WK2 Agenda • Hot topic: – News? – Facebook – Companion websites – No class last week of July • MIB Student survey • India vs. China • Reading Discovery • Nonverbal Communication • FDI • Mini FDI Decision Homework 1 MIB, BBA 2010
Jan 21, 2015
MIB, BBA 2010 1
WK2 Agenda• Hot topic:
– News?– Facebook– Companion websites– No class last week of July
• MIB Student survey• India vs. China• Reading Discovery• Nonverbal Communication• FDI• Mini FDI Decision Homework
2
India vs. China• BBC video clips, Fed Article• What is the focus of each country?• Why China and India walk different path?• What kind of business that you will prefer India
over China?• Apply the concepts you’ve learned to compare
China and India for the overall attractiveness of the country.
• What other information would be helpful for your reasoning? Where can you get it?
BBA, MIB 2010
MIB, BBA 2010 3
Reading Discovery
• Read the following articles.• What’s the main theme of those stories?• Why is it important?• How do we learn other cultures?• What are the determinants of culture?• Fill up this table.
Company Method of study Innovative way
MIB, BBA 2010 4
Nonverbal Communication
• Need two volunteers.• Act from the following list of body language.• Ask your classmates: What does it mean?
MIB, BBA 2010 5
Foreign Direct Investment
• Watch the video clips from PBS– Hanes brand relocates to Vietnam, Thailand, and China– FDI in Ethiopia
• What makes Vietnam and Ethiopia attractive for FDI?
• What are the issues in these stories?• What can the companies do to help improve the
situation?• What are the advantages and disadvantages of FDI?
MIB, BBA 2010 6
Homework for Friday• In a group of 4-5, select a particular business.1. Your goal is to decide on the best country for your
business.2. Create a list of criteria (4-6).3. Weight each criteria against each other.4. Create the country options(3-4) and compare all options
according to each criteria.5. Compare each option based on all criteria combined.
Compare the option score.6. Detail instruction example is in the sheet provided.7. Where can you get the data for this exercise?
MIB, BBA 2010 7
WK2.2 Agenda• Hot topics: World Cup? This time for?• Review: Monday discovery• Exchange students FDI interviewing exercise• Lecture• Mind map• Homework
MIB, BBA 2010 8
Exchange students interview(FDI analogy)
• In a group of 4-5, interview your friends from abroad(anywhere outside Ubon)
• Reasons for coming here. How long have they studied here? Did they start from high-school?
• What are the advantages and disadvantages of both sides(local students and exchange students)? What did you gain? What did you loose?
• Any investment? Expense?• How can we encourage more exchange students to come
here?• How can we decrease the number of exchange students to
come here?
MIB, BBA 2010 9
Review
• What’s the meaning of this diagram?
• Two types of model you can choose.
• Adaptive• Changing agent• How to choose?• Depend on your resources
(time & money), sustainable growth.
Business
Culture
Politics
Economics
Law
MIB, BBA 2010 10
Culture
• Culture: the collection of values, belief, behaviors, customs, and attitudes that distinguish one society from another
• A society’s culture determines the rules that govern how firms operate in the society.
• A society is a group of people who share common set of values and norms– Values: abstract ideas of about what
the group believes to be good, right and desirable i.e. Asian value?
– Norms: social rules and guidelines that prescribe appropriate behavior in a particular situation i.e. dress code
Culture Norms
and Value
Religion
Political
Philosophy
Economic
Philosophy
Education
Language
Social Struct
ure
11
Values and Norms
Nation with
subculture: the US,
India
Society Culture with
many nations:
Middle East, Hispanic
• Values form the basis of a culture: abstract concept & emotional significance.
• Abstract concepts: freedom, democracy, truth, justice, honesty, loyalty, responsibility,
• Emotional significance: people fight over freedom, fight for democracy
• Norms: folkways & mores• Folkways: the routine conventions
of everyday life such as dress code, social manner and neighborly behavior
• Mores: norms that are seen as central to the functioning of a society and to its social life such as theft and incest.
• Which one is more serious, folkways or mores?
MIB, BBA 2010
Thailand?
MIB, BBA 2010 12
Social Structure
• Social structure refers to its basic social organization• There are two dimensions:
– Degree of individual and group– Degree of class or caste – Country in each quadrant?
Individual
Group
ClassCaste
BharminK
shatriya
Vaishay
Sutra
Untouchable
High
Middle
Low
MIB, BBA 2010 13
Individuals and Groups
-Western Societies
-Individualism: high mobility,
entrepreneurial economy, innovative products
-Raise the cost of doing business:
-No loyalty, no network, no
team building
-Asian Societies-loyal to the
firm, life time employment,
cooperation in solving business
problemsExample: Sony,
Toshiba
-Suppress creativity and
initiative-Long time for
decision making
MIB, BBA 2010 14
Social Stratification• All societies are stratified on hierarchical
basis into social categories or social strata i.e. birth, occupation, and education
• All societies are differ by– The degree of mobility between social
strata– The significance attached to social strata in
business contact
• Social Mobility is the ability from which an individual can move out from which they are born…How?
• The social stratification of a society is significant if it affects the operation of business organizations.
• What would be the concerns for MNEs operating in highly stratify countries?
• Front end: your market segment• Back end: hiring and promotion
procedures
BharminK
shatriya
Vaishay
Sutra
Untouchable
High
Middle
Low
MIB, BBA 2010 15
Religious and Ethical System
• Religion: a shared belief and rituals • Ethical systems: a set of moral principles, or values
that are used to guide and shape behavior• Four major religions:
– Christianity, Islam, Hinduism, and Buddhism– Confucianism
• Economic research suggests that strong religious beliefs stimulate economic growth, because they help to sustain aspects of individual behavior that lead to higher productivity.
MIB, BBA 2010 16
Religions
-The world’s largest religion-Europe and America
-Economic implication: Protestant Work Ethic: hard work, wealth creation, and
frugality=>capitalism
-The world’s second largest religion
-Middle East, North Africa, South Asia
Doctrine: Peace, justice, and tolerance
-Pray 5 times a day-Economic implication:
People do not own property, but only act as stewards of God.Example: no interest, no alcohol
MIB, BBA 2010 17
Religions
-India-Focuses on the importance of
achieving spiritual growth and
development, not material=>Nirvana
-Promotion and adding new responsibilities
may not be the goal of an employee, or may be infeasible due to
employee’s caste
-Central and South East Asia
-Focus on spiritual growth and the afterlife,
rather than the achievement
-Emphasize on wealth creation but
entrepreneurial behavior is not stressed
-No caste system, individuals do have
mobility and can work with different classes
-China-Focus on the
importance of attaining personal salvation
through right action-Loyalty, reciprocal
obligations(guanxi), and honesty=> lowering the cost of doing business in
Confucianism societyExample: If people
behave in a moral way, expensive contract is not
necessary.
MIB, BBA 2010 18
Language
• Means of communication: spoken and unspoken language(facial expression, personal space, and hand gesture).
• Express how people see the world.• More languages, more cultures: Swiss,
Belgium, India• Language is a competitive advantage for doing
international business.• Example:
Chevy No Va, Toyota Camry in Thai
MIB, BBA 2010 19
Education
• Formal education is the medium through which individuals learn many of the language, conceptual, and math skills that are crucial for the society.
• Education is important for the nation’s competitive advantage. The US, UK, Germany, and Japan have their distinctive systems.
• General education level can be a good index of what kinds of product to sell or invest in a particular country.
• Example: Illiterate country is unlikely to sell popular books.
MIB, BBA 2010 20
Culture and the workplaceHofsteds’s Five Dimensions of National Culture
MIB, BBA 2010 21
Research and our result• Collectivism: relationship over task, learn how to do things not learn how to learn• Transition state: lecture vs. activities, Power tolerance: need resourceful democrat teacher, but also
Power respect: Parental teacher: tell you what to do in every situation• Uncertainty avoidance: like structure and objective, teacher must know all, dislike rules(uncertainty
acceptance because you’re still young)• Passive goal: use intuition, emphasize on life quality• Long term: but no goal???
MIB, BBA 2010 22
Implication for Manager• Culture changes over time.• Beware of ethnocentric behavior.• Manager need cross cultural literacy for success.
Culture Norms
and Value
Religion
Political
Philosophy
Economic
Philosophy
Educatio
n
Language
Social Struct
ure
Back end: Production choice, work ethic, meeting, HR policy such as hiring, promotion, incentive, and compensation. You can use either adaptive model(act locally) or be the changing agent with your employees. Emphasize your “Corporate culture”.
Front end: provide the products or services that best satisfied your customers. You can use either adaptive model(act locally) or be the changing agent in that market.
23
Foreign Direct Investment• FDI: occurs when a firm invest directly in new
facilities to produce and/or market in a foreign country (an ownership share of at least 10-25%)=>MNE
• FDI can be:– Greenfield investment: wholly own company– Merger and Acquisition (M&A, Brownfield)
with firms in the foreign country
• Does it require capital movement?
• The flow of FDI: amount of FDI undertaken over a given time period
• The stock of FDI: total accumulated value of foreign-owned assets at a given time
• Out flows of FDI: the flows of FDI out of the country
• In flows of FDI: the flows of FDI into a country
• Gross fixed capital formation: the total amount of capital invested in factories, stores, and office buildings.
• FDI: source of capital investment and economic growth
• MNE
MIB, BBA 2010
Out flow In flow
24
Trends in FDI• FDI has increased
tremendously for the past 30 years, except for these past two years due to world economic collapse.
• Reasons:– Fear of protectionism– The shift toward
democratic and free market economies, FDI↑
– Globalization, ensure presence in the regional market
MIB, BBA 2010
MIB, BBA 2010 25
The Direction of FDI• Historically, most FDI have been directed
to the developed nations, with the US as the favorite target.
• While the US still maintain its rank as the largest for host and home country of FDI, some EU countries have lost their ranks and got the negative inflow of FDI.
• The emerging direction includes: South, East, and South East Asia—particularly China.
• Latin America is also an emerging market for FDI, especially for oil and energy sector.
• Notice the increasing trend of FDI to Africa.
MIB, BBA 2010 26
The Forms of FDI Acquisition vs. Greenfield Investments
• Most cross border investment are in the form of M&A rather than Greenfield investment
• Firms prefer to acquire existing asset because:– M&A are quicker to execute than Greenfield investments– M&A are easier and less risky than to build from the
ground up– Firms believe that they can increase the efficiency of an
acquired unit by transferring capital, technology or management skills
MIB, BBA 2010 27
The Shift to Services
• FDI is shifting away from extractive industries and manufacturing, and towards services.
• The shift to service is driven by:– General move in developed nations toward services– The fact that many services need to be produced where
they are consumed i.e. Starbucks, cement– A liberalization of policies governing FDI in services i.e.
banking, insurance– The rise of Internet-based global telecommunication
networks
MIB, BBA 2010 28
Why FDI?
Motivations
Limitations
MIB, BBA 2010 29
Theories of FDI
• Internalization:Market Imperfection
• FDI advantage when:cost↑, trade barrier↑, know how protection↑, want control↑, firms capabilities ↑
What didn’t he explain?
Licensing drawbacks:-Give away know how to potential competitor: RCA=>Sony in 1960-No tight control over manufacturer, marketing, or strategy to max profit-Know how or corporate culture is not amendable: Toyota lean manufacturing, Philip managing skills, P&G marketing skills.
Firms of the same industry do FDI at the same time at roughly the same location because: - Strategic rivalry or imitative behavior in the oligopolistic industries: Honda, Toyota, Nissan, Airline industry-Multipoint competition: Kodak vs. Fuji, Coke vs. Pepsi, Nike vs. Adidas, Mc Donald vs. Burger King
MIB, BBA 2010 30
Theories of FDI
Firms undertake FDI at particular stages in a life cycle of a product. Firms invest in:-Developed countries when demand in those countries are high.-Developing countries when standardize product or market susurration to save production cost.
Vernon fails to explain why it is profitable for firms to undertake FDI rather than continuing to export from home base or licensing a foreign firm.
In addition to the various factors discuss earlier, Eclectic Paradigm suggest that we consider:
-Location specific advantages: that arise from using resource endowments or assets that are tied to a particular location and that firms find valuable to combine with its own unique assets i.e. oil and mineral, low cost highly skilled Bangalore-Externalities: knowledge spillovers that occur when companies in the same industry locate in the same area i.e. rubber town, silicon valley
John DunningRaymond Vernon
MIB, BBA 2010 31
Political Ideology and FDI• Ideology towards FDI range from
– Radical View: hostile to all FDI, MNEs are the instrument of imperialist (only until 80s)
– Pragmatic View: pragmatic nationalism, only if the benefit outweigh the cost
– Free Market View: non-inverterventionist, disperse products and increase overall efficiency
Free Market Pragmatic Radical
MIB, BBA 2010 32
Benefits and Costs of FDI for Host Country
• Benefit1. Resource transfer effect: capital,
technology, management resource
2. Employment effect: bring jobs3. Balance of payment effect: receive
from other countries, FDI can help achieve a current account surplus
4. Effect on competition and economic growth: more green field investment~more suppliers~competition~priceconsumer welfare ↑
Increase competition:productivity↑,innovation↑, economy↑
• Cost1. Possible adverse effect on
competition (MNE might do better due to larger support)
2. Adverse effect on the BOPs:repatriate earnings to the parent country, MNE still import parts from abroad
3. Loss of national sovereignty and autonomy: no commitment from MNE, host country government has no real control
33
Benefits and Costs of FDI for Home Country
• Benefit1. Positive effect on BOP:
from the repatriate money
2. Employment effect: Toyota supplier in Japan, Thai companies still order the machines for operating from abroad
3. Gain from learning new skills that can transfer back to the home country
• Cost1. Initial capital outflow
to finance FDI2. Job loss: Serve home
market from the low cost labor, FDI is a substitute for direct export
MIB, BBA 2010
MIB, BBA 2010 34
International Trade Theory and FDI
• International trade theory suggested that the home country concern about the negative economic effects of offshore production may not be valid because of the following reasons: – Free up resource in the home country to concentrate on
comparative advantage– Consumers benefit if the price of the products falls as a
result of offshore production– Not worth losing market share to international competitor
• Therefore, the long run economic effect of FDI, outweigh the minor BOP and employment effects.
MIB, BBA 2010 35
Government Policy on FDI for Home Country
• Encouraging Outward FDI– Government backed
insurance to cover major types of foreign investment risk, special loan, tax incentive, eliminate double tax, encourage host country to open market: US, Japan
• Restricting Outward FDI– Most countries limit
capital outflows, manipulate tax rules, or outright prohibit FDI (Cuba, Iran)
MIB, BBA 2010 36
Government Policy on FDI for Host Country
• Encouraging Inward FDI– Offer incentive to foreign
firms such as tax concessions, low interest loan, grants or subsidies, improve infrastructure and education
• Why should we encourage inward FDI?
• Restricting Inward FDI– Government can use
ownership restraint and performance requirement
• To protect national security and competition: Sweden excludes foreign ownership in tobacco and mining industry, US government rejected DP United Arab Emirates, Malaysia protects its infant auto business
• Max the benefit of resource transfer and employment: Japan during the 80s allowed JV with valuable technology only
MIB, BBA 2010 37
Implications for Manager Decision factors to undertake FDI
• Supply factors=>Cost– Production costs: better location, tax rate, labor– Logistics: transportation cost– Resource availability: oil, gas, tuna etc.– Access to key technology: faster than developing by itself i.e. Swiss
Pharmaceutical• Demand factors=>Benefit
– Sales expansion: market size, market growth– Customer access: require presence i.e. fast food chain– Marketing advantage– Exploiting competitive advantage: brand, trade mark, technology– Customer mobility: to continue to supply the customer i.e. Japanese auto
supplier• Political Factors=>Risk
– Avoidance of trade barriers i.e. Fuji– Economic development incentive, BOI, Chinese government– Share the risk: not depend only on home country market
MIB, BBA 2010 38
Implications for Managers
• What type of firm that should not be licensing?– High technology
(need to protect firms expertise)
– Global oligopolies (need tight control)
– Industries with cost pressures (need tight control)
MIB, BBA 2010 39
Mind Map & Homework
• Summarize this lecture through your mind map.
• Any question for Friday homework?
MIB, BBA 2010 40
Different Diagrams of the Same Topics
Why FDI? Benefit
Cost
Risk
Why FDI?
Resource
Seeking
Market Seeking
Efficiency
Seeking
Strategic Asset Seeking
Why FDI?
Motivation
Sales expansion
Resource acquisition
Diversify sales&supplies
Minimize risk
Limitation
Capacity, quality
Exporting limitation
Licensing limitation
41
WK2.3 Agenda• Discussion: news? CCTV?
– China– Mind map all elements? How
can we have all elements? Do we need all elements?
– Facebook, PPT, notebook
• The good, the bad, and the ugly mind maps.
• FDI Decision Homework– Business?– Criteria?– Options?– Result of option score?
• BOI target countries:– Africa: Nigeria, Morocco– Middle East: Iran, Qatar, Dubai,
Oman, Jordan– South Asia: India, Pakistan– Latin America: Brazil, Chile,
Caribbean– Neighboring countries: Lao,
Cambodia, Myanmar, Vietnam, China
• Business:Construction, Energy, Petrochemical, Food, Automotive parts, Textile, Shoes, Tourism and services
MIB, BBA 2010
MIB, BBA 2010 42
FDI Decision Homework• The order of creating criteria vs. options, will lead
you to different result or different path of doing business. It doesn’t mean that you won’t be success. You’ll have to use different strategy.
• Creating the criteria first will lead you to try to find all of your options. Creating options first, will make you think of how to compare them.
• If you have more than 6 criteria, you should not use this method because you might end up having very little importance(weight) to all those criteria.