Download (Textbook) Behavior in Organizations, 8ed (A. B. Shani)

Globalization
What Is Globalization?
The world is moving away from self-contained national
economies toward an interdependent, integrated global
economic system
Globalization refers to the shift toward a more integrated
and interdependent world economy
Globalization has two facets:
1) the globalization of markets
2) the globalization of production
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The Globalization Of Markets
The globalization of markets refers to the merging of
historically distinct and separate national markets into one
huge global marketplace
In many industries, it is no longer meaningful to talk
about the “German market” or the “American market”
Instead, there is only the global market
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The Globalization Of Markets
Falling trade barriers make it easier to sell internationally
The tastes and preferences of consumers are converging
on some global norm
Firms help create the global market by offering the same
basic products worldwide
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Drivers Of Globalization
Two macro factors underlie the trend toward greater
globalization:
the decline in barriers to the free flow of goods, services,
and capital that has occurred since the end of World War II
technological change
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The Globalization Debate
Is the shift toward a more integrated and interdependent
global economy a good thing?
Supporters believe that increased trade and cross-border
investment mean lower prices for goods and services,
greater economic growth, higher consumer income, and
more jobs
Critics worry that globalization will cause job losses,
environmental degradation, and the cultural imperialism of
global media and MNEs
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Globalization, Jobs, And Income
Globalization critics argue that falling barriers to trade are
destroying manufacturing jobs in advanced countries
Supporters of globalization contend that the benefits of
this trend outweigh the costs—that countries will specialize
in what they do most efficiently and trade for other goods—
and all countries will benefit
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Foreign Direct Investment
Introduction
Foreign direct investment (FDI) occurs when a firm
invests directly in new facilities to produce and/or market in
a foreign country
Once a firm undertakes FDI it becomes a multinational
enterprise
FDI can be:
greenfield investments - the establishment of a wholly
new operation in a foreign country
acquisitions or mergers with existing firms in the foreign
country
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Foreign Direct Investment
In The World Economy
The flow of FDI refers to the amount of FDI undertaken
over a given time period
The stock of FDI refers to the total accumulated value of
foreign-owned assets at a given time
Outflows of FDI are the flows of FDI out of a country
Inflows of FDI are the flows of FDI into a country
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Trends In FDI
There has been a marked increase in both the flow and
stock of FDI in the world economy over the last 30 years
FDI has grown more rapidly than world trade and world
output because:
firms still fear the threat of protectionism
the general shift toward democratic political institutions
and free market economies has encouraged FDI
the globalization of the world economy is having a
positive impact on the volume of FDI as firms undertake
FDI to ensure they have a significant presence in many
regions of the world
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The Direction Of FDI
Most FDI has historically been directed at the developed
nations of the world, with the United States being a favorite
target
FDI inflows have remained high during the early 2000s
for the United States, and also for the European Union
South, East, and Southeast Asia, and particularly China,
are now seeing an increase of FDI inflows
Latin America is also emerging as an important region for
FDI
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The Direction Of FDI
Gross fixed capital formation summarizes the total
amount of capital invested in factories, stores, office
buildings, and the like
All else being equal, the greater the capital investment in
an economy, the more favorable its future prospects are
likely to be
So, FDI can be seen as an important source of capital
investment and a determinant of the future growth rate of
an economy
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The Source Of FDI
Since World War II, the U.S. has been the largest source
country for FDI
The United Kingdom, the Netherlands, France, Germany,
and Japan are other important source countries
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The Form Of FDI: Acquisitions
Versus Greenfield Investments
Most cross-border investment is in the form of mergers
and acquisitions rather than greenfield investments
Firms prefer to acquire existing assets because:
mergers and acquisitions are quicker to execute than
greenfield investments
it is easier and perhaps less risky for a firm to acquire
desired assets than build them from the ground up
firms believe that they can increase the efficiency of an
acquired unit by transferring capital, technology, or
management skills
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The Shift To Services
FDI is shifting away from extractive industries and
manufacturing, and towards services
The shift to services is being driven by:
 the general move in many developed countries toward
services
the fact that many services need to be produced where
they are consumed
a liberalization of policies governing FDI in services
the rise of Internet-based global telecommunications
networks
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Theories Of Foreign Direct Investment
Why do firms invest rather than use exporting or licensing
to enter foreign markets?
Why do firms from the same industry undertake FDI at
the same time?
How can the pattern of foreign direct investment flows be
explained?
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Why Foreign Direct Investment?
Why do firms choose FDI instead of:
exporting - producing goods at home and then shipping
them to the receiving country for sale
or
licensing - granting a foreign entity the right to produce
and sell the firm’s product in return for a royalty fee on
every unit that the foreign entity sells
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Why Foreign Direct Investment?
An export strategy can be constrained by transportation
costs and trade barriers
Foreign direct investment may be undertaken as a
response to actual or threatened trade barriers such as
import tariffs or quotas
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Why Foreign Direct Investment?
Internalization theory (also known as market imperfections
theory) suggests that licensing has three major drawbacks:
licensing may result in a firm’s giving away valuable
technological know-how to a potential foreign competitor
licensing does not give a firm the tight control over
manufacturing, marketing, and strategy in a foreign country
that may be required to maximize its profitability
a problem arises with licensing when the firm’s
competitive advantage is based not so much on its
products as on the management, marketing, and
manufacturing capabilities that produce those products
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The Pattern Of Foreign
Direct Investment
Firms in the same industry often undertake foreign direct
investment around the same time and tend to direct their
investment activities towards certain locations
Knickerbocker looked at the relationship between FDI
and rivalry in oligopolistic industries (industries composed
of a limited number of large firms) and suggested that FDI
flows are a reflection of strategic rivalry between firms in
the global marketplace
The theory can be extended to embrace the concept of
multipoint competition (when two or more enterprises
encounter each other in different regional markets, national
markets, or industries)
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Benefits And Costs Of FDI
Government policy is often shaped by a consideration of
the costs and benefits of FDI
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Host-Country Benefits
There are four main benefits of inward FDI for a host
country:
1. resource transfer effects - FDI can make a positive
contribution to a host economy by supplying capital,
technology, and management resources that would
otherwise not be available
2. employment effects - FDI can bring jobs to a host
country that would otherwise not be created there
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Host-Country Benefits
3. balance of payments effects - a country’s balance-ofpayments account is a record of a country’s payments to
and receipts from other countries.
The current account is a record of a country’s export and
import of goods and services
Governments typically prefer to see a current account
surplus than a deficit
FDI can help a country to achieve a current account
surplus if the FDI is a substitute for imports of goods and
services, and if the MNE uses a foreign subsidiary to export
goods and services to other countries
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Host-Country Benefits
4. effects on competition and economic growth - FDI in the
form of greenfield investment increases the level of
competition in a market, driving down prices and improving
the welfare of consumers
Increased competition can lead to increased productivity
growth, product and process innovation, and greater
economic growth
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The Foreign Exchange Market
Introduction
A firm’s sales, profits, and strategy are affected by events
in the foreign exchange market
The foreign exchange market is a market for converting
the currency of one country into that of another country
The exchange rate is the rate at which one currency is
converted into another
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The Functions Of The
Foreign Exchange Market
The foreign exchange market:
is used to convert the currency of one country into the
currency of another
provide some insurance against foreign exchange risk
(the adverse consequences of unpredictable changes in
exchange rates)
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Currency Conversion
International companies use the foreign exchange market when:
 the payments they receive for exports, the income they receive from
foreign investments, or the income they receive from licensing
agreements with foreign firms are in foreign currencies
 they must pay a foreign company for its products or services in its
country’s currency
 they have spare cash that they wish to invest for short terms in
money markets
 they are involved in currency speculation (the short-term movement
of funds from one currency to another in the hopes of profiting from
shifts in exchange rates)
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Insuring Against Foreign Exchange Risk
The foreign exchange market can be used to provide
insurance to protect against foreign exchange risk (the
possibility that unpredicted changes in future exchange
rates will have adverse consequences for the firm)
A firm that insures itself against foreign exchange risk is
hedging
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Insuring Against Foreign Exchange Risk
The spot exchange rate is the rate at which a foreign
exchange dealer converts one currency into another
currency on a particular day
Spot rates change continually depending on the supply
and demand for that currency and other currencies
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Insuring Against Foreign Exchange Risk
To insure or hedge against a possible adverse foreign
exchange rate movement, firms engage in forward
exchanges
A forward exchange occurs when two parties agree to
exchange currency and execute the deal at some specific
date in the future
 A forward exchange rate is the rate governing such
future transactions
Rates for currency exchange are typically quoted for 30,
90, or 180 days into the future
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Insuring Against Foreign Exchange Risk
A currency swap is the simultaneous purchase and sale
of a given amount of foreign exchange for two different
value dates
Swaps are transacted between international businesses
and their banks, between banks, and between
governments when it is desirable to move out of one
currency into another for a limited period without incurring
foreign exchange rate risk
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The Nature Of The
Foreign Exchange Market
The foreign exchange market is a global network of
banks, brokers, and foreign exchange dealers connected
by electronic communications systems—it is not located in
any one place
The most important trading centers are London, New
York, Tokyo, and Singapore
The markets is always open somewhere in the world—it
never sleeps
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The Nature Of The
Foreign Exchange Market
High-speed computer linkages between trading centers
around the globe have effectively created a single market—
there is no significant difference between exchange rates
quotes in the differing trading centers
If exchange rates quoted in different markets were not
essentially the same, there would be an opportunity for
arbitrage (the process of buying a currency low and selling
it high), and the gap would close
Most transactions involve dollars on one side—it is a
vehicle currency along with the euro, the Japanese yen,
and the British pound
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Economic Theories Of
Exchange Rate Determination
Exchange rates are determined by the demand and
supply for different currencies.
Three factors impact future exchange rate movements:
 a country’s price inflation
 a country’s interest rate
 market psychology
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Prices And Exchange Rates
The law of one price states that in competitive markets
free of transportation costs and barriers to trade, identical
products sold in different countries must sell for the same
price when their price is expressed in terms of the same
currency
Purchasing power parity (PPP) theory argues that given
relatively efficient markets (markets in which few
impediments to international trade and investment exist)
the price of a “basket of goods” should be roughly
equivalent in each country
PPP theory predicts that changes in relative prices will
result in a change in exchange rates
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Prices And Exchange Rates
A positive relationship between the inflation rate and the
level of money supply exists
 When the growth in the money supply is greater than the
growth in output, inflation will occur
 PPP theory suggests that changes in relative prices
between countries will lead to exchange rate changes, at
least in the short run
A country with high inflation should see its currency
depreciate relative to others
Empirical testing of PPP theory suggests that it is most
accurate in the long run, and for countries with high
inflation and underdeveloped capital markets
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Interest Rates And Exchange Rates
There is a link between interest rates and exchange rates
The International Fisher Effect states that for any two
countries the spot exchange rate should change in an
equal amount but in the opposite direction to the difference
in nominal interest rates between two countries
 In other words:
(S1 - S2) / S2 x 100 = i $ - i ¥
where i $ and i ¥ are the respective nominal interest
rates in two countries (in this case the US and Japan), S1
is the spot exchange rate at the beginning of the period and
S2 is the spot exchange rate at the end of the period
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Summary
Relative monetary growth, relative inflation rates, and
nominal interest rate differentials are all moderately good
predictors of long-run changes in exchange rates
 So, international businesses should pay attention to
countries’ differing monetary growth, inflation, and interest
rates
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Exchange Rate Forecasting
Should companies use exchange rate forecasting services
to aid decision-making?
The efficient market school argues that forward exchange
rates do the best possible job of forecasting future spot
exchange rates, and, therefore, investing in forecasting
services would be a waste of money
The inefficient market school argues that companies can
improve the foreign exchange market’s estimate of future
exchange rates by investing in forecasting services
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Approaches To Forecasting
There are two schools of thought on forecasting:
Fundamental analysis draw upon economic factors like
interest rates, monetary policy, inflation rates, or balance of
payments information to predict exchange rates
Technical analysis charts trends with the assumption that
past trends and waves are reasonable predictors of future
trends and waves
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Entry Strategy and
Strategic Alliances
Introduction
Firms expanding internationally must decide:
 which markets to enter
 when to enter them and on what scale
 which entry mode to use
Entry modes include:
 exporting
 licensing or franchising to a company in the host nation
 establishing a joint venture with a local company
 establishing a new wholly owned subsidiary
 acquiring an established enterprise
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Introduction
Several factors affect the choice of entry mode including:
 transport costs
 trade barriers
 political risks
 economic risks
 costs
 firm strategy
 The optimal mode varies by situation – what makes
sense for one company might not make sense for
another
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Basic Entry Decisions
Firms entering foreign markets make three basic decisions:
1. which markets to enter
2. when to enter those markets
3. on what scale to enter those markets
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Which Foreign Markets?
 The choice of foreign markets will depend on their long
run profit potential
 Favorable markets are politically stable developed and
developing nations with free market systems and
relatively low inflation rates and private sector debt
 Less desirable markets are politically unstable
developing nations with mixed or command economies,
or developing nations with excessive levels of borrowing
 Markets are also more attractive when the product in
question is not widely available and satisfies an unmet
need
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Timing Of Entry
 Once attractive markets are identified, the firm must
consider the timing of entry
 Entry is early when the firm enters a foreign market
before other foreign firms
 Entry is late when the firm enters the market after firms
have already established themselves in the market
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Timing Of Entry
 First mover advantages are the advantages associated
with entering a market early
First mover advantages include:
 the ability to pre-empt rivals and capture demand by
establishing a strong brand name
 the ability to build up sales volume in that country and
ride down the experience curve ahead of rivals and gain
a cost advantage over later entrants
 the ability to create switching costs that tie customers
into products or services making it difficult for later
entrants to win business
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Timing Of Entry
 First mover disadvantages are disadvantages associated with
entering a foreign market before other international businesses
First mover disadvantages include:
 pioneering costs - arise when the foreign business system is so
different from that in a firm’s home market that the firm must devote
considerable time, effort and expense to learning the rules of the
game
Pioneering costs include:
 the costs of business failure if the firm, due to its ignorance of the
foreign environment, makes some major mistakes
 the costs of promoting and establishing a product offering, including
the cost of educating customers
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Scale Of Entry And Strategic Commitments
 After choosing which market to enter and the timing of
entry, firms need to decide on the scale of market entry
 Entering a foreign market on a significant scale is a
major strategic commitment that changes the
competitive playing field
 Firms that enter a market on a significant scale make a
strategic commitment to the market (the decision has a
long term impact and is difficult to reverse)
 Small-scale entry has the advantage of allowing a firm to
learn about a foreign market while simultaneously
limiting the firm’s exposure to that market
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Entry Modes
These are six different ways to enter a foreign market:
1. exporting
2. turnkey projects
3. licensing
4. franchising
5. establishing joint ventures with a host country firm
6. setting up a new wholly owned subsidiary in the host
country
 Managers need to consider the advantages and
disadvantages of each entry mode
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Selecting An Entry Mode
Table 14.1:
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