IBE Fall 2018
Dr. R. B. Sambharya
Your company is thinking of investing in East Asia. What cultural issues would you expect to crop up before the FDI begins and after it becomes operational? Which functions in a firm is most effected by culture?
Pankaj Ghemawat, in his paper “Distance still matters, the hard reality of global expansion,” gives insight to the difficulties of investing abroad. He explains that the distance in culture, geography, economics, and administration are often uncounted impediments to successful entry into a foreign market. Culture is stated to be one of the most overlooked issues when assessing the potential success of investing abroad. If my company was investing in East Asia I would expect that initially issues related to culture would be associated with communication and language, both spoken and non-spoken. There may be initial issues related to differences in social norms regarding meetings, appropriate behavior, and expectations of general conduct related to business. But according to Ghemawat, as seen in the Rupert Murdock example, the real drubbing is after operations begin. While the type of investment will dictate the magnitude of the cultural effect generally issues of how homogenous the target customer is in respect to language, customs, norms, and religion will affect the company’s ability to penetrate this new market. Customer preference, how nationalistic is the target customer, do they prefer a domestic product over a foreign one, will all be issues that are related to culture. The function most affected by culture will be related to the hiring, training/socializing, and managing of the workforce. The power distance observed in the target country may be different than that of the home country reducing workplace cohesion and potentially leading to misunderstanding related to adhesion to the organizational culture. Will the workforce obtained in the target country be amenable to the work mandates required for successful integration into the organization? This issue can be reduced by recruiting management from the target country.
What dimensions of culture are useful to managers in analyzing cross-cultural differences? Rank and explain the top five dimensions of culture in order of importance to MNE management according to you.
The dimensions of culture useful for analyzing cross-cultural differences are related to how society’s cultures affect workplace values. Geert Hofstede research led to the categorization of workplace culture into dimensions. The dimensions are Power distance, individualism vs collectivism, uncertainty avoidance, masculinity vs femininity, long-term vs short-term orientation, and indulgence vs restraint. Below are Geert Hofstede’s workplace cultural dimensions in the order of importance as perceived by me:
Power distance: The power distance defines the degree that the less powerful members (employees) of an organization accept and adhere to direction and control exerted by powerful members of the organization (management). High power distance reflects a clearly established hierarchy (chain of command). A lower power distance signifies less structured and greater distribution of power within the work culture.
Individualism vs collectivism: The degree to which individuality and individual achievement are championed vs that of group cohesion and collective success.
Uncertainty avoidance: The tolerance for ambiguity within a workplace culture. Low uncertainty avoidance workplaces tend to impose fewer regulations, ambiguity is more accustomed to, and have a greater readiness to take a risk and accept change. Uncertainty avoidance is characterized by a workplace culture that strongly believes in job security, career patterns, and retirement benefits.
*(not in original 5 dimensions) Indulgence vs restraint: An indulgence society is defined as a society that allows free enjoyment of basic and natural human desires related to pleasure. A society that controls the gratification of needs and regulates it by means of strict social norms is functioning under restraint.
Masculinity vs femininity: Masculine societies are tolerant of inequality between men and women and gender roles are defined. Power and achievement are principal characteristics within this culture. In feminine societies, the gender roles are less defined and inequality is less tolerated.
Long-term orientation vs short-term orientation: Derived from Confucian teaching, associates the connection and existent that a country adheres to traditional values.
Why does an international manager need to understand regional economic integration and other forms of cross-national cooperation? If your firm has plans to expand in an EU country what kinds of opportunities and threats do you perceive?
The failure of an international manager to not understand regional economic integration and other forms of cross-national cooperation would potentially result in lost opportunities of gains for their organization and substantial losses from the failure to recognize issues arising within them.
There are 5 levels of regional integration. The free trade area is the lowest degree of national integration, followed by the customs union, common market, economic union, and political union. At each level of integration properties of the preceding level is incorporated.
Free Trade Area: An agreement between countries to remove all barriers to trade among member nations. However, member nations determine their trade relationships with non-member countries.
Customs Union: An agreement between countries to remove all barriers to trade among members and apply common trade policy against nonmembers countries.
Common Market: An agreement between countries to remove all barriers to trade and have unrestricted movement of labor and capital within the zone which requires member countries to coordinate their economic and labor policies. Common trade policies are applied against nonmembers countries.
Economic Union: An agreement to remove trade barriers and to have unrestricted movement of labor and capital within the zone. Economic policies are coordinated to facilitate trade and common trade policies are applied against nonmember countries. Additionally, there is the coordination of tax, monetary, and fiscal policy.
Political Union: When Countries coordinate facets of their economic and political systems for the purpose of market cohesion. Member nations have the autonomy set political and economic policies within their territories not restricted by the agreement and take a common stance against nonmembers.
Through my firm’s expansion in the EU higher levels of trade within the political union should result in increased efficiency through the economy of scale reached by access to lower labor cost, resources, and cost of capital that my firm may be able to acquire outside of my own borders but within the political union. This will lower the firm’s factor costs. Within the zone, the firm will have the free movement of goods, the harmony of product standards and taxes, and the potential for increased business within the zone. However, there will be the drawback of trade diversion. If the firm could acquire good at a cheaper cost outside of the zone, the tariffs and other administrative cost placed on those good will increase their price making a provider of those goods within the zone a more suitable firm to acquire those goods even those their cost that are technically higher (stuck within a trade fortress). There is also the threat of the single market within the zone to create pricing competition amongst firms.
Is the proliferation of such agreements (free trade areas, customs unions, etc.) good for world trade in general? Which type of trade agreements is better for world trade: regional agreements like NAFTA, EU, or the worldwide WTO?
In theory, the WTO would be better for world trade. Trade diversion would be eliminated, however, in practice each increasing level of integration results in greater difficulty of harmonization between member nations. National sovereignty gets in the way of harmonization of trade agreements that member nations belonging to the WTO can all agree upon. However, this method has the greatest potential for creating mechanisms for resolving a conflict between regions, allowing nations to retain their national sovereignty, and benefit consumers worldwide.
Drawing on the new (strategic) trade theory and Porter’s theory of national competitive advantage, outline the case for government policies designed to build a national competitive advantage in biotechnology. What kind of policies would you recommend the government adopt? Are these policies at variance with the basic free trade philosophy?
New Trade Theory, developed by Paul Krugman, stresses a limited amount of firms can specialize in products and services, not because of the limitations of nations, but because of the limitations of the market. When designing policies to build a national competitive advantage in biotechnology a government should adopt subsidies for this industry until the domestic firms have established first-mover advantages in the world market. The support of the government is necessary and justified government to support domestic firms in overcoming the first-mover advantages that foreign competitors have and domestic firms to assist in being viable competitors in the world market. A combination of home market protection and export-promoting subsidies are necessary for national competitive advantage. Barriers to trade may be necessary such as tariffs, administrative policies, or regulation aimed at stifling foreign entry into the home market. This approach would be in conflict with the free trade which is simply what it’s called “free trade.” Free of barriers, restrictions, or impediments into a market. Porter’s theory would require steps that more in line with free trade or at least does not interfere with it. Porter’s theory focuses on government intervention inward. The government focus would be on the investment in education, regulating the domestic market, and creating a competitive infrastructure for reducing costs. The government would foster an environment of internal competition to create or improve the nations competitive advantage.
Whose interests should be the paramount concern of government trade policy- the interest of producers (businesses and their employees) or those of consumers?
The government’s interests should be focused on raising the standard of living for its citizens. Generally, this would lead to policies that favor the customer. However, countries may want to protect certain industries for reasons of national security, national identity, or an industry may be in its infancy. Ultimately, government trade policy should be in the interest of the home-based consumer (citizen). Why else would you pay taxes?
Two countries, Great Britain and the US, produce just one good: beef. Suppose that the price of beef in the US is $2.80 per pound, and Britain it is L 3.70 per pound.
According to PPP theory, what should the $/L spot exchange rate be?
2.80/3.70 = .76$/L
Suppose the price of beef is expected to rise to $3.10 in the US, and to L4.65 in Britain.
What should the one year forward $/L exchange rate?
3.10/4.65 = .67$/L
Given your answer to part (a) and (b), and given that the current interest rate in the US is 10%, what would you expect current interest rates to be in Britain?
.76 – .67/.67×100 = 13.4% + 10% =23.4%