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Rosemarie: I don’t really care to supervise these people. They are not very hard working and they resent being shown the proper way to do their jobs. They seem to think they know it all – but they don’t. We could do 25 percent more work if they would just do things the way I show them.

Workers: In the beginning we got along just fine with Rosemarie. However, our feelings have changed. She may have been a great worker but she’s a lousy boss. She has very little human relations skill. She tells us what to do, gets angry if we don’t do things her way, and is critical of anything less than perfect performance. It’s no fun working for her.

1.In terms of the skills of a manager, which one does Rosemarie have in abundance? Explain.

2.What exactly seems to be Rosemarie’s problem? Why is she having trouble with her work group? Why do they dislike her management style?

3.If you were Rosemarie’s boss, what would you tell her? How would you attempt to help her? Be complete in your answer.

Unit 2

GLOBAL BUSINESS:

BRIDGING NATIONS AND CULTURES

READING I

MULTINATIONAL COMPANIES

Think ahead

1)What is the nature of international business and what does it comprise?

2)Multinational companies can either attempt to use similar management methods in all their foreign subsidiaries, or adapt their methods to the local culture in each country or continent. Which procedure do you think is the most efficient?

Key concepts and terms

Match up the words on the left with their definitions on the right.

1)globalisation

2)cost

3)isolationism

4)offshore

5)trade barrier

6)licensing

7)subsidiary

8)joint venture

9)asset

10)economies of scale

11)default

a)a policy of nonparticipation in or withdrawal from international affairs

b)a general term covering any government limitation on the free international exchange of merchandise, i.e. laws, institutions or practices which make trade between countries more difficult than trade within countries

c)any property owned by a person or firm

d)a company with at least half of its capital stock owned by another company

e)the process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications

f)based or operating abroad in places where the tax system is more advantageous than that of the home country

g)the value of the inputs needed to produce any good or service

h)factors which cause the average cost of producing a commodity to fall as output of the commodity rises

i)a business where the provision of risk capital is shared between two or more firms

j)a failure to make payments or repayments of interest or principal on the due date

k)allowing another firm, for payment, to make use of a patent or trademark

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Text 2.1. Read the text and define globalisation.

Globalisation Process

Globalisation is a process by which the people of the world are unified into a single society and function together. This process is a combination of economic, technological, sociocultural and political forces. Globalisation is often used to refer to economic intergaration, i.e. the trend towards increased integration of national economies and business activities into the international economy through trade, foreign direct investment, capital flows and migration throughout the world. This policy is a response to the needs of large companies to both gain economies of scale and take opportunities throughout the world.

Among convergent forces supporting and stimulating global harmonisation and the emergence of the global village are openness and transparency among nations, willingness to cooperate, recognition of interdependency and reduction of trade barriers, increased awareness and respect for other cultures, convergence of consumer tastes, developments in communications, common concerns for ecology and social consequences. These forces are the first steps to building a global civilisation. But there are many difficulties and paradoxes. For instance, we know of the Westernisation of tastes in many countries of Asia, the Middle East and Africa. Rashly, we may see these as “harmonisation”. At the same time, however, we recognise ethnic, religious and cultural differences within and between nations. Western industrialism and commercialism meet Islamic fundamentalism and Confucianism. The obstacles to harmonisation are powerful. They include uneven distribution of natural resources, different and shifting climates, contrasting stages of economic development, the rich and the poor within nations, flows of the brightest out of poorer countries, conflict among ethnic and cultural groups, as well as rising divergence within languages such as English.

W o r t h y o f N o t e

The globalisation and isolationism go side by side. Isolationism tried by some countries does not work. Autonomy and difference can only be sustained within a framework of worldwide cooperation.

Countries, companies and individuals increasingly accept the need to do business with each other. International business is simply that which takes place across national boundaries. At first we may think just of trade. Then we recognise the presence of foreign firms in most countries. These companies, often among the largest in the world, have made investments in foreign operations that go beyond simply trading from their home base. Foreign investment tends to be handled by the large multinational enterprises. One more popular method of development is the international joint venture.

Text 2.2. Read the text and point out four main methods of doing international business.

Forms of International Involvement

The terms multinational and transnational, enterprise and corporation, are used interchangeably when referring to organisations operating across frontiers. Hence, we have MNEs, TNEs, MNCs and TNCs.

While different scholars identify different methods of international business, many modern scientists focus on the four main methods of engaging in international business – trading, licensing, cooperating and investing. These are sometimes presented as a set of stages through which most home businesses develop into multinational enterprises (MNEs). However, an organisation may start with any of the methods and proceed by using others. The diagramme below* shows some of these routes. The business may not start out with the intention of becoming an MNE. Yet, as the diagramme shows from left to right, this is a likely development when the business gathers strength and experience in international affairs. The sequence of four main policies represents an increased degree of control over foreign operations. Given the need of large corporations both to control their activities and to strongly influence their operating environments, the expanding MNE moves towards the lower right-hand corner of the diagramme.

* Naylor J. Management. Pearson Education, 2004, p. 116.

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Trading, or Export-Import

Once an enterprise has become a MNE, its operations in different countries will themselves engage in international trade. The ability of the multinational company to rationalise and coordinate these activities, and use them to avoid trade restrictions, is one of its strengths. Companies that use international markets usually employ multiple strategies for their operations. Some of these strategies are unique to international operations and require personnel with specialised knowledge. For example, exporting goods from one country to another involves special transportation, packaging, documentation and financing, as well as knowledge of the laws and customs of the host country. Some examples of general methods of trading are: individual sales, exclusive sales agreements, independent agents, distributors, subsidiary companies, etc.

Licensing

International licensing is the sale to an organisation in a host country of the right to use items recognised in law, such as patents, designs, works of art, trademarks, or other intangible assets. For these transactions, it is especially important to have personnel with specialised legal knowledge, since each country treats these assets and their transfer differently. Licensing involves trade in intellectual property. Some organisations, from research centres of universities to the entertainment conglomerates of Hollywood, trade almost entirely in intellectual property, looking for worldwide exploitation for their profits.

Franchising is the system by which independent firms are authorised to use a common business system. This may include the use of a brand name, designs, patents and operating systems, provision of equipment, training, capital or credit by the franchiser. This system combines the advantages of incentive for the operating firms and economies of scale in research, development and advertising for the franchiser. The holders of franchises are subject to supervision of their operations in order to maintain the reputation of the franchised product.

Cooperating, or Forming Strategic Alliances

Strategic alliances involve all types of cooperation between two or more partners for mutual benefit. Applied to international business, a frequent arrangement is for one party to offer product and process expertise and, possibly, capital, while the other is a local company, bringing with it relevant political, market and management experience. Alliances are generally for experienced companies willing to commit themselves to long-term links. The attraction of this form is integration into a global network, including economies of scale, without loss of independence. Cooperation can take many forms: joint ventures, joint selling organisations, consortiums and others.

Investing

Investments imply international capital transfer from one country to another aiming at profit gaining and social effect. There are direct investments acquiring the right of ownership and portfolio investments.

Some other forms of international business include (1) factoring – transacting business for another as a home or foreign agent who buys and sells in their own name, being entrusted with the possession and control of the goods; (2) offshore – locating or conducting business abroad in order to take advantage of lower costs and taxes or less stringent regulations; (3) tolling – a kind of joint production when one company works on the raw materials of the partner, whereby one part of the produced goods compensates the value of the raw materials to their supplier and the other part is sold to third countries.

Text 2.3. Read the text and then

•explain the difference between international and multinational firms, and

•elicit the industries in which the world’s largest corporations operate.

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Who Are the Multinational Enterprises?

Features of Multinational Enterprises

A continuum exists from the domestic company to the international company and to the multinational company.

Domestic		International		Multinational
purchases and	sales	direct	purchases and/or	usually, one	or	more
only within	one	sales	in home country	subsidiaries	in	host
country		and one or more host		countries
		countries

As the table shows, a domestic organisation limits its purchases and sales to a single country. An international organisation has interests that cut across national boundaries; it imports or exports goods, services, or products.

If asked to define a multinational, most people would say that it is a company doing business in more than one country, a company that has one or more subsidiaries abroad and that is willing to go to any place in the world to secure resources and make sales. Many experts, however, would not be satisfied with this definition. They believe that it does not indicate the size and scale of the multinational’s activities. To be a “true” multinational, they say, an organisation should operate in at least six countries and have no less than 20 % of its sales or assets in those countries. In addition, it should “think internationally”. That is to say, the management should have a “global perspective”. It should see the world as inter-related and inter-dependent.

In general a business does not have to be huge to be multinational. On the other hand, most of the largest are multinational and have subsidiaries in sixty to eighty countries. Some get over than half of their profits from overseas business.

W o r t h y o f N o t e

An MNE is an enterprise that has its headquarters in one place (the home country) but has operations in others (the host countries). This is a form of international business in that it is involved in both trade and investment across frontiers.

Key characteristics of these organisations can be derived.

•MNEs must respond to environments in both their home and host countries. They supply products for which demand is high in many corners of the world and have built their size through the internalisation of markets: the petroleum companies control all stages from oil wells to service stations; the motor and engineering companies work by exploiting their technical innovations and process skills on the world stage; the service providers – telecommunications, retailing and insurance – match the high demand for these functions in and between the world’s major economies.

•Turnover is but one measure of size.

•The strength of the MNE is drawn from its pool of resources and the company can plan and control all its resources.

•MNEs are also assessed on the basis of employment or capitalisation. After all, for many observers, a big company is one with many staff and huge facilities.

•Multinational corporations are also ranked by the amount of foreign assets that they own.

Transnationality Index

Among leading MNCs, commitment to international activities and investments varies. UNCTAD (United Nations Conference on Trade and Development) calculated the transnationality index. The Transnationality Index (TNI) is a means of ranking multinational corporations that is employed by economists and politicians. It is calculated as the average of the following three ratios (where “foreign” means outside of the corporation’s home country):

•the ratio of foreign assets to total assets;

•the ratio of foreign sales to total sales; and

•the ratio of foreign employment to total employment.

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Text 2.4. Read the text and name reasons why firms become MNEs.

Why Become an MNE?

Reasons for International and Multinational Operations

Foreign operations provide opportunities not available to domestic companies. Since markets abroad imply additional people and income, the company can expect greater sales and greater market opportunities. The following points summarise the reasons why firms become MNEs.

• Reduction of costs

Costs can be reduced through foreign operations in many ways. One method is to acquire cheaper inputs to production in the form of labour, raw materials, power, or capital. Another method is to get an access to scarce resources or to buy existing sales outlets abroad so that competitors are prevented from gaining control over essential supplies or markets. Since business cycles vary among countries, the dependence on multiple rather than one-country markets may help stabilise a company’s earnings as well.

• Avoid reliance on home base

There may be difficulties in the home country. For example, the market could be highly competitive or subject to constraints imposed by government controls or difficulties in distribution. Lack of human and other resources may also mean that the prospects are not good. Finally, the market may suffer from a nation’s business cycle, meaning that income and profits vary widely. In all these cases, entering a new country is a form of diversification. The company will look for an operating environment whose characteristics differ from those of its home base and are more favourable.

• Take opportunities abroad

Involvement ranges from exports of all types of goods to direct investments.

• Improve competitiveness

Firms become MNEs in response to threats from international competitors. This behaviour may be in retaliation against a rival entering the home market.

• Respond to creation or removal of trade barriers

Trade barriers are designed to protect national markets from overseas competition. Such obstacles have accelerated the trend among manufacturers in developed countries to shift their operations to lowcost countries.

• Improve operations

Direct control of operations in a foreign country can result in service improvements and reduced costs. This is the advantage of an MNE compared with trading in the market or using agents. Provided the business is of sufficient scale, direct control enables more rapid response to customers, selection of the most efficient pattern of production, as well as distribution and elimination of intermediate traders and inventory holders.

• Apply knowledge

Innovative firms have the potential to reap benefits from their developments. These can be in all aspects of business from products to processes. One way of rapidly exploiting these inventions on a world scale is to allow others the right to use them in their own regions on the basis of licences and franchises.

Concept check

1.How can you describe the process of globalisation?

2.What forces encourage the process of globalisation?

3.What are the four main methods of engaging in international business? Fill in the table to describe

them.

	Methods of	General characteristics and details
	international involvement

1)Trading

2)…

3)…

4)…

4.What other forms of international business do you know?

5.What is the difference between domestic, international and multinational forms of operation?

6.What is a multinational enterprise? Give examples of multinationals from various industries.

7.What are the features of multinationals enterprises?

8.What are the reasons for firms to become MNEs?

9.Complete the following sentences.

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1)Businesses operate internationally by exporting or importing goods and services, …

2)An MNE is an enterprise … .

3)Multinationals must be capable to react to … .

4)The Transnationality Index is a method of … .

5)Reduction of costs is one of the reasons … .

READING II

ENVIRONMENTAL CONSTRAINTS

Think ahead

Does the relationship between multinationals and governments vary dramatically from country to country? Give examples to illustrate the answer. What are the reasons for it? How to overcome these impediments?

Key concepts and terms

Match up the words on the left with their definitions on the right.

1) transfer price	a) unfair treatment of a person, racial
	group, minority, etc.
2) equity	b) an owner of corporate capital stock
3) codetermination	c) the interest of ordinary shareholders in a
	company
4) discrimination	d) established by or founded upon law
5) exchange rate	e) joint participation of management and
	employees or employees’ trade union
	representatives in some decisions
6) legal	f) a price for the transfer of raw materials,
	components, products, or services between
	the trading units of a large organisation
7) corporate culture	g) the rate at which the currency unit of one
	country may be exchanged for that of
	another
8) merchandise	h) the distinctive ethos of an organisation
	that influences the level of formality,
	loyalty and general behaviour of its
	employees
9) stockholder	i) commercial goods; commodities

Text 2.5. Read the text and find out what kinds of environmental constraints may be encountered in international business.

Clash of Interests

Introduction

There are a number of legal and other problems faced by multinational organisations. For example, the interests of the host country in which the subsidiary is formed may conflict with those of the home country of the multinational. In such cases the laws and public policies of the host country prevail over those of the home country. Because of their global approach, multinationals often make decisions which are against the interests of their host countries. Multinationals are criticised by foreign governments for different reasons.

•Multinationals may decide, for example, to close down their plant in Country A because they wish to concentrate production in Country B. Obviously, this will be an unpopular decision in Country A. The government of that country will probably put pressure on the multinational to change its mind.

•Sometimes a subsidiary in one country will supply another subsidiary with cheap or below-cost products (use transfer prices). This happens when a subsidiary has just started up in a country. The other subsidiary will help it to get on its feet.

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• Difficulties often arise when a multinational wishes to transfer its earnings back to the Head Office. The host country mау fеel that the transfer will have a bad effect on the exchange rate of its currency. Or, it may want the multinational to reinvest profits in the business.

The list of complaints against multinationals is a long one and the interests of multinationals and foreign governments frequently clash. This can lead to controversy between the parties, and even bitterness. As a result, many countries have tried to restrict operations of such companies. Some governments insist that a certain percentage of the equity of a foreign company must be owned by local investors. Other countries are confident that a certain percentage of managers of a multinational must be local staff. Such restrictions on managerial actions explain why management practices differ from country to country.

W o r t h y o f N o t e

Although every aspect of business operations including marketing, finance and accounting can be affected by various constraints, a special emphasis should be put on those limitations that affect the overall policy of a multinational.

Legal Constraints

Each country has its own set of laws, and these laws are a combination of formalised and traditional practices. It is often difficult for multinational companies to recognise that all countries have certain laws and certain practices that, although not specified in the written law, are nevertheless so customary that all companies are expected to follow them. Multinationals are apt to face more difficulties than domestic companies because their managers may lack the experience necessary to recognise subtle differences between law and practice. Furthermore, multinationals may receive a great deal more criticism than domestic companies for not following the letter of the law. For example, in many countries the tax law is routinely circumvented whenever possible by the citizens. Yet, if multinationals circumvent it to the same extent, a public outcry may ensue, and the multinationals may even be expelled from the country.

Countries also vary greatly in their hiring laws and practices. It concerns differences in the employment legislations, especially such things as nondiscrimination by sex, religion, race, national origin, as well as retirement age. Most countries differ in the practice of reducing their work force and laying off workers during slack periods.

Another area of marked contrasts is the policy of codetermination. Under this policy, labour representatives are included in management or on boards of directors. The inclusion ensures that workers gain information that normally is hidden from them and that they can share in policy making decisions.

Political Constraints

Multinational companies usually must receive permission from political authorities in the country where they plan to operate before setting up facilities. In order to get the permission, they may have to agree in advance to follow certain practices. Negotiations with foreign governments can deal with such issues as what a firm will do about pollution, whose ships will carry its merchandise, how much of its earnings will be reinvested, and who will serve in its management and on its board of directors. Once these issues have been resolved, the multinationals may find themselves operating under a political system very different from their own.

Because of the large size of multinational companies in relation to the small size of some host countries, their operations are often scrutinised by the highest level of a country’s government. Even in the ex-Soviet Union corporate leaders such as Armand Hammer of Occidental Petroleum or Henry Ford II of Ford Motor Company talked directly to top-level officials at the Kremlin. The necessity of such communication can hardly be considered advantageous. It often forces managers to deal directly with systems with which they do not agree personally, and the close connections with foreign government leaders often create adverse public opinion at home about the firm’s foreign operations.

Problems are also arising from joint operations between multinational companies and foreign governments. A multinational, for example, can share ownership of plants with the local government. The objectives of such an alliance may be the maximisation of employment or minimisation of prices, and these objectives must take precedence over the maximisation of profit.

Economic Constraints

Economic and social conditions vary from country to country. For example, small countries are often plagued by low levels of education, poor social services, inadequate transportation facilities and utilities, high levels of unemployment and small markets. These conditions dictate certain differences in the

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production process. For example, a high unemployment rate inclines a government to push for both low wage rates and absorption of as many people as possible into the work force. The result is that companies may have to use labour-intensive types of production instead of the machine-oriented production common to industrialised countries. Further complications may then arise because of low levels of education, which may necessitate additional training and supervision. Quality control and product uniformity are additional potential problems whenever people are used instead of machines.

The economic system of a country may also prohibit many of the practices that keep firms competitive on the world market. In the ex-USSR, for example, multinational companies were prohibited from owning production facilities and from promoting their products as they did it at home. Some US steel producers argued that the very close connection between Japanese firms and their government made it almost impossible to export products into that market because locally owned firms were favoured regardless of price.

In other countries certain functions are heavily controlled by government agencies. By controlling the economy, governments also exert considerable control on the decision-making of individual companies.

Text 2.6. Read the text and examine cultural differences that affect foreign business operations.

Cultural Constraints

Cultural Differences in International Business

Apart from practical and technical problems (to which solutions are often readily found), national psychology and characteristics frequently interfere at the executive level, where decisions tend to be more complex than the practical accords reached between accountants, engineers and other technicians. Corporate cultures vary widely inside one country; national business styles are even more diverse. In a Japanese-US joint venture, where the Americans are interested mainly in profits and the Japanese in the market share, which direction is to be taken?

As the globalisation of business brings executives more frequently together, there is a growing understanding of the fact that if we examine concepts and values, we can take almost nothing for granted. The word “contract” translates easily from language into language, but notionally it has many interpretations. To a Swiss, German, Scandinavian, American or British person it is something that has been signed in order to be adhered to. Signatures give it a sense of finality. But a Japanese regards a contract as a starting document to be rewritten and modified as circumstances require. A South American sees it as an ideal which is unlikely to be achieved, but which is signed to avoid argument.

Our society has trained us to adopt certain concepts and values. We know that many of these concepts are shared by other cultures. What we often overlook is the fact that everyone has different notions of these concepts which appeal to so many cultures. Chinese duty is not American duty. There are few countries in Europe or the world where people do not believe that they are the best, or the most intelligent, or at least normal. If each culture considers itself normal, it may choose to consider everybody else abnormal.

Cultural Constraints

Norms, or standards of behaviour, vary from country to country. They are difficult to assess and thus are one of the most subtle environmental constraints for companies as they expand abroad. There is growing evidence that a certain few behavioural variables, described in the following list, are most decisive.

1)The prestige of work and particular occupations and professions within the society: Certain types of occupations have higher prestige in some countries than in others.

2)How managers react to the job: Managers from different countries reveal significant differences in their willingness to take personal responsibility for solving problems, in setting for goals achievement, taking calculated risks and requesting concrete feedback about performance.

3)The preference for individual versus group-oriented compensation: Remuneration depends on whether individual or group achievements are emphasised.

4)The identification of individuals with certain groups: The group affiliations are based on such things as gender, family, age, religion, political preference, ethnic background and occupation. Membership in various groups often reflects the degree of access to economic resources, prestige, social relations and power. If a company does not understand the subtle meanings of these group affiliations, it may hire people who will be unacceptable to their peers and subordinates.

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5) Social mobility: Culture or traditions dictate certain occupational norms. The more open or mobile the society, the more likely it is that a person can obtain а job strictly on the basis of his or her qualifications.

These are but a few examples of many cultural differences that affect foreign business operations. They indicate the caution appropriate for any multinational company operating abroad. Before introducing a change into the environment of another country, an organisation should determine if the benefits of that change are worth the costs that will be incurred. Then, if the change is still deemed wise, the company should ensure that local persons participate in the decision-making and in the rewards of that change. Those in charge of implementing the change should watch for obstacles arising from a host society’s fears that social structures may be upset. Sometimes the time is simply not right for modifying practices or implementing new ones.

Concept check

1.Why do interests of multinationals and foreign governments often clash?

2.Can governments put pressure on multinationals to change their decision? In what way?

3.What types of constraints might affect international or multinational operations? Fill in the table to describe these limitations.

Constraints

Scope and essence of the constraints

1)Political

2)…

3)…

4)…

4.What cultural constraints may affect foreign business operation?

5.What are the most decisive behavioural variables?

6.Read the statements and decide whether they are true or false.

1)The interests of the host and home countries, on the one hand, and the interests of multinationals and foreign governments, on the other hand, may often contradict each other.

2)As a rule, foreign governments do not object when multinationals transfer their profits back to the Head Office.

3)Multinational companies only recruit local staff for managerial positions.

4)Management practices used by companies are practically the same in all countries.

5)By regulating the economy, governments also take considerable control of the performance of multinational companies.

6)It is common knowledge that corporate cultures do not vary widely inside one country.

7)Investigating cultural peculiarities, we can take almost nothing for granted.

READING III

CROSS-CULTURAL MANAGEMENT

Think ahead 1

1) Which of the following do you think have been the most important influences on you? Do you think the same is true for most people?

•Nature: your genes or DNA, the characteristics you inherited from your parents and were born with, your emotional and physical make-up

•Your family environment in early life

•Your friends and social life, the things you do in your free time

•Primary and secondary school, teachers and what you learnt

•Higher education: college, university, teachers, colleagues, the subjects you studied (or are studying)

•Your job

•The culture of your particular company

•Your colleagues: the people in your team or department

•The characteristics that are considered typical of people from your country, arising from geography, climate, history, religion, the political, social and economic system, and so on

2) Do you believe that it is possible to sum up national characteristics in a few words? Is there usually some (or a lot of) truth in such stereotypes? Or, on the contrary, do you find such stereotyping dangerous?

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3) Do you think the culture of your country is similar enough to those of neighbouring countries to have the same attitudes to work, hierarchy, organisation, management techniques, and so on? Or are there countries nearby where people have very different attitudes to these things?

Think ahead 2

If you already have a job, use that job and company to answer these questions. If you are still studying, answer these questions hypothetically.

1)Some practitioners talk of tailoring individuals’ needs and abilities to the operational needs of the company. For management positions, do you think the job or task should be adapted to the person who does it, or should the individual employee adapt to the needs of the job?

2)Would you like to work for a company that has a pay-for-performance policy? Does this only work for salespeople, or could it be extended to all jobs?

3)Do you (or would you) like to work in a team?

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