During the 1990s and early 2000s, many companies took advantage of a world market that was increasingly open to international expansion and trade. Obstacles to free trade were eased through the General Agreement on Tariffs and Trade (GATT), the North American Free Trade Agreement (NAFTA), and the Association of South East Asian Nations (ASEAN).
Economies opened, and due to technological developments in communication, transportation, and finance, there were fewer difficulties with the practical issues of conducting business across national borders. Communications technology showed exponential growth, including innovations that facilitated doing business anywhere at anytime, such as remote access and net conferencing.
As shown in Table 1, the number of Internet users in the world grew from 30 million to over 562 million over six years. By 2002 almost 10 percent of the world population used the Internet. As of 2008, more than 21 percent of the world population is online.
|Internet Users 1996-2002|
|Year||Internet Users (millions)||Internet Users as a Percentage of World Population|
Accompanying all of these changes was an increase in need for international management for people who understand business and cultural issues well enough to manage and grow an international business effectively. Among those issues are:
- Business structure
- Political and economic environments
- Finance and business issues such as contracts, taxation, intellectual property, and risk
- Employment and leadership
- Cultural norms and values
An international manager has the task of reopening business in a radically different environment. He or she must determine the overall structure of the business and its workflow. In a functional-based business (i.e., the new location needs to be able to perform standardized tasks that comply with overall corporate practices), skilled labor and ability to perform these tasks is key.
Technological infrastructure could be a crucial factor. For an area-based business, location is key, and detailed knowledge of the country and its culture is critical. Products may have to be adapted to the host market.
A global-based structure may have a varied set of product lines, each of which can be made and marketed across locations. These approaches can be mixed, but choosing the structure of the business should support the firm's primary goals.
Many businesses start by first establishing the new office or facility as an “export division” that falls under the umbrella of Operations or Marketing—which may eventually become an “International Division.” How this new entity best fits within the parent organization's overall structure depends on the purpose for the new location and how much the parent company plans to grow the business.
Other options include opening a wholly owned subsidiary or an overseas joint venture, contracting from an international company (IC) to manufacture products to specification, or purchasing supplies and/or materials from an IC manufacturer.
Other considerations include the additional costs of globalization, such as international freight, insurance, packing (up to 12 percent of manufacturing prices), sales terms, import duties, broker's fees, inventory costs, and international travel.
Competition in the global marketplace continues to grow, particularly between the United States, the European Union, and Asian nations. For this reason, companies need to evaluate the competitive landscape of the host country. First, it is helpful to understand that the nature of competition varies by region and industry. Some nations support an atmosphere of pure competition; for example, there may be any number of sellers, each with relatively small market share, with competition based solely on price. Others may be more monopolistic. Understanding the type of environment in which a firm will participate in its host country ensures the use of appropriate business practices.
More specific threats to companies comes from existing competitors, new competitors who may also enter the market, and the bargaining power of suppliers and buyers in the host country or region. Also, some countries' business environments make entering the marketplace harder than others. For example, foreign businesses find it hard to compete with industry in Japan, where groups of firms are connected financially and rarely do business outside of that group (called “keiretsu”).
When investigating the competitive climate, it is also helpful to understand the power wielded by many of the world's transnational corporations (TNCs). Many of the world's top TNCs earn more in revenues each year than most nations. While this does not mean other companies cannot compete with the products and services offered by these companies, it helps to know that these TNCs are involved in establishing direction, lobbying industry, and other activities that have direct impact on the laws and regulations that affect entire industries and how smaller companies can conduct international business.
Finally, an understanding of international anti-trust laws and when they are enforced is critical to assessing the risks to an international business. The United States is the toughest nation in regard to anti-trust, even trying to
enforce laws outside the country. The European Union is relatively lax on enforcing anti-trust laws, but does use them as a means to levy fines on cartels. In Japan, enforcement of anti-trust legislation, which was enacted only under great pressure from outside the country, is weak at best, and usually nonexistent. Learning how “fair competition” is viewed in foreign business environments better prepares a manager to protect his or her own business.
Both the economic and political environments of countries and regions have great impact on the managing of international operations. A few of the economic factors that impact international business are:
- Host nation's economy: free-market vs. centrally planned, or mixed.
- Gross Domestic Product (GDP), Gross National Product (GNP), and per capita income—all are gauges to consumer buying power.
- Spending patterns of the host population.
- Variation in the degree of development or industrialization.
- Infrastructure and technology available to business.
- Differences in available education and health care.
Some economies are less hospitable to job creation than others. For example, in Western Europe high minimum wages, healthy unemployment benefits, and employment protection laws are significant barriers to companies hoping to produce job growth in this part of the world. This and other issues also have an impact on finding employees to help staff and manage international operations.
The political environment plays a large role in determining how international companies will be able to manage business operations. Examples of political forces affecting international corporations include:
- Governments, political parties, and ideological beliefs (communism, capitalism, socialism, liberal, conservative, etc.).
- Nature of government-business relationships.
- Laws and attitude toward business.
- Tariffs and quotas.
- Currency controls (limits on the amount of money entering or leaving a country).
All businesses must abide by the laws, regulations, and bureaucracy in the host nation, including the United States and other capitalist countries. Examples of the obstacles an international corporation may encounter include complying with government restrictions on regulated professions and industries such as law, medicine, banking, insurance, transportation, and utilities. State and local governments may also require specific licenses for business and restrict foreign use of buildings. For all of these, proper compliance takes knowledge, time to learn, and expense.
While all of the above factors have significant impact on multi-national corporations, perhaps the most important factor for an international manager is awareness of the degree of risk associated with various political forces in the host region. In addition to weighing the stability of the established government in the region in which it conducts business, governments can seize property owned by foreigners within its borders. This is known as expropriation in cases where the government follows up with quick, adequate compensation for former owners of the property. However, some governments may confiscate property, meaning former owners do not receive proper compensation.
When parties representing different nations enter into a contract, dispute resolution becomes especially complicated. The United Nations (UN) Convention on Contracts for the International Sale of Goods (CISG) established legal rules for international sales contracts, including rights and obligations for both buyer and seller. Unless the parties to the contract expressly exclude the CISG, it applies to all contracts signed by companies from the countries that ratified the Convention. In the European Union (EU), the Rome Convention (1991) also applies to contracts formed between EU residents. Outside of these two agreements, companies must rely on private solutions and arbitration (which is used with increasing frequency).
Intellectual property is well protected in the United States, with patents, trademarks, and copyrights. But when companies engage in business with other countries, they take risks. For example, product counterfeiting, common in Asia, costs U.S. business between $200 and $250 billion annually, according to the U.S. Federal Bureau of Investigation.
Other risks to business included trade secrets and industrial espionage. Most often, competitive information is obtained from inside the company, from published business materials, customers, competitor employees, and sometimes through direct observation.
Each nation has its own laws to protect intellectual property, but which products those laws protect differs as well. The UN's World Intellectual Property Organization (WIPO) was created to administer international property treaties, as was TRIPS, a World Trade Organization (WTO) agency.
The United States adopted its Foreign Corruption Practices Act (FCPA), which unfortunately acts as a barrier to United States companies. The FCPA was not adopted in Europe, or elsewhere, and compliance with the FCPA means American exporters lose business. Most importantly, international managers need to be aware piracy of and counterfeiting, particularly in certain markets, and take steps to protect proprietary corporate information.
Product liability is a much bigger issue in the United States than in other countries. For example, the United States is the only country that conducts jury trials or pays punitive damages in cases of product liability. There was a principle of strict liability adopted in Europe, but company defense is strong and some countries cap damages.
The United States places many burdens upon its own companies, which impacts how well American companies can conduct business internationally and what it costs them to do so. Like the FCPA, boycott legislation often applies only to the United States. These become significant obstacles to international competition when other countries do not follow suit.
Financial management of international corporations is particularly challenging, as countries change in value in terms of each other based on currency exchange rates. Companies must comply with financial laws and regulations in the host country. International managers need to:
- Understand how fluctuations in currency value change international business transactions.
- Learn about financial tools such as derivatives, hedges, payment timing, exposure netting, price adjustments, balance-sheet neutralizing, and swaps, and how they affect business performance.
- Meet, network, and cooperate with counterparts in other organizations to protect and/or benefit the organization.
- Learn when and how to pay exporters in forms other than money; buyers frequently prefer payment rendered in the form of goods or services (countertrade).
- Differentiate between two types of currency: hard, convertible currency is accepted around the world at uniform rates; soft, nonconvertible currency is rarely of value outside the host country.
- Use international finance centers as a resource—these accumulate expertise and information to conduct financial transaction for international company units most profitably and at the lowest cost.
For an example of how legislation can affect a nation's financial markets, Americans need to look no further than 2002. The Sarbanes-Oxley Act became United States federal law that year; in part, the legislation was a response to corporate scandals including Enron and WorldCom. The Public Company Accounting Reform and Investor Protection Act (or Sarbox) ramped up the requirements for financial reporting at public companies. The Securities and Exchange Commission is responsible for enforcing these laws, and the newly created Public Company Accounting Oversight Board is responsible for overseeing the accounting firms that audit public companies. Opponents of this legislation argue that Sarbox has resulted in the loss of business from New York to London, where the U.K.'s Financial Services Authority is less strict.
Investigation of the available labor force should be performed before a company chooses to expand its business to a given region. Managers should determine whether there are enough people of the right skill level for a company to run the business effectively, and whether or not they will want to work for a foreign employer.
When staffing international operations, managers must be able to fill positions from a pool of labor with the right education and skill to maintain and grow the business. Hiring options include choosing from the parent company, choosing people from the host country, or hiring from a local subsidiary. Refugees are often pulled into operations. However, they may lack the skills, health, or education to work. Guest workers may also provide labor, and are particularly helpful in times of rapid growth—when native workers are not willing or able to fill all positions and they do not feel displaced. However, even in times of growth, bringing in large numbers of guest workers (foreigners) often causes friction with citizens of the host country.
Proper planning also helps a company to recognize other forces that cannot be controlled (but must be managed) and plan accordingly. Managers of international operations need to understand the effects of price and wage controls, labor laws, and currency exchange in the host country. In Europe, the government plays a very active role in legislating wages and working conditions, particularly in Germany and France. In Japan, unions align more with specific companies than with industry, so union members have a stake in how well the company does and how much money it makes. They often work with company management.
Understanding cultural issues is critical to international management in general, but culture plays a particularly important role in building a labor force outside the United States. Though U.S. businesses have come to see
women as part of the employment pool, women are less accepted as part of the workforce in many other countries.
Another consideration is race, which is still a source of conflict and discrimination in many areas, as is social status. Religious, tribal, racial, and other cultural factors have an impact, not just on employment, but on how an international company will be viewed by the host culture (and how many people will buy products made by the company). However, if managers are well informed and handle cultural issues properly, people from different cultures, speaking different languages, and possessing various abilities and levels of experience can strengthen the overall management of an international company.
Many corporations have particular difficulty finding qualified executives to effectively manage international companies. Successful leaders of international companies need to understand motivation, leadership, communication, conflict, and other behavioral issues that arise in cross-national and cross-cultural context. The ability to address these issues depends on an understanding of the host culture's values. Other skills cited as keys to successful international management include the following:
- Technical competence
- Ability to speak, or willingness to learn, the host language
- Tolerance for ambiguity and ability to manage uncertainty
- Nonjudgmental attitude
- Ability to emotionally connect with people from diverse cultures and backgrounds, and to understand differing viewpoints
- Personal integrity
- Strong commitment to personal and company standards.
- Inquisitive mindset/continuous learning
Managers of international operations need to be adaptable and have a high tolerance for change and ambiguity. They are most successful when given autonomy and discretion in the workplace. Overall business savvy on the part of executives helps to ensure an international company will run well.
Thorough understanding of both the company and industry is important, along with an ability to leverage that understanding when planning, organizing, and implementing ideas. On a more practical level, international managers need to be able to manage accounting and auditing, business plans, policies and procedures, information systems, and corporate culture—all of which vary based on the infrastructure and culture of the host country.
Defined as the body of beliefs, norms, and values shared by a group of people, culture presents the biggest challenge to businesses working internationally. It is a key factor in how all other areas of business work together. Culture influences negotiation tactics, decision making, and rewards and recognition programs. For example, when conducting business, members of some cultures sit right down to business after shaking hands. In other countries, it is considered rude to mention business at all until after both parties have spent a significant amount of time establishing a relationship.
As stated by Geert Hofstede, “Culture is more often a source of conflict than of synergy. Cultural differences are a nuisance at best and often a disaster.” A summary of Hofstede's major factors impacting international business relationships that also influence the practice of international management are shown in Table 2.
Hofstede's framework is one of the most prominent in international management. He identified four major dimensions of cultural values (individualism-collectivism, power distance, uncertainty avoidance, and masculinity-femininity) along with a fifth dimension subsequently identified as Confucian Dynamism, or long-term orientation. Finally, Trompenaars and Hampden-Turner extended Hofstede's classification with seven dimensions that include universalism versus particularism, collectivism versus individualism, affective versus neutral relationships, specificity versus diffuseness, achievement versus ascription, orientation toward time, and internal versus external control. The different classifications provide different and overlapping approaches to organize the many complex dimensions that make up culture. A major premise underlying the need for organizing different cultural dimensions is a means to avoid costly mistakes in conducting international business.
Managers of international operations should be aware of the importance of context in various countries. Context indicates the level in which communication occurs outside of verbal discussion. High-context communication depends heavily on gestures, body language, and other nonverbal cues. Much of what is communicated is implicit, or unspoken, and assumed to be understood through other cues. Low-context communication is explicit and precise, relying little on non-verbal embellishment for meaning. Many of these, and other cultural practices, are learned through socialization.
Increasing one's ability to work effectively across cultures also provides positive support to address a range of adjustment issues for expatriates who often face culture shock in the acculturation process. Overall, the most important key of cultural intelligence and intercultural competence is the integration of multiple spheres of cross-cultural learning to effectively engage in international
|Table 2 |
Hofstede's 5 Cultural Dimensions
|Value Dimension||Value Description||High Score||Low Score|
|Source: Adapted from Geert Hofstede Cultural Dimensions website, http://www.geert-hofstede.com/|
|Power Distance Index (PDI)||The degree of equality, or inequality, between people in the country's society.||Indicates that inequalities of power and wealth have been allowed to grow within the society. These societies are more likely to follow a caste system that does not allow significant upward mobility of its citizens.||Indicates the society de-emphasizes the differences between citizen's power and wealth. In these societies equality and opportunity for everyone is stressed.|
|Individualism (IDV)||Degree to which a society reinforces individual or collective achievement and interpersonal relationships.||Indicates that individuality and individual rights are paramount within the society. Individuals may tend to form a larger number of looser relationships.||Typifies societies of a more collectivist nature with close ties between individuals. Reinforce extended families and collectives where everyone takes responsibility for fellow members of their group.|
|Masculinity (MAS)||Degree to which a society reinforces, or does not reinforce, the traditional masculine work role model of male achievement, control, and power.||Indicates the country experiences a high degree of gender differentiation. Males dominate a significant portion of the society and power structure, with females being controlled by male domination.||Indicates the country has a low level of differentiation and discrimination between genders. Females are treated equally to males in all aspects of the society.|
|Uncertainty Avoidance Index (UAI)||Level of tolerance for uncertainty and ambiguity within the society - i.e. unstructured situations.||Indicates the country has a low tolerance for uncertainty and ambiguity. Creates a rule-oriented society that institutes laws, rules, regulations, and controls in order to reduce the amount of uncertainty.||Indicates the country has less concern about ambiguity and uncertainty and has more tolerance for a variety of opinions. Reflected in a society that is less rule-oriented, more readily accepts change, and takes more and greater risks.|
|Long-Term Orientation (LTO)||Degree to which a society embraces, or does not embrace, long-term devotion to traditional, forward thinking values.||Indicates the country prescribes to the values of long-term commitments and respect for tradition. This is thought to support a strong work ethic where long-term rewards are expected as a result of today's hard work. However, business may take longer to develop in this society, particularly for an “outsider”.||Indicates the country does not reinforce the concept of long-term, traditional orientation. In this culture, change can occur more rapidly as long-term traditions and commitments do not become impediments to change.|
business situations. Effectiveness in reconciling cross-cultural differences often leads to creativity, innovation, and synergy for productive workplace performances.
Technology is an important factor that can vary significantly, depending on the purpose of foreign investment and how important it is for technology to be standardized across business divisions. While some business leaders may choose to expand internationally to take advantage of cheaper labor or manufacturing costs, particularly in developing nations, they may also need to plan for “intermediate and appropriate technology.”
The production processes used may vary from advanced to primitive, depending on the economic, cultural, and political variables of the host nation. Some governments urge investors to consider intermediate technology rather than the highly-automated equipment and processes of industrialized countries, in part because less advanced countries lack the infrastructure to support such technology. Companies may respond by searching for an appropriate technology that matches a country's resources, or it may choose to invest elsewhere.
Technology has also contributed significantly to the spread of globalization and international expansion. Advances in technology enable international businesses to conduct international financial transactions, purchase products, analyze data rapidly, make capital improvements, and streamline communications, transportation, and distribution channels.
The summaries above are brief introductions to broad issues to which entire semesters are devoted in business programs. International management requires a broad knowledge base in many areas, as well as an ability to adapt to working conditions in which the only constants are change and a devotion to continuous learning.
Most critical to international management is the desire and ability to work well with people of various cultures, interests, degrees of education, and intelligence—from employees to colleagues to government officials, with home country and host country, and across national and industrial borders.
SEE ALSO International Business
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The Sarbanes-Oxley Act of 2002. Available from http://www.sarbanes-oxley.com/.
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