Prentice Hall 2003 Chapter 1 1

Assessing the Environment – Political, Economic, Legal, Technological

Chapter 1

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Chapter 1 Overview

Globalism The Political and Economic Environment The Legal Environment The Technological Environment

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What is Global Management?

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

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What is Globalism?

The term globalism refers to global competition characterized by networks that bind countries, institutions, and people in an interdependent global economy.

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Regional Trading Blocs

The Triad Western Europe Asia North America

Other Regions Central and Eastern Europe China Less Developed Countries (LDCs)

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The European Union (EU)

12 of the 15 member states of the European Community have adopted a common currency and monetary policy.

The Euro is now a legally tradable currency. The EU is the largest and most integrated common

market in the world with 376 million consumers. The creation of EU has not eliminated national pride.

Most people in W. Europe still think of themselves first as British, French, Danish or Italian, and are wary of giving up too much power to centralized institutions, or of giving up their national culture.

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Global Managers and the E.U.

Global managers face two major tasks with respect to the E.U.– How firms outside of Europe can deal with a market

giving preference to insiders– How to deal effectively with multiple sets of national

cultures, traditions, and customs within Europe.

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North America

The North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico has created a single market of 360 million consumers.

The “one America” trading bloc has the potential for expansion in South America as trade liberalization among the Latin American countries progresses.

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North America (contd.)

Maquiladoras are U.S. manufacturing facilities that have operated just south of the Mexican-American border since the 1960s under special tax concessions.

Joint ventures between Mexican and American companies are common. Examples include the one between Wal-Mart and Cifra, which in 2001 was Mexico’s biggest chain.

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Asia

Japan and the Four Tigers – Singapore, Hong Kong, Taiwan, and South Korea – provide most of the capital and expertise for Asia’s developing countries.

In the 1980s and early 1990s, much of Asia’s economic power and competitive edge was attributed to Japan’s keiretsu and S.Korea’s chaebol.

Recent economic woes have slowed growth in the region.

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Other Regions

The Central and Eastern European bloc, where communism proved unworkable and crumbled, has created a new market of 430 million people.

Impediments to business growth here are the lack of capitalist structure and systems to reproduce Western management practices easily.

China has enjoyed recent success as an export powerhouse.

Its GDP growth rate, though slowing, was the fastest in the world for several consecutive years.

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Other Regions (contd.)

The economic situation and the often unacceptable level of government intervention discourage foreign investment in less developed countries (LDCs).

Assessing the risk-return tradeoffs and keeping up with political developments in the LDCs are two of the many demands on international managers.

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Workforce Diversity

The world labor force is undergoing considerable change as a result of

• the increasing movement across borders ofworkers at all skill levels;

• the rising average age of employees; and• the addition of great numbers of women to the

workforce (particularly in developing countries),many with higher levels of education.

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An Open Systems Model: The Contingency Role of the Global Manager

(Exhibit 1-1)

FunctionsAnd PeopleOPERATINGENVIRONMENT

RegulationsCulture

Skills Soc. ResponsibilityEthics

MEGAENVIRONMENT

HOST-COUNTRYENVIRONMENT

Cul

ture

Local

Competitio

n

Economic

PoliticalTechnological

Subsidiary-HostInterdependence

MNC-Host-CountryInterdependence

Global CompetitionGlob

al

Trends

and F

orce

s

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What is Political Risk?

Political risks are any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm.

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Terrorism Risk

Terrorism is “the use, or threat of use, of anxiety-inducing … violence for ideological or political purposes” (Micklous).

The increasing incidence of terrorism around the world concerns MNCs.

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Typical Political Risk Events

Expropriation of corporate assets without prompt and adequate compensation.

Forced sale of equity to host-country nationals, usually at or below depreciated book value.

Discriminatory treatment against foreign firms in the application of regulations or laws.

Barriers to repatriation of funds (profits or equity).

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Typical Political Risk Events (Contd.)

Loss of technology or other intellectual property (such as patents, trademarks, or trade names).

Interference in managerial decision making. Dishonesty by government officials, including

canceling or altering contractual agreements, extortion demands, and so forth.

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Managing Political Risk(Taoka and Beeman’s suggestions)

Equity sharing Participative management Localization of the operation Development assistance

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Economic Risk

The economic risk incurred by a foreign corporation usually falls into one of two main categories: its subsidiary (or other investment) in a specific country may become unprofitable

if the government abruptly changes its domestic monetary or fiscal policies or

if the government decides to modify its foreign-investment policies.

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Some Means that Managers Might Use to Maintain Dependency

Input control Market control Position control Staged contribution strategies

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The Legal Environment

A host country’s legal system may be derived from common law, civil law, or Muslim law, and is a reflection of the country’s culture, religion, and traditions.

Under common law, past court decisions act as precedents to the interpretation of the law and to common custom.

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The Legal Environment (contd.)

Civil law is based on a comprehensive set of laws organized into a code. Interpretation of these laws is based on reference to codes and statutes.

Islamic law combines, in varying degrees, civil, common, and indigenous law. It is followed in approximately 27 countries.

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The Technological Environment

Technoglobalism is the phenomenon in which rapid developments in information and communication technologies (ICTs) are propelling globalization and vice-versa.

An MNC’s major concern is the appropriability of technology – that is, the ability of the innovating firm to profit from its own technology by protecting it from competitors.

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Global E-Business

E-business is “the integration of systems, processes, organizations, value chains and entire markets using Internet-based and related technologies and concepts.”

E-commerce refers directly to the marketing and sales process

The Internet and e-business provide a number of uses and advantages in global business.

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The Environment of the Global Manager

Political Environment• Form of government• Political stability• Foreign policy• State companies• Role of military• Level of terrorism• Restrictions on

imports/exports

Economic Environment• Economic system• Stage of development• Economic stability• GNP• Int’l financial standing• Monetary/fiscal

policies• Foreign investment

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The Environment of the Global Manager (contd.)

Regulatory Environment• Legal system• Prevailing int’l laws• Protectionist laws• Tax laws• Role of contracts• Protection for

proprietary property

Technological Environment• Level of technology• Availability of local

technical skills• Technical requirements of

country• Appropriability• Transfer of technology• Infrastructure• Environmental protection