Transcript Political Risk

What is different about operating
abroad?
Culture and Politics
Operating Margins for 147 of the Fortune Global 500
12 %
8%
4%
Domestic
Foreign
0%
1990
1995
Source: Gestrin, OECD
2001
What is different about operating
abroad?
• Geographic distance
• Different economic conditions and
currency
• Different language, culture, and
institutions
• Different governments
Geographic distance
• Increases transport costs
Perishability
Services
• Increases management costs
Economic conditions and
currency
• Level of economic development
– Income inequality
• Currency
– Foreign exchange risk if currency is not at
Purchasing Power Parity
Big Mac Index of Currencies
% Undervalued Relative to US $
% Overvalued Relative to US $
Switzerland
UK
Euro area
South Korea
Japan
Singapore
China
-60 -50 -40 -30 -20 -10 0
10 20 30 40 50 60 70
Source: Economist, based on July 2008 prices
Real trade-weighted dollar exchange rate
ppp=100
130
120
110
100
90
80
70
60
50
1975
Source: Goldman Sachs
77
79
81
83
85
87
89
91
Why persistent deviations from PPP?
• PPP assumes arbitrage equalizes exchange
rates
• Barriers to arbitrage prevent convergence
– Trade barriers, transport costs, tax differences
– Untraded inputs
• Price of untraded inputs slow to converge
Hence exchange rates can deviate from PPP
for long periods
• Most efficient way to hedge against persistent
PPP deviations is local
production/procurement
Culture and Politics
Home Country
Host Country
Local Firms
2
Headquarters
1
Subsidiary
manager
1
Subsidiary
employees
3
Government
1.
2.
3.
4.
Communication of goals and directives/interpretation of behavior
Communication/Negotiation
Communication/negotiation
Marketing mix adaptation
4
Customers
2
Press
Cost of foreignness: the dumb
foreigner syndrome
• Management
• Politics
• Marketing and communication
• Business takes place within societal rules
• These rules determine how the game is
played and who wins and loses
• Rules can be explicit (laws) or implicit
(customs)
• Rules both affect and are affected by
business
• This is true both at home and abroad, but
foreigners are at a disadvantage because
they do not know, cannot impact, and often
cannot accept
The social group in which rules are
enforced can vary
– family
– Tribe
– Region/province
– country
– Multicountry grouping (EU)
– world
The rules of the game determine..
• Employer-employee relationships
(management costs)
• Firm-firm relationships
• Firm-government relationships
• Firm-customer relationships
We will now look at…
• Cultural differences and their impact on
intra and inter-organizational relationships
• Cultural and institutional differences and
their impact on relationships with nonbusiness actors (political risk)
• Cultural and environmental differences and
their impact on relationships with
consumers (product and service adaptation)
Different Language and Culture
• Language
– Spoken and silent
– Impact on international business
• Culture
– Dimensions of culture
– Impact on international business
Language
• Spoken and written language
• Silent language
Communication across
languages
• Perceptual gaps
• Encoding/Decoding gaps
(translation errors)
Seller in country A
Buyer in country B
Buyer’s field of
experience
Seller’s field of experience
Sender Encoder
Decoder
Message
Receiver
Medium
Culture
Choice of words
Choice of symbols
Meaning
Choice of words
Choice of symbols
Understanding
Culture
Silent language
•
•
•
•
•
Silence
Color
Time
Space
Things
Meanings of color
China
Korea
Japan
USA
Blue
High quality
Powerful
High quality
Adventurous
Sincere
Trustworthy
Sincere **
Trustworthy **
High quality *
Dependable
Dependable **
High quality *
Sincere
Trustworthy
Expensive
Powerful
Black
Powerful **
Expensive
High quality
Dependable
Trustworthy
Powerful *
Expensive
Powerful *
Expensive
Dependable
Powerful **
Expensive
Red
Happy **
Love *
Adventurous *
Love **
Good-tasting
Adventurous
Love **
Good-tasting
Happy
Adventurous
Love **
Adventurous
Happy
Good-tasting
Inexpensive
Yellow
Happy
Pure **
Progressive*
Happy **
Pure
Good-tasting
Dependable
Happy **
Pure*
Good-tasting
Happy
Pure
Good-tasting
Green
Pure
Trustworthy
Dependable
Sincere
Pure 纯洁*
Adventurous
Sincere
Trustworthy
Pure
Good-tasting
Adventurous
Good-tasting
Adventurous
Grey
Inexpensive *
Inexpensive
Expensive
High quality
Dependable
** 50% or more of respondents made this association.
* 30-49% of respondents made this association.
All others, 20-29% of respondents made this association.
Source: Jacobs/Keown/Worthley/Ghymn (1991), p. 24.
Language impacts…
• management
– Information loss
– “Language bias”
• marketing
What is Culture?
• Learned
• Integrated
• Shared
Stereotypes
• Useful as a starting point
• National cultural traits are
normally distributed
Stereotyping
Americans
Direct, Honest
Rude
French
Indirect
Tactful
A Model of Culture
- explicit
Hofstede’s Cultural Dimensions
• Surveyed 116,000 employees from 70
countries
• Highlighted four dimensions of culture
–
–
–
–
Power distance
Uncertainty avoidance
Individualism
Masculinity/femininity
Power distance
the extent to which less powerful members of institutions and
organizations accept that power is distributed unequally
High power distance
Low power distance
Managers make decisions
autocratically
Managers consult with subordinates
Close supervision is appreciated
by subordinates
Close supervision is resented by
subordinates
Employees disagree with their boss
Employees fear to disagree with
their boss
Employees put high value on
conformity
Managers can seek help from
employees
Individualism
Tendency of people to look after themselves and their immediate family
only
High Individualism
Low Individualism
Everybody is expected to take
care of himself/herself
Extended families and clans
protect individuals in exchange
for loyalty
Everyone is responsible for
his/her fate
Belief in group decisions
Emotional independence of the
individual from the organization
Emotional dependence or the
individual on the organization
Emphasis on individual initiative
and achievement
Emphasis to belonging to
organizations
Masculinity/Feminity
A masculine society is one where the dominant values in society are
success, money, and things
Masculinity
Feminity
Great importance put on
earnings, recognition,
advancement, and challenge
Importance put on
relationships and cooperation
Uncertainty Avoidance
Extent to which people feel threatened by ambiguous situations
High Uncertainty Avoidance
Low Uncertainty Avoidance
Concern with security in life
Willingness to take risks
Uncertainty is a threat that must
be fought
Uncertainty more accepted
Belief in experts and their
knowledge
Belief in generalist and common
sense
Strong need for consensus
More acceptance of dissent
Values of Hofstede’s Dimensions
Power
Distance
Individualism
Masculinity
Uncertainty
Avoidance
Brazil
69
38
49
76
China
58
17
45
69
Germany
35
67
66
65
Japan
54
46
95
92
Mexico
81
30
69
82
Netherlands
38
80
14
53
Norway
31
69
8
50
U.K.
35
89
66
35
U.S.
40
91
62
46
Uncertainty Avoidance Index (UAI)
Masculinity-Femininity and Uncertainty Avoidance (for 50 countries and 3 regions)
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
55
58
61
64
67
70
73
76
79
82
85
88
91
94
97
100
103
106
109
112
115
Weak uncertainty
avoidance
Feminine
Weak uncertainty
avoidance
Masculine
SIN
JAM
DEN
SWE
HOK
IRE
MAL
GBR
IND
PHI
IDO
CAN
USA
NZL
SAF
NOR
EAF
NET
FIN
AUL
WAF
SWI
IRA
THA
GER
ARA
PAK
TAI
EQA
AUT
ITA
BRA
VEN
COL
ISR
COS
CHL
KOR
MEX
SPA
PER
TUR
FRA PAN
ARG
JPN
SAL
BEL
URU
GUA
Strong uncertainty
avoidance
Feminine
Strong uncertainty
avoidance
Masculine
POR
GRE
0
18
36
54
Masculinity Index (MAS)
72
90
108
Power Distance and Uncertainty Avoidance
4
(for over 50 countries and 3 regions)
Small power distance Strong
uncertainty avoidance
(vintage market)
12
Large power distance
Week uncertainty avoidance
(family)
SIN
JAM
20
DEN
Uncertainty Avoidance Index (UAI)
28
SWE
IRE
36
HOK
MAL
GBR
IND
44
NZL
USA
CAN
SAF
NOR AUL
52
EAF
NET
SWI
60
PHI
IDO
WAF
IRA
FIN
THA
GER
PAK
68
TAI
AUT
ITA
76
BRA
COS
ARG
92
VEN
COL
KORPER CHL
ISR
84
EQA
ARA
MEX
SPA FRA
TUR
JPN
BEL SAL
PAN
URU
100
Small power distance
Strong uncertainty
avoidance Feminine
(well-oiled machine)
108
0
5
10
15
GUA
POR
Large power distance
Strong uncertainty avoidance
(pyramid of people)
GRE
20
25
30
35
40
45
50
55
60
65
70
Power Distance Index (PDI)
75
80
85
90
95 100 105 110
Individualism Index (IDV)
Power Distance and Individualism-Collectivism (for 50 countries and 3 regions)
4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
EQA
Small power distance
Low individualism
GUA
VEN
IDO
COL
PAK PER
TAI
KOR SAL
SIN
THA
WAF
CHL
HOK
POR
EAF
COS
Large power distance
Low individualism
PAN
MAL
MEX
PHI
URU
GRE
BRA
TUR
JAM
IRA
ARG
ARA
JPN
IND
SPA
ISR
AUT
FIN
SAF
GER
SWI
SWE
NOR
IRE
FRA
DEN
NZL
ITA
CAN
BEL
NET
GBR
Small power distance
High individualism
5
22
Large power distance
High individualism
USA
AUL
39
56
Power Distance Index (PDI)
73
90
107
High-context culture
Japanese
Arab
Greek
Spanish
Italian
English
French
American
Scandinavian
German
German-Swiss
Low-context cultures
Impacts of culture
• Cultural traits
• Differences between cultural
traits: cultural distance
Many people lack cultural selfawareness
• “We are the world”
– Middle Kingdom
– The World (World Series)
• Everybody is like us (or should be)!
• Just be sincere and it will show through
Cultures have the advantages of
their disadvantages and the
disadvantages of their
advantages
Cultural frictions are a major, but
underestimated, management
problem in international business
They greatly impair the implementation of
global strategies
– global marketing coordination
– technology transfer
– Joint ventures and mergers and acquisitions
• Unclear that cultures are converging
• Management practices are not
universal
– Accounting
– Motivation techniques
– Decision making
Impact of cultural differences on
management
• Authority and delegation
• Communication
• Job scope
Managers in Latin American affiliates of
MNEs (as percent of total managers)
US MNEs
European
MNEs
Japanese
MNEs
Parent-Country
Nationals
44
78
83
Host-Country
Nationals
47
16
17
Third-Country
Nationals
9
5
HRM
• Recruitment
• Socialization
• Performance appraisal
• Compensation and rewards
Executive pay*
1996, $000s
Variable compensation
Fixed compensation
800
600
400
200
Source: Towers Perrin
es
St
at
te
d
an
ce
U
ni
Fr
um
Sw
i tz
er
la
nd
lg
i
Be
an
y
m
G
er
i ta
in
Br
Ita
ly
n
Ja
pa
st
ra
lia
s
Au
la
nd
he
r
ad
a
N
et
C
an
ai
n
Sp
Sw
ed
en
0
*Total remuneration for chief executive officer
Firm-to-firm relationships
• Legalistic or social
• Personal or impersonal
Adaptation problem is harder with
values than with customs
• Customs are explicit and easier to imitate
• Values are implicit and must be inferred
• Ignorance of local values create the most
problems
– Federal Express in Germany
– Mitsubishi and Toyota in US
Coping with cultural differences
•
•
•
•
•
Try to make sense of it
Sleep over it
Question friends and colleagues
It’s not all about you!
Keep your sense of humor
The U-curve of cross-cultural adjustment
Degree of Adjustment
8
-4
46
4
Adjustment
-2
9
6-
Mastery
13
4
3-
7
6,5
6
5,5 Honeymoon
5
4,5
4
3,5
3
2,5
2
1,5
Culture Shock
1
0,5
Time in Months
SOURCE:
Black, J.S. & M. Mendenhall. 1991.”The U-Curve adjustment hypothesis revisited: A review and theoretical framework.”
Journal of International Business Studies, Vol. 22 second quarter, pp. 225-247.
Culture and Politics
Home Country
Host Country
Local Firms
2
Headquarters
1
Subsidiary
manager
1
Subsidiary
employees
3
Government
1.
2.
3.
4.
Communication of goals and directives/interpretation of behavior
Communication/Negotiation
Communication/negotiation
Marketing mix adaptation
4
Customers
2
Press
Governments…
• Buy and subsidize or penalize
• Regulate (competition,
employment, pollution)
• Set standards (technical, health)
• Set tariff and non-tariff barriers
Porter’s strategic framework
• Firms compete on technology,
product differentiation, costs, not
politics
• The rules of the game are
exogenous and given
Political strategies
• Tariffs and quotas: US response to Japanese
competition
• Subsidies: ADM and gasohol; subsidies for
foreign investment
• Government procurement: MDD in China; M-K
and LA metro
• National Security: DP World, Lenovo and IBM
PC, CNOOC and Unocal
• Environmental regulations: Venezuelan gasoline
Political strategies
•
•
•
•
Know the rules of the game
Impact the rules of the game
obtain access
exert influence
• knowledge
• offer support (money, votes, etc.)
• Political rules of the game differ across
countries in form and/or in content
• centralized vs. federal
• regulatory vs. incitative (pollution
control)
• are often implicit and difficult to
fathom
• things that “are not done”
Foreigners
• do not know
• cannot do
• have no impact
Foreigners do not know
• Do not speak language
• do not know local ways
• have fewer contacts
Indonesia
Lebanon
Venezuela
Philippines
China
Nigeria
India
Russia
Mexico
Italy
Poland
Brazil
France
Korea
Taiwan
Japan
Germany
Netherlands
Singapore
Canada
Australia
USA
Hong Kong
Sweden
Denmark
United Kingdom
Finland
Opacity Index, 2004
60
50
40
30
20
10
0
Table: The Opacity Index
Country
Category
OPA
COR
LEG
ENF
ACC
REG
Finland
3
11
23
17
9
13
United Kingdom
20
3
25
33
13
19
Denmark
6
15
21
33
19
19
Hong Kong
26
12
14
33
15
20
USA
28
19
27
20
10
21
Australia
19
16
26
33
10
21
Canada
26
17
37
20
16
23
Singapore
15
19
25
50
10
24
Germany
28
14
33
17
32
25
Japan
38
24
31
22
22
28
Taiwan
47
33
20
40
28
34
Korea
61
35
22
30
37
37
Brazil
47
48
32
40
35
40
Poland
63
35
47
40
19
41
Italy
52
32
45
63
24
43
Mexico
65
60
35
33
25
44
Russia
78
44
39
40
31
46
India
74
44
49
30
46
48
Nigeria
80
65
48
0
50
49
China
74
39
39
56
43
50
Philippines
75
56
52
33
36
50
Indonesia
82
54
90
22
49
59
Foreigners cannot do
Constrained by home-country rules and public
opinion
– Corruption
– Embargoes
– Working conditions
Foreigners have no impact
•
•
•
•
•
Foreigners are outsiders
Foreigners have fewer contacts
are outside the network of reciprocity
Foreigners carry their home flag (+ or -)
US firms in Arab countries
Firms are exposed to political risk
• In all countries and by all regimes
• For all types of entry modes
• Through many forms of risk
- Revolution?
- Subversion?
- Turmoil?
- External
aggression?
General
- Nationalization?
- Intervention?
- Requisition?
- Coerced sale?
- Coerced contract
renegotiation?
- Contract
revocation?
no
Instability
Ownership/ no
Control
Risk
Chaotic?
Too high?
yes
STOP
- Import restrictions?
- Local content
requirements?
- Taxation?
- Price control?
- Foreign staff
limits?
- Restrictions on
- Labor codes
repatriation of
/strikes?
dividends, royalties,
- Export
interest, fees, or
requirements? capital?
- Discrimination - Exchange rates?
Operations
no
Risk
(Expropriation)
Risk
Transfer
no
GO
Risk
Unacceptable
Unacceptable
yes effects on
yes effects on
yes
local-currency
Dollar ROI?
ROI?
STOP
STOP
STOP
Two important points:
• Political risk is almost always
micro
• Political risk is not exogenous
Political risk is micro
• Limited value of political risk indices
(Euromoney, Institutional investor)
– Generally export receipts = solvency risk
What to do?
•
•
•
•
Consider the political dimension
Monitor and stay informed
Become an insider
Protect investments
• Consider the political
dimension
–P&G and Ariel
–Cargill and Indian salt mine
• Monitor and stay informed
– Both internal and external sources
Become an insider
• Take joint venture partners
• Hire local managers
• Enlist local stakeholders
– directors
– banks
• PR campaigns
– Toyota in US, IBM in France
Protect investments
•
•
•
•
•
•
Structure the investment
sequencing
bring in allies
project finance
set up dependence
Insure