost developing countries.

Vernon’s product life­cycle theory has the following phases:

Phase 1: Production in US with exports

Phase 2: Productions starts in Europe, and US exports to less
developed countries
Phase 3: Europe exports to less developed countries
Phase 4: Europe exports to the US
Phase 5: Less developed countries export to the US

Vernon’s Theory has less relevance to today’s globalised world where

product components are developed in any location, and assembly in
any location around the world.

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Porter’s Theory of Competitive Advantage

In the 1990s Michael Porter developed the theory of national
competitive advantage. The theory can be encapsulated in diamond
form as shown in Figure 7.1.

Firm strategy, structure

and rivalry

Factor conditions Demand conditions

Related and supporting

industries

Figure 7.1: Porter’s diamond: the determinants of national advantage

The four corners of the diamond are the attributes of national

competitive advantage:

Factor conditions: For a given industry, the country’s production

factors, e.g. skilled labour, infrastructure.

Demand conditions: Home demand for the market offering.

Related and supporting industries: In relation to the market offering,

the availability of internationally competitive supporting/related
industries within the country.

Firm strategy, structure and rivalry: Company structuring – creation,

organisation and management. Domestic rivalry.

The Porter Diamond tool is also used to predict how industries will
evolve in the future.

Although the models of Vernon and Porter are a useful contribution to

the understanding of international trade, their validity should be
questioned in all contexts of the contemporary international business
environment. They under­emphasise the effects of globalisation and

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economic integration, and are not directly relevant to a services

orientation.

Government Trade Policy

The ideal in a globalised world, with international economic
interdependence, is complete free trade. However, governments across
the world (from the US to developing countries) intervene to safeguard
their own national interests. The term ‘free trade’ is therefore a
misnomer, as trade barriers are common.

The basic argument put forward in favour of free trade is that it allows
countries to specialise, producing those goods and services that it is best
at, or most efficient at. Nevertheless governments see it advantageous
to intervene. Most interventions are motivated by the belief that
intervention will help or protect domestic producers and maintain an
industry. At other times interventions are motivated for political
reasons – to respond to interest groups.

So how do governments intervene? Government intervention is

through its trade policy. Policy is formulated with some or all of the
following priorities:

· Promotion of industrialisation: achieved through import

substitution, i.e. producing equivalent products locally
for domestic consumption, rather than importing.

· Protection of employment.
· Protection of consumer (in the context of health and
safety) e.g. French ban on beef imported from the UK due
to BSE­infected cows.

· Promotion of national interests: to protect the national

interest by insulating the country from foreign
dependence in key areas. Includes strategic trade policy,
foreign policy and national culture. An example of
foreign policy is the US ban on imports from Iran. An
example of strategic trade policy is protection of defence
industries. An example of national culture protection is
the promotion of local film industry, arts and literature.

Tools used to implement trade policy are:

· Tariffs – duty paid on imported goods.

· Import quotas.

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· Voluntary export restraints (VER) – imposing limits on

exporting countries with the threat of imposition of
tariffs/quotas if limits are violated.

· Local content requirement: requirement that the product

have some content that is locally produced.

· Subsidies paid to domestic producers.

KEY POINT
The term ‘free trade’ in reality is a misnomer, as governments intervene to
safeguard their own interests, and trade barriers almost always exist.
Government intervention, through trade policy, is designed to:

· Promote industrialisation.

· Protect employment.

· Protect the consumer.

· Promote national interests.

International Regulation of Trade

The international body responsible for oversight of trade between
nations is the World Trade Organisation (WTO). Its main objective is to
ensure that trade flows freely between nations. The WTO was set up by
the GATT, Uruguay round of negotiations and was formally
established in January 1995. The GATT treaty itself was instituted in
1947. However, member states (which by the end of 1994 had reached
over 110 countries) recognised that increasing world trade necessitated
a stronger institutional framework with more legal standing. Today the
WTO has some 147 member states.

The WTO functions include:

· Administering WTO trade agreements.

· Forum for trade negotiations.
· Handling trade disputes.
· Monitoring national trade policies.

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· Technical assistance and training for developing

countries.

The WTO is built on the GATT principles of open trade which includes
trade without discrimination, gradual transition to free trade through
negotiation, predictability through transparency and binding
agreements, promotion of fair competition and encouraging
development and economic reform.

ACTIVITY
You can read more about the GATT principles and functions at the WTO
website

http://www.wto.org/english/thewto_e/thewto_e.htm

Relevant documents for the regulation of international trade may be

found on: http://www.wto.org/english/docs_e/legal_e/legal_e.htm

Perhaps the most important articles of the WTO, and established

originally by GATT, is the Most Favoured Nation clause (MFN). Under
the terms of MFN, and MFN is negotiated between countries, each
country agrees not to discriminate against any other contracted party.
In practice this means that, for any particular product/service,
favourable tariffs agreed with one country have to be extended to all
countries. It also means that domestic goods and imported goods have
to be treated in the same way under the principle of national treatment.

There is also the principle of fairness which allows any country that has
experienced unfair trading practices to take protectionist measures
against that country.

CASE STUDY
Consider the following scenario.

The US has brought a case against Europe at the WTO stating that Europe is
discriminating against GM foods without clear and proven health reasons. This
case goes as far as saying that GM foods should not have to be forced to be
labelled as containing GM components.

Assume that you work for the European Commissioner on Trade. You have
been tasked to put forward a case to counter the American complaint.

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1. Research the criteria by which WTO considers exceptions.

2. Use the above criteria to prepare your case.

Issues Facing the WTO

Despite the significant impact WTO has had on multilateral trade,
national interests continue to dominate. There are also major policy
differences between the member states arising from the consequences of
trade liberalisation; the social and environmental price. Today the big
issues confronting the WTO are labour standards, environmental
protection and international competition.

The issue of labour standards is one of the most controversial issues.

The WTO is accused of casting a blind eye to the exploitation of labour
and of undermining efforts to protect the health and safety of workers.
Human rights groups and the International Labor Organization (ILO)
are pressing for action in the form of multilateral agreements on labour
standards. The debate at the WTO is whether the WTO is the right
vehicle for enforcing labour standards, and what effect such action
would have on the comparative advantage of labour­intensive
industries. The WTO is now in discussions with the International Labor
Organisation (ILO) on enforcing core labour standards.

Another contentious issue for the WTO is that of environmental

protection and trade policy. Several high­profile cases on import bans
for environmental reasons have been lost recently. The view held by
many countries is that the WTO is not sufficiently sympathetic to the
environmental issues. Those in favour of trade liberalisation argue that
environmental issues should be dealt with by proper labelling giving
the consumer the choice.

VIRTUAL CAMPUS
There are other issues impacting the WTO and its broad principle of giving all
countries a level playing field. For example, the US has not agreed to ratify the
Kyoto Agreement to curtail greenhouse emissions. Does this give the US an
unfair advantage in international trade?

Research the WTO position on this. What is your view?

Post your view on the Virtual Campus. Challenge and debate those of others,
where appropriate.

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Then there is the issue of international competition policy. There is

disagreement between member states on whether the WTO should
create multilateral policy to regulate international competition. Most
developing countries believe that competition policy should be left up
to national governments, whilst the US and EU argue that this could
lead to institutional barriers to trade and foreign investment. Although
the US and EU are in favour of international competition standards,
their approaches vary. The EU, for example, propose that developing
countries be allowed to opt out of competition policy for certain sectors.

Regional Trade Agreements

We have already noted that regional groupings have grown in
economic importance in recent years; the EU, NAFTA, ASEAN being
examples.

An alternative to seeking trade liberalisation through the WTO is for

countries to enter into trade agreements within the regional grouping.
However, regional trade groupings must be notified to the WTO.

Trade agreements within regional groupings are by nature

discriminatory. Countries may decide to make reciprocal tariff
reductions in their trade with each other, with these concessions not
necessarily being extended to other countries. In this context, regional
groupings can be classified as follows:

1. Free Trade Area: an area within which countries agree to

eliminate trade barriers with each other, but not on imports from
countries outside the Free Trade area. The best example of a Free
Trade Area is NAFTA.
2. Customs Union: countries agree to eliminate trade barriers with
each other, and adopt a common set of trade barriers against the
rest of the world. The EU is the best known example of a
Customs Union.
3. Common Market: member states enjoy free movement of goods,
labour and capital. MERCOSUR (Argentina, Brazil, Paraguay,
Uruguay) is a good example.
4. Economic Union: unified economic policy (monetary, fiscal and
welfare) across member states.
5. Political Union: Sovereignty, regional, political and law­making,
with a new ‘superstate’. The EU has aspirations of political
union.

Refer to your key text, Morrison, J, 2006 for further information, in the
context of trade, on the major regional groupings EU, NAFTA, etc. Pay
particular attention to the issues arising from EU enlargement.

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It should also be noted that regional groupings are strengthening

relations with each other (e.g. EU and Mercosur, ASEAN and Latin
America) and are signing interregional co­operation agreements. Thus,
although the WTO has its goal of liberalising trade between all nations,
today the majority of trade agreements are bi­lateral.

Developing Countries and World Trade

Developing countries in the context of trade are at the bottom of the
value chain. Perhaps an exception being the recent developments in the
services industries – particularly concerning IT. In general they export
low­value, primary products (e.g. metals, agricultural produce), whilst
the developed economies trade in high­value products.

Although the WTO promotes the ideal of a level playing field in trade,
developing countries make the case that the world trade system is
stacked against them. They make the point that GATT barely touched
barriers to developed countries’ markets in textiles and agricultural
products, and challenge the WTO on protectionism. Developing
countries make up more than 75% of WTO membership, but the real
muscle, as evident in many WTO adjudications, is exerted by the main
trading nations/groupings (e.g. US, EU, Japan).

ACTIVITY
Research WTO adjudications in the recent past. You will note from your
research that the US and Europe appear to have the upper hand, and get their
own way (except when they are opposed to each other).

Every country has the same free trade rights under the WTO. Why is then that
the US and Europe have such an advantage?

ACTIVITY FEEDBACK
One organisational issue is that the WTO operates on the basis of consensus
rather than democratic principles. Consensus-based decision making requires
lobbying – often diplomatic level lobbying. Developing countries do may not
have the same level of resources to dedicate diplomatic time to such activities.

It is also the case that winning trade battles is not just a case of applying WTO
rules, but involves legal interpretation and legal know-how to exploit

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exceptions. Small countries just do not have the resources to engage technical
and legal expertise to counter the main powers in trade.

So although the WTO is often quoted as a key vehicle of globalisation;

supposedly opening up to developing countries the potential of trade
expansion and setting a level playing field, the reality today is different.
Gordon Brown, the UK Chancellor, is one of the most vocal figures in
supporting the cause of the developing economies and is urging the
WTO to more fairly reflect the needs and views of developing countries.

KEY POINT
The role of the WTO is being challenged today. A criticism of the WTO is that it
is a consensus-based organisation, rather than a democratic organisation.
Hence, the wealthier nations wield more power and influence over trade
issues. It is questioned whether the WTO fairly reflects the needs and views of
developing countries.

Some of the controversial issues confronting the WTO today are:

· Labour standards.

· Environmental protection and trade policy.

· International competition policy.

CASE STUDY
Read and answer the question contained in the case study 10.1: ‘The impact of
oil in world trade’ on p. 316-318 of your key text, J Morrison.

VIRTUAL CAMPUS
Post your answers on the Virtual Campus. Learn from the feedback of
your colleagues.

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International Business Environment Unit 7 – World Trade and the International Competitive Environment

Summary
In this unit we have looked at the issues concerning world trade and the
international competitive environment. We started off by examining the
development of trade theories, initially country theories and later
theories based on the firm.

We have noted the central role of the WTO in international trade and
have considered some of the issues it faces today. Despite attempts and
successes by the WTO in liberalising trade, we have seen that
governments frequently intervene to protect their own national
interests. We have looked at the drivers for government interventionist
trade policy and the tools used by governments to achieve these
policies.

We have also looked again at the role of regional groupings – this time
in the context of trade agreements, and have seen how member states
attempt to achieve liberalisation through these groupings.

Finally we have considered whether the WTO really provides a

level­playing field for developing countries, and the factors that work
against them.

REVIEW ACTIVITY
Identify the top three aspects of government trade policy (in your country),
which could be perceived internationally as being interventionist and not in
keeping with trade liberalisation.

What were the drivers for these policies? Did it entail any WTO hearings and
adjudications?

In your opinion has this has a positive or negative effect on your competitive
trading position in the short-term? In the long-term? Elaborate.

Now widen your scope to the bigger picture. Will these actions further your
country’s social, cultural, political, environmental, technological aims?

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References
The following are the references for your key text and other
recommended reading:

1. Daniels, J (2000) International Business, 9th Edition , Addison

Wesley
2. Dicken, P (1998) Global Shift, 3rd edition (London:Paul Chapman
Publishing)
3. Dunning, J (1993) The Globalisation of Business (London:
Routledge)
4. Hirst, P and Thompson, G. (1999) Globalisation in Question, 2nd
edition (Cambridge: Polity Press)
5. Hill, C. (2000) International Business (McGraw­Hill)
6. Mattli, W (1999), The Logic of Regional Integration: Europe and
Beyond (Cambridge: Cambridge University Press)
7. Morrison, J. (2006) The International Business Environment,
Basingstoke, Palgrave Macmillan (key textbook)
8. Rugman, A., and Hodgetts, R., (2000) International Business, 2nd
edition, FT Prentice Hall
9. Tayeb, M (2000) International Business: Theories, Policies and
Practices, 3rd edition, FT Prentice Hall
10. Waters, M (1995) Globalisation (London: Routledge)

144
Unit 8

The Technological Environment

LEARNING OUTCOMES
Following the completion of this unit you should be able to:

· Explain the role that technology can play in achieving strategic

advantage for companies and countries.

· Evaluate the role of technology in operational efficiency for global

corporations.

· Describe the national technological environment: innovation,

research and development, technology transfer.

· Assess the impact of new technologies, in particular, the Internet and

e-commerce.

Introduction
Today’s International Managers, whatever sector they operate in, need
to maintain a good awareness of the role of technology in their business
field. In the international business environment, technology and IT, in
particular, are vital for achieving operational efficiencies and
effectiveness; operations that are often widely distributed
geographically. Global corporations simply will not be able to operate
in the way that they do without the enabling technology. However,
technology is not just about internal efficiencies and effectiveness. It is
also about strategic advantage. The timely assessment and exploitation
of relevant, new and emerging technologies can yield significant
competitive advantage. Today we see numerous examples of young
organisations challenging and displacing traditional incumbents
because they have revolutionised products and business processes with
new technology.

Government policy and pro­active support in technology is critical for

technological advancement in any country. Recognising the strategic
implications of technology and the competitive edge it can give
companies and countries, we shall firstly outline the national
innovation system, including approaches to R&D. Theories of
technology and innovation will also be briefly considered.

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We shall then introduce some of patenting issues as it relates to

technology, and discuss it from the points of view of the industrialised
and developing economies. Methods of technology transfer will also be
considered.

Although the focus of much of this unit is on countries and their

technological advancement, we conclude by looking at the strategic
implications from technology and innovation for companies.

READING ACTIVITY
Please read Chapter 11, ‘Technology and Innovation’ of your key text,
Morrison, J (2006), which is essential reading for this unit.

Concepts and Processes

Most of you will be familiar with the concepts and processes relating to
the technological environment. However, to baseline our
understanding, let us briefly define the key concepts, abbreviations and
processes that will be referred to in this unit.

Technology: the methodical application of scientific knowledge to

practical purposes.

Innovation: improvement to products, services or processes, bringing

commercial benefits.

Invention: a new product or process which is commercially exploitable.

R&D: Research and Development.

e­commerce and e­business: The two terms are sometimes used

synonymously. However, in the strict sense an e­business is an
organisation that is transforming its interactions with customers,
suppliers, strategic partners, and employees by exploiting Web
technologies, and extending its market reach to improve performance.
e­commerce is one aspect of e­business, and relates to trade carried out
over the Web. It includes business­to­consumer (B2C) and
business­to­business (B2B) transactions.

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International Business Environment Unit 8 – The Technological Environment

Theory of Industrial Waves

Recognising that technical innovations are key to economic progress
and national competitive advantage, a number of theories relating to
technological innovation have been developed.

We have come across some of these theories already in Unit 7 – Porter’s

First Mover Advantage and Vernon’s Product Life­Cycle Theory (which
has been extended in its interpretation to incorporate the dynamic
implications of technology development).

One of the original theories was that put forward by Schumpeter

(1912­1942), known as the Theory of Industrial Waves. He related
waves of economic development with critical technological
innovations. The waves are summarised below:

· First Wave: Industrial revolution and factory

production

· Second Wave: Age of steam and railways

· Third Wave: Age of electricity and steel

· Fourth Wave: Age of mass production

· Fifth Wave: Age of computers and

micro­electronics

Note, the fourth and fifth waves were added by other theorists.

National System of Innovation

In this section we shall look at national systems of innovation, simply
because of the vital role that technology and innovation play in a
country’s economic growth and in its competitive advantage. So firstly,
what do we mean by a national system of innovation? The national
system of innovation relates to the structures and institutions by which
innovation is encouraged and facilitated.

Because of the huge funding implications, unless a country provides

and cultivates a supportive framework and infrastructure for
innovation, technological achievements will not result. This is one of the
principal reasons for the huge divide between the levels of innovation in
richer countries, which devote about 3% of their GDP to R&D, and
developing countries, which simply do not have the resources at hand.
One consequence of this is the brain drain from developing countries to
developed countries, which worsens the problem for the developing
world.

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The key aspects of a national innovation system, as outlined by

Archibugi & Michie (1997), are elaborated below:

1. Education and Training:

Traditional forms of formal education (primary to higher
education, universities, colleges) but also newer methods for
continuous learning, such as e­learning (which is facilitated by
technology in itself).
2. Science and Technology Capabilities:
Frontier capabilities developed through R&D activities.
3. Science and Technology Strengths and Weaknesses:
Firstly an objective assessment of a country’s strengths and
weaknesses in the global context. Then, specialisation in
strengths to gain strategic advantage. The Japanese achieved this
with the consumer electronics market. Today, Korea is aiming to
exploit its perceived strengths in the emerging field of
nanotechnology.
4. Industry Structure:
Most R&D investment outside of government is borne by large
companies, which usually channel these investments to their own
R&D labs. Most of their efforts are devoted to evolutionary
innovations that make their current offerings perform better.
Disruptive and radical innovations, however, require a different
approach and culture. The creativity required for such
innovations thrives in the smaller, flexible and less bureaucratic
‘start­up’ company culture. Thus the nature of a country’s
industry structure and the investment support (venture capital)
given to start­ups, can have a direct impact on innovation in a
country. The high­tech revolution was largely triggered by
start­ups in Silicon Valley with venture capital.
5. Interactions:
Effective interactions (Government/Academic Institutions –
Business) are essential for innovation. An academic institution
working in isolation does not have the real­world business
domain knowledge for industry contextualisation and
commercialisation. Similarly commercial firms do not have the
luxury or capabilities for pure research that academia possess.

Inter­firm collaboration is also increasingly important because of the

significant levels of funding, complexities and different specialisations
required in innovative products. As an example, the Bluetooth Alliance,
which developed and brought to market a cheap, ubiquitous
connectivity system for all classes of electronic device (wireless),
included IBM, Ericsson, Nokia and Toshiba.

Cross­industry collaboration is also necessary for the rapid deployment

of new ideas/innovations developed in one industry to another. As an
example, technical know­how relating to the management of large
volumes of data (in the order of Terabytes) developed in the petroleum

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exploration & production industry is being deployed in other data

intensive sectors (e.g. medical imaging, genetic engineering).

Technology interactions can take the form of formal contractual

collaboration arrangements or informal networking. Indeed, in the
context of technology, competitors will co­operate in certain
circumstances (termed ‘co­opetition’).

ACTIVITY
Assess your country’s national innovation system against each of the criteria
discussed above.

How has government policy fostered technological advancement?

Can you identify any strategic strengths that your country possesses in the area
of technology? How is this being further developed and exploited in the
international business environment?

What are the key issues and inhibitors to further advancement? What steps can
be taken to counter this, taking into account the resources of your country?

VIRTUAL CAMPUS
The Government of Singapore has been a leader in recognising and then
harnessing the power of technology. It has one of the most advanced
nation-wide technology infrastructures in the world. Effectively the whole of
Singapore is ‘wired up’ and e-transactions are widely accepted by the
population at large.

Investigate this aspect of Singapore’s strategy. Identify what concrete business

benefits it has yielded to the country and to companies.

Share your findings on the Virtual Camps. Review and learn from the
submission of your colleagues.

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KEY POINT
Technology and innovation play a vital role in a country’s economic growth
prospects and international competitive position.

The quality of a country’s innovation system (Archibugi & Michie (1997)) can be
assessed by its:

· Education and Training.

· Science and Technology Capabilities.

· Science and Technology Strengths and Weaknesses.

· Industry Structure.

· Technology Interactions.

Patents and Innovation

The issue of patents is a contentious one in the international arena.
There are winners and losers. The winners are the large countries which
own the bulk of patents internationally. The vast majority of patent
filings come from the rich countries of the world. The losers are usually
the poorer countries who incur huge royalties for the use of these
inventions. There are also ethical issues, as you will see from the next
Virtual Campus Activity.

But let’s step back a moment and examine what a patent is. A patent, is
the granting of property rights to an inventor or applicant. It gives the
owner exclusive rights for a period of time to exploit the invention,
license it to others and stop unauthorised exploitation of it. In the US, in
the words of the US Patent and Trademark Office*, ‘A patent for an
invention is the grant of a property right to the inventor, issued by the Patent
and Trademark Office. The term of a new patent is 20 years from the date on
which the application for the patent was filed in the United States or, in special
cases, from the date an earlier related application was filed, subject to the
payment of maintenance fees. US patent grants are effective only within the
US, US territories, and US possessions.’

*(see http://www.uspto.gov/web/offices/pac/doc/general/whatis.htm)

There are country­differences on IP and patent laws, and International

Managers should be aware of this for the countries they operate in.

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It should be noted that the vast majority of patents are held by

companies (approx. 80%) and not by the actual inventor. Filing of
patents is not a straightforward process, and legal resourcing is costly.
Royalties from patents are a huge revenue stream for companies. For
example, IBM the leader in patents for the 11th consecutive year in 2003,
has generated well over $10 billion in royalties over a 10 year period.
Because of the lucrative revenue from royalties, companies such as IBM
dedicate vast legal resources to filing patents and fighting patent
infringements, which ordinary inventors cannot do.

In the context of innovation, categories which may be patentable are

those that have a ‘technical effect’. This includes computer software and
business methods. Corporations, such as IBM, Accenture, Siebel
Systems, are investing huge legal amounts into patenting business
methods because of the strategic potential resulting from the growth in
the knowledge­based economy and services sector.

Channels for International Technology

Transfer
Because of the increasing complexity in technology and specilisations –
specialisations which are often country­dependent and may even be
company specific – international technology cooperation is on the rise.
Technology transfer has benefits to both the provider and recipient; for
the provider because of the technology and ensuing business benefits
and to the recipient in the form of commercial benefits through licensing
fees and royalties.

The four main channels for technology transfer are:

· FDI.
· Joint Ventures and Strategic Alliances.
· Technology Licensing: permission to use of patented
item, in return for loyalties.

· Capital Goods Transfer: reverse engineering and

extension. Sometimes thought of as ‘imitation’.

Refer to your key text, Morrison, J, 2006 for further details on the above.

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Recent Advances in Technology

Information and Communication Technology

Historical development
Advances in information and communication technology have had, and
continue to have, such a monumental impact on business, that theorists
have included it as the fifth wave in the Schumpeter Theory of Waves.

The way man interacts with the computer has evolved over the last few
decades, and significant milestones have been the introduction of
commercial mainframes in the 1950s, developments in microelectronics
and the microprocessor in the 1960s, and advances in communication
technology and the Internet in recent years.

However, until as recently as the early 1980s, the computer was for the
specialists and used largely for heavyweight scientific applications such
as weather forecasting, modelling nuclear reactors, modelling
petroleum reservoirs, space applications (NASA), cryptography, etc.
The computers used were what is classed super­computers and cost
millions of dollars. In the 1950s with the introduction of IBM
mainframes, computers came to be used by large corporations but again
required significant capital expenditure and high maintenance costs.
However, the advent of the microprocessor, led to a paradigm shift in
IT. Computers in the form of UNIX workstations and PCs came on the
market and introduced significantly cheaper computing that was
within the realms of affordability of SMEs, and even personal users. The
microprocessor also yielded significantly more computing power per
unit cost. Furthermore, computer manufacturers released products that
were far more intuitive, and accessible to the average user. Until the
mid­1990s, however, computers were not widely networked and so
they were constrained to internal company integration, at best.

Today broadband connectivity, portability, wireless and mobile

computing, and standard languages such as HTML and XML have
given rise to the digital age and its most pervasive manifestation, the
Internet.

The Internet, e-business, e-commerce

The Internet is a key facilitator of globalisation. The Internet has
removed barriers of physical distance for the transmission of data,
images and sound. It has made possible any computer anywhere in the
world to talk to another. This has enabled global corporations not only
to seamlessly integrate their own operations across the world, but to
integrate with their strategic partners, supply chain and even
customers.

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In the age of the Internet and e­commerce, new markets are emerging
faster than ever before. Today approximately 20% of exports are carried
out on the Web, and a significant slice of growth is coming from
cross­border transactions using e­commerce. As each new market goes
through its development cycle, it gives power to those companies that
are able to harness the power of new technologies to transform their
businesses, and that of their customers. Power is shifting from what was
previously a trusted source of value creation towards something that
was previously secondary. Information has replaced assets as the
source of value. This is the new management agenda, and is viewed as
the source of competitive advantage in many sectors. This new
paradigm is described as the new economy or knowledge economy.

Value in the new economy is not defined by the traditional yardsticks of

tangible assets, but rather valued on the basis of intangible assets such
as intellectual property, information, knowledge, people, networks,
relationships, etc.

The dot.com boom of the late 1990s led to the establishment of

e­commerce – trade over the web both business­to­business (B2B) and
business­to­consumer (B2C). e­commerce changed the whole landscape
of business. In every sector, there are examples of traditional ‘bricks and
mortar’ incumbents being displaced by new entrants exploiting the
power of e­commerce. Company size is less of an issue today.
e­commerce is giving companies the global reach they did not have
before. A wine producer in a small village in Italy now has the whole
world as its market through the power of e­commerce. e­commerce can
also enrich customer relationships by enabling the supplier to add value
by easier customisation, variety and timeliness.

The dot.com boom that led to e­commerce was followed in 2000 by the
dot.com bust. Why? It should be noted that the bust had little to do with
e­commerce, but rather with market hysteria, and business naivety and
greed on the part of many dot.com Chief Executives. Based on nothing
more than a website, companies with no earnings and no prospects of
operating in the black were awarded market valuations that exceeded
many of the world’s most respected companies. Business metrics like
profit, cash flow and price/earnings (PE) ratios went out of the window.
Unrealism and hysteria took over the market. The lesson to learn is that
the principles of business apply, whether in e­commerce or not. There
has to be a sound business case for any business to succeed, and
e­commerce is no different.

The largest opportunities and growth areas in e­commerce are in B2B

transactions. This is set to grow at a phenomenal rate of 60­80% per
annum.

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billing
e-procurement
customer relationship
management supply chain
management
e-commerce
order fulfillment
e-busi ness
business intelligence

HRM
e-learning
knowledge management

Figure 8.1: e-business integration

In the context of the new economy, one can argue that the real power of
the Internet is in e­business, which is far wider than just e­commerce.
An e­business not only conducts e­commerce but integrates external
and internal transactions, so that the whole business is seamlessly
integrated. See Figure 8.1. These transactions cover a whole host of
transactions including e­procurement, order fulfilment, billing,
supply­chain management, customer­relationship management, HR
management and knowledge management.

An e­business promotes and facilitates knowledge sharing and

collaboration with strategic partners, so that it can respond in a timely
manner to new opportunities anywhere in the world. The competitive
strength of global businesses in the new economy is highly dependent
on these factors.

Strategic implications for a business

No study of the technological environment would be complete without
an assessment of the strategic implications of information and
communication technology to a business.

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As we have already noted, in the international context, technology and

IT is the key enabling infrastructure, to managing the complexities of
different time zones and distance in geographically distributed
operations. Infrastructure includes telecommunications, networks,
computer hardware and software. But it also includes the adoption of
technology standards to ensure the seamless integration of business
functions at all levels, and ‘’plug and play’’ interoperability. Successful
deployment of IT and organisational transformation requires support at
the highest levels of management, adoption of a learning culture and
often involves organisational culture change. This can be one of the
biggest challenges for an organisation.

Although technology is vital to achieve operational efficiency, one can

argue that technology is even more important in achieving strategic
advantage in today’s highly competitive global market. So how does
technology deliver competitive advantage? Competitive advantage is
achieved by adding value to the customer – by using technology to
transform business activities for greater efficiencies and improved
effectiveness. Increasingly the technology emphasis is shifting to the
effective use (re­use) of information and knowledge. The ability to
quickly assess customer requirements, rapidly exploit project
experience from one geography to another, reuse intellectual capital
and processes, and respond quickly to new opportunities anywhere in
the world are vital for competitiveness in a global world. This requires
an organisation to exploit its knowledge assets and work
collaboratively with its supply chain, strategic partners and customers.
Knowledge management is thus becoming a strategic factor in the
global marketplace.

ACTIVITY
Consider your own organisation. To what extent is your organisation an
e-business?

How tightly is your company integrated with its supply chain, strategic partners
and customers? Refer to Figure 8.1.

What further steps can your organisation take to increase efficiency,

effectiveness and competitive advantage? How can this be implemented?

Biotechnology
Biotechnology or life science technologies are the latest areas of
scientific investment. Life science technology concerns the
manipulation of living organisms and has wide­ranging applications.

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Recent research on the genetic makeup of living organisms and the

Human Genome Project have led to a greater focus on genetic
engineering and its applications.

Research in biotechnology is giving rise to applications in medicine,

vaccines and agricultural crops. The potential is enormous (including
cures for some of today’s terminal diseases), but there are also very
serious ethical issues. It is an area of controversy and the ethical issues
are hotly debated today. Serious questions are also being asked about
the impact of such work on the world’s biodiversity and ecosystems, not
to say anything of the power it will give a few US and European
companies (e.g. Monsanto) to dominate the world’s GM agricultural
sector.

Globalisation Issues
Technological advances and innovations in a country are highly
dependent on the quality of its national innovation system and
proactive stance by government. Richer countries are clearly able to
invest far more in their national innovation systems than poorer
countries, and are thus able to reap the rewards of innovation. This is
clearly apparent from patent statistics. Government policy is therefore
crucial for technological advancement. Many, including Michael Porter,
stress the role of government not just in investing but in fostering
innovation by proactive encouragement of technology partnerships
between universities and industry, international technology
co­operation and other technology initiatives. Thus, although advances
in technology, particularly in IT, are presenting huge opportunities for
certain developing countries (e.g. India), the poorest countries are
falling further behind. This is known as the ‘digital divide’, and has
become more pronounced in the age of the Internet and new economy.

The knowledge­intensive industries, fuelled by the power of the

Internet and communications advances, are providing huge
opportunities for some developing countries. The Indian economy is
growing phenomenally because of the growth in the services industries,
which is transforming certain cities like Bangalore into high­tech
havens, not dissimilar to Silicon Valley. The power of operational
integration that can be achieved through technology, coupled with
strong project management and the adoption of standards, is making
geographical location less important. International business is
becoming increasingly distributed, and outsourcing to low cost
locations such as India, Philippines, Sri Lanka, Latin America is
emerging as an important competitive factor. In sectors such as
software development, by adopting the geographically dispersed
development model, global corporations are able to work round the
24­hour clock and achieve competitive advantage and benefit from
lower­cost development. Countries such as India are strategically

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placed in time­zone for the US and Europe, and have the added
advantage of English as their business language.

KEY POINT
The timely exploitation of advances in technology is a source of strategic
advantage in international business. However, the ability to exploit new
technologies is dependent on the quality of national innovation systems.

Advances in information and communication technology have had, and

continue to have, a monumental impact on business. The age of the Internet
and new economy is creating a digital divide with new opportunities and
prosperity for some countries, but with the poorest countries falling further
behind.

Biotechnology is another recent area of research and development with huge

potential and implications for medicine and agriculture. It is also an area of
controversy with many ethical issues.

CASE STUDY
Read and answer the question contained in the case study 11.3: ‘Feeling lucky
with Google’ on p. 378-379 of your key text, J Morrison.

VIRTUAL CAMPUS
Post your answers on the Virtual Campus. Learn from the feedback of your
colleagues.

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Summary
In this unit we have seen how innovation and advances in technology
can render significant business advantage to countries and companies
alike.

Given the overwhelming evidence that innovation in a country is

directly proportional to government and corporate investment in R&D
and technology infrastructure, we looked at the components of national
systems of innovation. In the modern world, with the complexities in
technology and specialisations involved, we have noted the importance
of interactions – government to industry, inter­company, cross­industry
and international co­operation. We also noted that the country’s
industry structure needs to be conducive to encourage creativity and
entrepreneurial flair. We looked at the role of venture capital and
start­ups in this context.

We have also touched on the legal issues relating to technology, and

specifically some of the issues relating to patents.

Finally, we considered recent developments in information and

communication technology and biotechnology, and the ensuing issues
for globalisation.

REVIEW ACTIVITY
Potential world shortages in crude oil are in the spotlight today, due to the
political situation in Iraq, reduced production from Russia resulting from the
Yukos problem, and the increased demand from China.

Petroleum exploration companies are under immense pressure to increase

productivity quickly. Although in the very short term, developing new fields is
not the solution, the slightly longer term perspective requires development of
new reservoirs, possibly in ‘frontier’ geographical locations. The activities
associated with interpreting reservoirs and then optimally planning production
are very complex and require the integration of multi-disciplinary activities such
as seismology, geology, reservoir engineering, reservoir simulation, production
and economics.

In research activities undertaken recently, it has become evident there are

subtle similarities in the characteristics of certain classes of reservoirs, and that
the interpretation applied to one reservoir can broadly be re-applied in
context, and with refinement to another. Such similarities have been found
between reservoirs in diverse locations such as Alaska and Asia Pacific. This
discovery has the potential to reduce interpretation cycle time very significantly
and yield huge profits for oil companies.

Now assume that you are an International Manager working for one of the
global oil corporations. The operations of your company span the five

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continents. Interpretation activities are carried out globally. The nature of the
oil business is such that many operations are in the developing countries of the
world. You have been tasked by your senior management to investigate, and
propose to the Board the measures that should be put in place to exploit this
opportunity.

Prepare your brief. Consider factors such as global company infrastructure

(technology perspective), data management, knowledge capture and
knowledge management, standards, education and training, organisation
culture issues, collaboration with external parties.

References
The following are the references for your key text and other
recommended reading:

1. Archibugi, D and Michie, J (1997), Technology, Globalisation and

Economic Performance (Cambridge: Cambridge University Press)
2. Castells, M (2000), The Rise of the Network Society, 2nd edn
(Oxford: Blackwell)
3. Daniels, J (2000) International Business, 9th Edition , Addison
Wesley
4. Dicken, P (1998) Global Shift, 3rd edition (London:Paul Chapman
Publishing)
5. Dunning, J (1993) The Globalisation of Business (London:
Routledge)
6. Hirst, P and Thompson, G. (1999) Globalisation in Question, 2nd
edition (Cambridge: Polity Press)
7. Hill, C. (2000) International Business (McGraw­Hill)
8. Morrison, J. (2006) The International Business Environment,
Basingstoke, Palgrave Macmillan (key textbook)
9. Rugman, A., and Hodgetts, R., (2000) International Business, 2nd
edition, FT Prentice Hall
10. Tayeb, M (2000) International Business: Theories, Policies and
Practices, 3rd edition, FT Prentice Hall
11. Waters, M (1995) Globalisation (London: Routledge)

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Unit 9

International Financial
Environment

LEARNING OUTCOMES
Following the completion of this unit you should be able to:

· Describe the development of the International Monetary System,

and contrast the different foreign exchange rate systems operational
today.

· Assess the root causes of the Asian Financial Crisis of 1997, and the
lessons learnt

· Critically assess the roles of the institutions of global governance,

especially the IMF and World Bank. Propose changes for their future
role in international business.

Introduction
Largely due to specific in­country market liberalisations and advances
in communications technology, financial markets are now globalised.
But financial shocks, such as the Asian crisis of 1997­98, have shown the
vulnerability of the world’s financial markets and the rapid worldwide
reverberations that can result from a problem in one geographical area.

In this unit we shall examine the Bretton Woods institutions – the

International Monetary Fund (IMF) and World Bank – emphasising
their evolving roles in the global economy of the twenty­first century.
Students will be encouraged to critically examine their roles and make
proposals for change.

READING ACTIVITY
Please read Chapters 12, ‘International financial markets’ of your key text
Morrison, J (2006), which is essential reading for this unit.

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Development of International Monetary

System
Global finance, which includes equity investment, debt financing and
cross­border flows via money markets, has been evolving quite
dramatically since the 1980s. Much of its recent evolution has been
facilitated by advances in communications and information technology.

Let us briefly consider its evolution. Further details can be found in your
key text, Morrison, J, 2006.

The Gold Standard: (1870s – 1914)

Internationalisation of finance started to occur in the late 19th century

and the world’s trading partners adopted a global gold standard, by
which their currency exchange rates were fixed to the value of gold.

Bretton Woods System (1944 – 1971)

At the end of the Second World War with the increasing dominance of
the US in world trade, a new financial order was adopted, the Bretton
Woods Agreement. Under the Bretton Woods system, currencies were
pegged to the US dollar, with the US dollar being fixed to gold. A new
institution, the International Monetary Fund (IMF), was also created
under the Bretton Woods system to monitor national economic policies.
In 1971, President Nixon announced that the dollar would no longer be
convertible to gold, and this brought about the collapse of the Bretton
Woods system. Volatility in exchange rates followed.

Post Bretton Woods (1971 – to date)

Countries now determine their own exchange rates, under the oversight
of the IMF. However, the treasuries of specific countries do intervene in
the markets to prevent wild fluctuations, though they have in the main,
failed to counter any particular trends. A good example is that of ‘Black
Wednesday’ (September 1987) when the UK Treasury attempted to
prevent the free fall of sterling and lost nearly £1billion in the process.
Subsequently the UK exit the Exchange Rate Mechanism (ERM) of the
European Monetary System (EMS).

Stock Exchanges
Stock exchanges facilitate the buying and selling of shares in publicly
quoted companies (these companies are referred to as ‘listed’
companies). Stock exchanges are located in the major financial centres
of the world; New York, London, Paris, Tokyo, Frankfurt. These
exchanges are now highly inter­connected due to advances in
communications, and there has been a phenomenal rise in electronic

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trading systems, which facilitates global trading. Many global

companies seek listings outside their home countries. Newer exchanges
such as the NASDAQ, take on specialisations and focus on technology
and ‘new economy’ stocks.

When a company is publicly ‘floated’ its shares are offered through an

initial public offering (abbreviated as IPO). Companies raise capital in
this way.

Stock exchanges are subject to national regulations with the aim of

achieving transparency and market integrity.

ACTIVITY
In a previous unit, we noted how the dot.com mania of the late 1990s was
followed by dot.com bust in 2000. Most of the dot.com companies were listed
on NASDAQ.

Did failure on the part of financial regulators, in sufficiently regulating

NASDAQ, contribute to the dot.com crash? NASDAQ is more tolerant to
start-ups listing on the market compared to, say, the NYSE. Could this have
contributed to the over-valuation of start-ups? What regulatory areas could
have been tightened? Investigate.

Determination of Exchange Rates

Cross­border transactions necessitate the need for currency conversion,
and its payment method is known as foreign exchange. The foreign
exchange market is the largest market in the world, and over $1 trillion
is traded on a daily basis on the currency markets.

An exchange rate can be thought of as a price. Like any price its

determinants are demand and supply. However, monetary authorities
intervene in currency markets, and exchange rates are not always free to
stabilise at the level at which demand and supply are balanced.

Exchange rate systems vary from free market determination to

intervention. Let us examine the various systems:

1. Fixed exchange rate system: the rate is determined by

government.
2. Pegged exchange rate system: the value of the currency is linked
to another currency, usually the US$. Pegging a currency can
help create currency stability in a country with weak capital

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markets and regulating institutions. In such a system, a country

can be forced to devalue its currency. This usually accompanies
certain conditions such as economic reforms or reforms to
financial institutions.
3. Flexible systems: the currency is allowed to float according to
supply and demand.

The Bretton Woods Institutions

Both the IMF and the World Bank were created by the Bretton Woods
Agreement in the 1940s. The two institutions have survived the collapse
of the Bretton Woods system, but have evolved in their roles.

International Monetary Fund

Although the IMF was originally designed to promote exchange rate
stability, post­Bretton Woods its role has changed.

Today the IMF describes itself as ‘an organization of 184 countries, working
to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable economic
growth, and reduce poverty.’

Today the IMF’s emphasis in role has changed to being more focused on
providing assistance to developing countries and helping them achieve
long­term development objectives. It should be stated that this aspect of
its role is controversial, and many would question whether the IMF
really helps developing countries achieve long­term objectives.

The IMF also assists in financial crises and plays a proactive and
surveillance role in the financial structures of countries.

ACTIVITY
Find out more about the IMF by visiting its website at:

http://www.imf.org/

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World Bank
The original aim of the World Bank was to assist in development
starting with post­war reconstruction. To achieve its aims, it channelled
funds through governments for specific development projects.

Today, the World Bank overlaps to a large extent with the IMF, and
finances broad programmes, rather than specific projects. Both the IMF
and World Bank are now involved in general economic and social
development. In financing such programmes, the World Bank imposes
conditions such as institutional changes, privatisation and legal
reforms.

ACTIVITY
Find out more about the World Bank by visiting its website at:

http://www.worldbank.org/

VIRTUAL CAMPUS
Certain critics of the IMF have accused it of being a front for US business
interests, and that it really acts to open markets for US exploitation. State the
case for and against this, in the context of international business.

Post your submission on the Virtual Campus, and debate the positions of your
colleagues.

Asian Financial Crisis, 1997

The IMF has been criticised for its role in, and after, the Asian financial
crisis of 1997.

The Asian Financial crisis first hit Thailand and rapidly spread to the
region impacting on Malaysia, Indonesia and South Korea. The affected
countries were high­growth, economic ‘miracle’ countries that had
adopted the Asian model of capitalism. Although they were perceived
as having relatively stable economic environments, they were

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characterised by governments with close links with banks. Banking

regulation was therefore weak and certainly not independent.

The crisis that started in 1996 in Thailand led to sharp declines in the
currencies, stock markets and other economic indicators of the affected
countries. It threatened their financial systems and disrupted their
economies, bringing unemployment hikes and spiralling prices.

Opinions vary on the root cause of the crisis, but it is widely

acknowledged that rapid liberalisation of national financial systems
without proper government controls and risk assessment triggered the
crisis. Liberalisation was aimed at attracting greater international trade
and investment, but also brought with it the risks of volatility. The weak
banking sector engaged in imprudent lending for development projects
(mainly in property, in Thailand). There was poor assessment and
management of financial risk. Banks and corporations borrowed huge
amounts of international capital. Foreign capital was often used to
finance the poorer quality investments.

Although private sector expenditure and poor financing decisions

directly led to the crisis, weak government handling was largely to
blame. In particular, lack of adequate controls and policing of the
private sector, coupled with issues in corporate accounting practices.

Thus over­investment and the exposure of questionable investments

led to a sharp decline in confidence and there followed a flight of capital,
caused by the departure of large inward investors.

Lessons from the Asian Crisis

There are many lessons to be learnt from the financial crisis and the IMF
intervention that followed.

Firstly, the success of liberalisation programmes are critically

dependent on sound and independent banking systems. Lack of proper
financial risk assessment and risk management on the part of lenders,
including the IMF, led to speculative investments to thrive in these
countries.

The crisis also exposed the vulnerability of pegged exchange rates. The
currencies of the countries involved were pegged to the US dollar.
When the foreign exchange markets came to the realisation that the
currencies of these countries were overvalued, and the currencies had to
be devalued, the monetary authorities in Thailand, Indonesia, Malaysia
and the Philippines decided to abandon undertakings to peg the value
of their currencies to the U.S. dollar. Further volatility followed.

Finally, the crisis has emphasised the risks involved in short­term cash
flows, which by nature are more volatile than long­term investment.

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But there are also lessons to be learnt from the IMF intervention that
followed the crisis. Many argue that the IMF actions exacerbated the
problems and led to social and economic unrest in these countries. The
‘one­size­fits­all’ market­oriented model adopted by the IMF has been
highly criticised for not taking into account country­specific issues.

CASE STUDY
There is an on-going global debate on the role and accountability of the IMF in
international development.

One of the purported aims of the IMF is to assist developing economies enter
the global marketplace with liberalised trade. The IMF is known to be
prescriptive in macroeconomic policy and other country reforms, imposing
strict conditions tied to its loans to governments. Even before the Asian crisis,
there have been strong criticisms of over-lending by the IMF and its imposition
of what is perceived by many as damaging structural reforms. Many argue that
following the Asian crisis, the IMF’s short-term macroeconomic policy
enforcements led to economic and social instability in many of those countries.
This view is expressed by the former World Bank Chief Economist, Joseph
Stiglitz.

A further criticism of the IMF concerns its role in global governance. Critics
argue that the IMF has gone way beyond its original mandate and has taken on
too dominant and arrogant a role intervening in the poorest countries of the
world by micro-managing their economies. At the same time no progress has
been made in debt relief and trade reform, key factors that hold back the
development of the poorest countries of the world.

Research the impact of IMF intervention in Indonesia and in Zambia.

What economic, social and other consequences have there been, as a result of
IMF involvement in these countries?

KEY POINT
There are many lessons to be learnt from the Asian financial crisis of 1997-98.
Lessons that have implications more generally, including implications for the
IMF:

· An independent banking system is a pre-cursor to the liberalisation

of national financial systems.

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· There are risks from short-term capital flows. Short term

investments exhibit higher volatility than long-term
investments.

· There is vulnerability in pegged exchanged systems.

· Financial crises arise for a number of reasons, including local

factors. IMF solutions must take into account national factors. A
‘one size fits all’ solution is not applicable across varying
national conditions.

Mergers and Acquisitions

We briefly consider Mergers and Acquisitions (abbreviated as M&A)
activity because M&A has become the main vehicle for FDI.

M&A activity is a key part of company growth strategies. Today M&A

activity is rife due to consolidation in mature industries, but
increasingly because foreign mergers and acquisitions are viewed as
fast track paths to global expansion. In 1999 M&A activity totalled a
staggering $3.4 trillion. 50% of all mergers in the US, EU and Asia were
cross­border M&As.

By mergers and acquisitions, corporations seek to create economic

value through economies of scale, economies of scope, access to global
markets, improved target management, tax benefits, or the availability
of low cost financing for financially constrained targets.

A merger is defined as the joining of two or more companies to form a

single legal entity. Generally, the assets of the smaller company are
merged into those of the larger, surviving company and shareholders of
the target company are either bought out or become shareholders in the
acquiring corporation. A merger usually requires approval by the
shareholders of both the acquiring corporation and the target entity.

There are several types of merger:

· Horizontal mergers involve two firms operating in the

same kind of business.

· Vertical mergers involve different stages of production

and operations.

· Conglomerate mergers involve firms engaged in

unrelated business activity.

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An acquisition is the purchase of more than 50% of the voting shares of

one firm by another. Following the acquisition the two companies can
continue as separate legal entities, with the acquiring company referred
to as the parent company and the target as a subsidiary. The parent
company can be termed a Holding Company if it plays no active role in
the management of the subsidiary.

Acquisitions are sometimes described as ‘mergers’ to be politically

correct. This is especially so in the early stages of an acquisition.

Acquisitions are more common than mergers.

A hostile takeover is when the target company tries to resist the

takeover. A recent example of this, in the UK, was the failed hostile bid
on Marks and Spencer by the entrepreneur Philip Green.

A de­merger is the spinning off of a part of the business as a separate

company. De­mergers have been on the increase in line with current
management thinking and the strategic focus on core businesses rather
than a diversified portfolio.

In the transitional democracies of the world (former Soviet Union states,

COMECON, Tiger economies), privatisation of state­owned companies
is commonplace. Frequently this involves a foreign player.

ACTIVITY
There has been a phenomenal rise in M&A as companies attempt to ‘fast track’
global ambitions via this route. Despite this increase, a large proportion of
mergers and acquisitions fail. One of the main reasons is the poor quality of
output from the due diligence and valuation process. (Note that due diligence is
the process by which a potential investor examines and verifies the material
facts associated with the operations and management of a potential
investment.)

Due diligence is a particular challenge in international business, particularly in

the emerging markets of the world. Why is this so, and what specific issues
should International Managers be looking out for?

ACTIVITY FEEDBACK
There are many challenges associated with due diligence.

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One is that accounting standards in the emerging countries of the world are
often not consistent with international standards, and can lead to
misunderstanding/errors leading to over-valuation. Adjustments have to be
made for hidden liabilities (often legal), overvaluation of inventories, accuracy
of real estate valuations, accruals, retirement and pension liabilities, complexity
of cross-border adjustments.

Secondly, sales and marketing forecasts may be unreliable, and over-optimistic.

Validation of information is required with customers, suppliers and lenders.

Finally, there may be cultural/political issues that might hinder co-operation

from all levels of the local company.

KEY POINT
M&A activity is a key part of global expansion strategies. Thus cross-border
M&A activity is on the rise. Mergers can be horizontal, vertical or
conglomerate.

Due diligence is a particular challenge in emerging markets. Some of the issues

include differences in accounting practices, unreliable sales and marketing
forecasts and cultural/political issues that inhibit co-operation.

Developing Countries and the

International Financial Environment
The reality today, for the poorest developing countries, despite the hype
about globalisation, is that very few attract capital flows. Asian
countries and Latin America have been the ‘winners’, whereas African
countries attract very little foreign investment. Even where the
‘winners’ are concerned, FDI has in some instances brought its own
share of problems. Where FDI has resulted in over­investment and
brought about significant and unrealistic growth, financial instability
and crises (e.g. Asian crisis of 1996/97) have resulted.

For the poorest countries of the world, lack of FDI investment has led to
a reliance on IMF aid. This is a particular problem for Africa, and many
countries on the continent are ridden with debt. The IMF conditions its
loans to the poorest nations with austerity, anti­social welfare and
anti­labour policies aimed at debt repayment. It forces them to prioritise
exports over domestic growth. These countries find themselves caught

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up in a vicious cycle. They are unable to attract foreign investment

because of huge debt. Among 41 countries eligible for debt relief in 2000,
the average debt load was a staggering 125% of their GDP (New York
Times, October 2000). Many charities have urged Western countries to
commit to cancelling all remaining Third World debt. Granting debt
relief would, at least, ease the burden of interest payments.

The poorest countries would welcome trade with the developed world,
and harness opportunities for export of agricultural produce and
textiles. Trade reforms are necessary to facilitate this, and these reforms
are reliant on the good will of the richest nations.

Many argue that the institutions of international governance, namely

the IMF, World Bank and WTO, should take up the cause of the poor
countries of the South and work for fair trade and redistribution of
wealth. The nations of the North would differ and push for fiscal
discipline. Currently the institutions of international governance are
biased towards the nations of the North.

KEY POINT
The poorest countries (many African states) attract little FDI. The biggest
challenge for these countries is a dependence on IMF aid and a huge debt
burden.

The role of the IMF, WTO and World Bank, are questioned in the context of
supporting these poorer countries in their development efforts. Currently the
IMF, WTO and World Bank are biased towards the nations of the North.

CASE STUDY
Read and answer the question contained in the case study 12.2: ‘The lessons of
financial crisis in Indonesia’ on p. 403-404 of your key text, J Morrison.

VIRTUAL CAMPUS
Post your answers on the Virtual Campus. Learn from the feedback of your
colleagues.

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Summary
In this unit we have examined the international financial environment;
the stock exchanges, and foreign exchange systems. We have looked at
the role of the institutions of international governance, namely the IMF,
World Bank . In a previous unit we looked at the role of the WTO. We
have considered the Asian financial crisis of 1997, the likely causes and
the lessons learnt.

We have also briefly considered Mergers and Acquisitions which are

viewed as vehicles for accomplishing global expansion.

Finally, we have questioned the role of the IMF both in the crises of Asia
(and indeed elsewhere) and also with regard to Third World poverty.

REVIEW ACTIVITY
Given the criticisms of the IMF’s role in the Asian crisis (and other crises in Latin
America), and in the poorest countries of the world, what proposals for change
would you suggest for the IMF?

Be specific in your proposals and identify the benefits to (i) the developing
countries (ii) the richest countries and (iii) for worldwide financial stability. Also
identify any potential drawbacks.

References
The following are the references for your key text and other
recommended reading:

1. Daniels, J (2000) International Business, 9th Edition , Addison

Wesley
2. Dicken, P (1998) Global Shift, 3rd edition (London:Paul Chapman
Publishing)
3. Dunning, J (1993) The Globalisation of Business (London:
Routledge)
4. Eichengreen, B (1996), Globalizing Capital: A History of the
International Monetary System, (Princeton: Princeton University
Press)
5. Hirst, P and Thompson, G. (1999) Globalisation in Question, 2nd
edition (Cambridge: Polity Press)

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6. Hill, C. (2000) International Business (McGraw­Hill)

7. Michie, J. and Grieve­Smith, J (2ds) (1999), Global Instability: The
Political Economy of World Economic Governance
(Andover:Routledge)
8. Morrison, J. (2006) The International Business Environment,
Basingstoke, Palgrave Macmillan (key textbook)
9. Rugman, A., and Hodgetts, R., (2000) International Business, 2nd
edition, FT Prentice Hall
10. Tayeb, M (2000) International Business: Theories, Policies and
Practices, 3rd edition, FT Prentice Hall
11. Waters, M (1995) Globalisation (London: Routledge)

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