Multinational Business..... a lesson

Multinational Business

Management Tutorial Q 1. Examine the factors affecting the FDI flow into a developing country. India is also making FDI abroad. Is it in India’s interest? Why and why not?

Ans: Abstract Foreign Direct Investment is of increasing importance for both developing and industrialized countries, with the UN estimating total FDI flows at $560 billion in 2003 (UNCTAD 2004), of which an increasing share went to developing countries. These investment flows can have a major impact on the economic environment and competitiveness of developing countries. Yet they remain uneven, with some countries and some regions within countries attracting more FDI in relation to their population and economic activity than others. This study examines the possible cultural factors affecting FDI in different regions of one large emerging economy, namely India, in terms of the varying religious, social and political backgrounds of the different states. Although a substantial amount of literature exists in relation to the effects of culture on business practice, less has been published on the effects of culture on international trade and investment. In addition, culture is often quite narrowly defined in terms of implicit psychological attitudes, with far less attention being paid to the effects of explicit cultural features such as religion and political philosophy or to sociological factors such as urbanization and education levels, which may have a crucial effect on the ability of countries and regions to attract FDI and on the uses to which FDI inflows are put.

Advantages of FDI in India:

The Indian government made several reforms in the economic policy of the country in the early 1990s. This helped in the liberalization and deregulation of the Indian economy and also opened the country's markets to foreign direct investment.

As a result of this, huge amounts of foreign direct investment came into India through non- resident Indians, international companies, and various other foreign investors. The growth of FDI in India boosted the economic growth of the country.

Major advantages of FDI in India have been in terms of -

• Increased capital flow.
• Improved technology.
• Management expertise.
• Access to international markets

Amount of foreign direct investment in India

The total amount of FDI in India came to around US$ 42.3 billion in 2001, in 2002 this figure stood at US$ 54.1 billion, in 2003 this figure came to US$ 75.4 billion, and in 2004 this figure increased to US$ 113 billion. This shows that the flow of foreign direct investment in India has grown at a very fast pace over the last few years. The various forms of foreign capital flowing into India are NRI deposits, investments in the commercial banks of India, and investments in the country's debt and stock markets.

FDI in major sectors in India

The major sectors of the Indian economy that have benefited from FDI in India are -

• Financial sector (banking and non-banking).
• Insurance
• Telecommunication
• Hospitality and tourism
• Pharmaceuticals
• Software and Information Technology.

Management Tutorial Q 2. Discus market entry strategies by an Indian Firm, Haldiram in any suitable overseas market of your choice. Why has McDonald succeeded as a most successful global franchiser?

Ans: Managing an international business is different from managing a company operating in a national market. The decision about which business areas to manage centrally and which parts locally has to be well thought.

It is essential to have local managers involved in the running of subsidiaries. They provide the necessary knowledge of the local business culture and market, and are in a better position to drive the business forward. Local management should always be in charge of the local workforce. Human resources (HR) management, except for top positions, should not be centralised.

Leadership within an international business should reflect the diversity of the customer base and the workforce. Top managers have awareness of cultural differences and knowledge of languages and customs.

The decision of how to enter a foreign market can have a significant impact on the results.

The available market strategies with their features could be:

• Exporting
• Licensing and Franchising
• Joint Venture
• Direct Investment

Exporting

Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.

Exporting commonly requires coordination among four players:

• Exporter
• Importer
• Transport provider
• Government

Licensing

Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.

Franchising refers to the methods of practicing and using another person's business philosophy. The franchisor grants the independent operator the right to distribute its products, techniques, and trademarks for a percentage of gross monthly sales and a royalty fee. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor. Agreements typically last from five to thirty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees.

Joint Venture

There are five common objectives in a joint venture:

market entry,

• risk/reward sharing,
• technology sharing and
• joint product development,
• Conforming to government regulations.

Other benefits include political connections and distribution channel access that may depend on relationships.

Such alliances often are favorable when:

the partners' strategic goals converge while their competitive goals diverge;

the partners' size, market power, and resources are small compared to the industry leaders; and

partners' are able to learn from one another while limiting access to their own proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions.

Potential problems include:

• conflict over asymmetric new investments
• mistrust over proprietary knowledge
• performance ambiguity - how to split the pie
• lack of parent firm support
• cultural clashes
• if, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.

The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.

The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.

Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise.

McDonald’s success story

Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.

It's part of the American landscape and a global icon and it has been 50 years in the making. McDonald's attracts 15 million customers a day, and has 31,000 stores in over 118 countries.

They speeded up the process by dropping most of the things from the menu like root beer and orangeade and copying a factory assembly line. So, they retained the big moneymakers and these were the fries, cheeseburgers and milkshakes, which were then put on an effiicient production line.

They reopened after this revamp and they began to get sales clerks, cab drivers and construction workers, who wanted their food fast and here they got that.

Tyron Davis is one such manager and he's all set to own his own franchise and he knows how to work the ropes to keep them happy and coming back for more. He cheerfully oversees the other employees, offers a refund because a customer waited for his food and of course, just knows that the restrooms have got to be clean - or the customers won't come back again.

It's this efficiency which has made McDonald's bigger and more efficient than any of its competitors. Financially, McDonald's is soaring with annual revenues of more than $21 billion but that's a major turnaround from where the company was a couple of years ago.

Management Tutorial Q 3. Why M&A’s have become the major instrument of global expansion, in spite of high failure rate. Prepare DO’s and DO Not’s for successful Cross-border mergers.

Ans: The Do's and Don'ts of Mergers & Acquisition

The world is getting smaller, especially with wave after wave of merger and acquisition activity.

The focus is needed to put upon:

People First

The most important piece of data needed is an overall profile of company personnel. This is because before individuals can appropriately continue to contribute to the new, combined company they must first understand what their role will be in the new company, in what group they will work, and for which manager.

At the same time, project management teams must be integrated to develop a single integrated product plan and a single integrated product team. This team must be plugged quickly into existing services and systems.

Then, as soon as an acquisition is announced, direct communications must be established between the two companies via e-mail to facilitate the timely exchange of critical business information. Networks must be connected and systems evaluated and integrated, where necessary, into the acquiring company’s existing infrastructure.

For many smaller acquisitions, this process can be completed in just 90 days. By then, users will be using the combined company’s shared e-mail system, technical support staff will have ready access to business systems, and HR documents and expense reports will flow through a shared set of systems and applications.

Processes and Technology

The 90-day integration goal also requires the organization to set up executive governance for rapid decision-making. Compliance concerns must be addressed early.

These might include merging development and project methodologies, production change management processes, and integrating financial systems and processes. Due diligence and integration planning should be completed concurrently for fastest results.

From a technology perspective, architecture and scalability must be the primary focus.

Due diligence on vendor contracts must be done prior to Day 1, with an auto-renewal clause and timing in place by that time. Particularly with mergers of equals, technology decisions need to be grounded with overall business priorities and made very quickly. Finally, decisions must be made to retire systems that are no longer relevant in the new environment.

Management Tutorial Q 4. How can companies prevent the failure of highly paid expatriates in their assignments abroad? What difficulties arise in their performance appraisal?

Ans: those areas in which savings may be achieved in the recruitment, selection, development, deployment, support and retention of people in international business ventures. Its aim is to suggest to the international HR manager some practical approaches to measuring (or at least estimating with a reasonable degree of accuracy) the actual costs of omitting or ineffectively performing specific HR management activities. Keeping records of these costs over the course of a fiscal year will provide credible input for decision making, budget planning, and cost control. It is hoped that the "hands-on" international human resource managers who are most qualified and who have the most to gain will be motivated to further develop means of measurement in the following areas.

Recruitment

Expatriate Managers

Citizens of one country working in another country

Ethnocentric policy- all home-country nationals

Geocentric policy- not need be home-country nationals; decisions not based on nationality.

Expatriate failure

-The premature return of an expatriate manager to his or her home country.

Expatriate RATES- failure of the firm’s selection policies to identify individuals who will not thrive abroad

- 16 to 40% of all American employee’s sent abroad to developed nations return from their assignments early

-High costs

Reasons for Expatriate failure

Inability of spouse to adjust

Manager’s inability to adjust

Other family problems

Manager’s personal or emotional maturity

Inability to cope with larger overseas responsibilities

Expatriate Selection

Four Dimensions that predict success in foreign postings:

SELF-ORIENTATION- expatriates with high self-esteem, self-confidence, and mental well-being.

OTHERS-ORIENTATION- expatriates who interact effectively with host-country nationals.

PERCEPTUAL ABILITY- expatriates who are willing to empathize.

CULTURAL TOUGHNESS- expatriates ability to adjust to the unfamiliar and uncomfortable cultures.

Training &Development Management

TRAINING FOR EXPATRIATE MANAGER

- CULTURAL TRAINING- seeks to foster an appreciation for host-country’s culture

-LANGUAGE TRAINING- helps foster a better image of the firm in host country

-PRACTICAL TRAINING- useful source of support and helps family adapt to a foreign culture

Training &  Development Management

REPATRIATION OF expatriate

Firms face many problems with repatriation

60-70% of repatriates did not know what expatriateposition would be when they returned home.

60% said organizations were vague about repatriation, about expatriate new roles, and about their future career progression within the country.

15% of expatriate leave expatriate firm within 1 year of returning home.

40% leave within 3 years

The key to solving these problems are good human resource planning

Training &  Development Management

MANAGEMENT DEVELOPMENT AND STRATEGY

Management develops programs to try to improve the overall productivity and quality of the firm’s management resources

Used to create a transnational strategy in international business

Helps build unifying corporate culture

Include songs, picnics, and sporting events that promote feelings of togetherness

Activities aim to strengthen a manager’s identification with the company

Builds an informal management network

Performance Appraisal

Used to evaluate the Performance against some criteria the firm judges to be important for the implementation of strategy and the attainment of competitive advantage. Performance Appraisal

PROBLEMS

Unintentional bias by both host nations managers and home office managers

56% of managers surveyed stated that a foreign is either Performance Appraisal

assignment detrimental or immaterial to their career

GUIDELINES FOR Performance Appraisal

More weight should be given to on-site manager’s appraisal

Involve a former expatriate who served in the same location to help reduce bias

Home office manager’s should be consulted before an on-site manager completes a formal termination evaluation

Compensation

How should compensation be adjusted to reflect national differences in economic circumstance and compensation practices?

How should expatriate managers be paid?

Compensation system should reward managers for taking actions that are consistent with the strategy of the enterprise.

National Differences in Compensation

Substantial differences exist in the compensation of executives at the same level in various countries.

Should the firm pay executives in different countries according to the prevailing standards in each country, or should it equalize pay on a global basis?

Expatriate Pay

The most common approach to expatriate pay is the balance sheet approach.

This approach equalizes purchasing power across countries to employees can enjoy the same living standards (income taxes, housing expenses, expenditures for goods and services, and reserves).

International Labor Relations

One task of HRM function is to foster harmony and minimize conflict between the firm and organized labor.

The concerns of organizedlabor 1)establish international labor organizations. 2)lobbying for national legislation to restrict multinationals. 3) trying to achieve international regulations on multinationals through organizations such as the United Nations.

Approaches to labor relations- Historically, decentralized international labor relations because of labor laws, union power, and collective bargaining vary so much from country to country. There is now a trend toward centralized control. It reflects the international firms attempts to rationalize their global operations

1. The lack of early identification of candidates qualified for expatriate assignments limits the time available for their preparation and training, resulting in lower performance and productivity overseas.

2. Rushed, last-minute recruiting causes excessive administrative costs (extra travel, expediter services, phone, telefax, express delivery, staff overtime, higher airfares, etc.).

Management Tutorial Q 5. How international firms are evaluating and managing political, economic and financial risks?

Ans: Risk management is of paramount importance to the economic consequences of investments.

The general types of risk faced by all businesses can be grouped into five broad categories:

1) market risks, such as unexpected changes in interest rates, exchange rates, stock prices, or commodity prices;

2) credit/default risks;

3) operational risks, such as equipment failure, fraud;

4) liquidity risks, such as inability to pay bills, inability to buy or sell commodities at quoted prices; and

5) political risks

One of the major considerations inherent in any international investment is the political risk represented by the host country. This is particularly true in industries such as the oil and gas or energy industries, which are high profile and often controversial in almost every country in which the energy industry has been privatized or in which private upstream petroleum operations exist.

Political risk does not result from the type of political system in place in the host country. For example, western companies have operated successfully under all types of political systems, be they Marxist, capitalist, nationalist, socialist, monarchy, or democracy. Political risk usually stems from changes to the political and socio-economic conditions of the host country from those that existed at the time the agreements in question were originally entered into.

Government Risks Instability RisksFirm Specific Risks Discriminatory regulations Sabotage "Creeping" expropriation Kidnappings Breach of contract Firm-specific boycottsCounty Level Risks Mass nationalizations Mass labor strikes Regulatory changes Urban rioting Currency inconvertibility Civil wars

Management Tutorial Q 6. What is meant by hedging in foreign exchange market? Enumerate the hedging tools.

Ans: Forex investors often use a strategy called hedging to decrease some of the risk associated with trading. Many people think of hedging as buying an insurance policy for their currency position, and it acts in much the same way. By using investment instruments known as derivatives, forex traders can rest easy knowing that any losses will be covered by the backup plan.

Currency futures are bought and sold on a market just like any other instrument such as stocks or currencies, and are a great way to hedge against changing currency exchange rates. For example, say you used dollars to take a long position in euros, but you are a little worried that the price of euros will fall relative to the dollar. One thing you could do is take out a futures contract on dollars using euros. As external factors affect the price of currencies, the price of futures contracts rise and fall as well, allowing your euros-to-dollars contract to counteract your long position in euros. If the euro weakens, the futures contract price rises, and vice-versa, so you have therefore eliminated the risk from your currency investment.

Traditional forex options are derivatives that allow the buyer to purchase an amount of currency from another trader for a set price, and make a great hedging tool. Again, these are instruments that are traded on the open market, and the investor is under no obligation to follow through with the option.

Currency Risk Assessment Tool

Quantify Risks That Can Be Avoided by Forex Hedging

This tool helps you estimate the benefits of using carry spot forex hedges on foreign currency amounts. It shows carry spot hedging costs and compares them to the potential losses that could result from unfavorable future forex rate changes if you didn’t hedge. Click the Add New Row button to add and compare additional foreign currency exposures.

Forex Hedging Cost Comparison Tool

Compare Carry Spot Forex Hedges to Bank Forward Contracts

This tool compares the cost difference (or rate difference) between a carry spot forex hedge and a forex forward contract, outlining the savings of using one method over the other.

Management Tutorial Q 7. What challenges are faced in the area of India’s foreign trade? Will the full convertibility of Indian currency help or retard the international trade? Justify your answer with suitable examples from different sectors.

Ans: With increase in competition, international trade is subjected to many challenges. Challenge of international trade may be psychological, infrastructural, physical. The challenge of international trade and other associated information and guidelines are usually made known in the trade policies.

In addition to the trade associated challenges in international trade, a new challenge, which is lurking large, and had practically devastated the United States of America, is the fight against terrorism.

After the terrorist attacks on the World Trade Center, there was global economic slowdown. International trade suffered massively. There were tremendous fluctuations in the exchange rates. Starting from anthrax attacks to the terrorist attacks on Sept 11th, the trade scenario worldwide has changed dramatically since then.

Political Instability the Indian political condition has not been so good hence not much favorable to attract for its value. And hence affecting the flow of foreign direct investment.

Ineffient marketing of SME products

The products especially primary sector is do not have marketing capability to sell in the international market.

Ill effects of terrorism

India has been the major country affected by terrorist activities especially affecting the hospitality industry. The recent 26/11/2008 terrorist attack on Bombay amassed this factor.