International Business Management: Study Map

THE MYTH OF GLOBALIZATION

Susan P. Douglas and Yoram Wind

In recent years, globalization has become a key theme in every discussion of international marketing strategy. Proponents of the philosophy of “global” products and brands, such as professor Theodore Levitt of Harvard, and the highly successful advertising agency, Saatchi and Saatchi, argue that in a world of growing internationalization, the key to success is the development of global products and brands, in other words, a focus on the marketing of standardized products and brands worldwide (Levitt, 1983). Others, however, point to the numerous barriers to standardization, and suggest that greater returns are to be obtained from adapting products and marketing strategies to the specific characteristics of individual markets (Fisher, 1984; Kotler, 1985; Vedder, 1986).

The growing integration of international markets as well as the growth of competition on a worldwide scale implies that adoption of a global perspective has become increasingly imperative in planning marketing strategy. However, to conclude that this mandates the adoption of a strategy of universal standardization appears naive and oversimplistic. In particular, it ignores the inherent complexity of operations in international markets, and the formulation of an effective strategy to penetrate these markets. While global products and brands may be appropriate for certain markets and in targeting certain segments, adopting such an approach as a universal strategy in relation to all markets may not be desirable, and may lead to major strategic blunders. Furthermore, it implies a product orientation and a product-driven strategy, rather than a strategy grounded in a systematic analysis of customer behavior and response patterns and market characteristics.

The purpose of this paper is thus to examine critically the notion that success in international markets necessitates adoption of a strategy of global products and brands. Given the restrictive characteristics of this philosophy, a somewhat broader perspective in developing global strategy is proposed which views standardization as merely one option in the range of possible strategies which may be effective in global markets.

The paper is divided into four parts. First, the traditional perspective on international marketing strategy focusing on the dichotomy between “standardization” and “adaptation” is reviewed. The second part examines the key assumptions underlying a philosophy of global standardization, as well as situations under which this is likely to prove effective. In the third part, the constraints to the implementation of a global standardization strategy are reviewed, including not only external p. 25 market constraints, but also internal constraints arising from the structure of the firm’s current operations. Finally, based on this review, a more general approach is suggested, enabling consideration of a range of alternative strategies incorporating varying degrees of standardization or adaptation.

Copyright 1987, Columbia Journal of World Business. Reprinted with permission. [footnote at the foot of p. 24]

The Traditional Perspective on International Marketing Strategy

Traditionally, discussion of international business strategy has been polarized around the debate concerning the pursuit of a uniform strategy worldwide versus adaptation to specific local market conditions. On the one hand, it has been argued that adoption of a uniform strategy worldwide enables a company to take advantage of the potential synergies arising from multicountry operations, and constitutes the multinational company’s key competitive advantage in international markets. Others however, have argued that adaptation of strategy to idiosyncratic national market characteristics is crucial to success in these markets.

Fayerweather (1969) in his seminal work in international business strategy described the central issue as one of conflict between forces toward unification and those resulting in fragmentation. He pointed out that within a multinational firm, internal forces created pressures toward the integration of strategy across national boundaries. On the other hand, differences in the sociocultural, political and economic characteristics of countries as well as the need for effective relations with the host society constitute fragmenting influences which favor adaptation to the local environment.

This theme has been elaborated further in subsequent discussions of international business strategy. Doz (1980), for example, characterizes the conflict as one between the requirements for economic survival and success (the economic imperative), and the adjustments to strategy made necessary by the demands of host governments (the political imperative). Economic success or profitability in international markets is viewed as contingent on the rationalization of activities across national boundaries.

The political imperative, on the other hand, implies a strategy of “national responsiveness,” forgoing potential benefits of global integration and allowing local subsidiaries substantial autonomy to develop their own production policies and strategy. A third alternative, “administrative coordination” is, however, postulated. In this case, each strategic decision is made on its own merits, allowing flexibility either to respond to pressures for national responsiveness or alternatively to move toward worldwide rationalization.

Recent discussion of global competitive strategy (Porter, 1980; 1985) echoes the same theme of the dichotomy between the forces that have triggered the globalization of markets and those that constitute barriers to global competition. Factors such as economies of scale in production, purchasing, faster accumulation of learning from operating worldwide, decrease in transportation and distribution costs, reduced costs of product adaptation, and the emergence of global market segments have encouraged competition on a global scale. However, barriers such as governmental and institutional constraints, tariff barriers and duties, preferential treatment of local firms, transportation costs, differences in customer demand, etc., call for nationalistic or “protected niche” strategies.

Similar arguments have characterized the debate concerning uniformity versus adaptation of marketing and advertising strategies. In this context, greater attention has generally been focused on barriers to standardization (Buzzell, 1968; Elinder, 1964). Differences in customer behavior and response patterns, in local competition, in the nature of the marketing infrastructure, as well as government and trade regulation have all been cited, as calling for, and in some cases rendering imperative, the adaptation of products, advertising copy, and other aspects of marketing policy (Miracle, 1968; Dunn, 1966; Donnelly and Ryans, 1969; Ryans, 1969). Yet, some advocates of a uniform or standardized strategy worldwide, especially p. 26 in relation to advertising copy, have emerged - who point to a growing internationalization of lifestyles, and increasing homogeneity in consumer interests and tastes (Britt, 1974; Fatt, 1967; Boote, 1967; Killough, 1978). They have, for example, noted benefits such as development of a consistent uniform image with customers worldwide, improved planning and control, exploitation of good ideas on a broader geographic scale, as well as potential cost savings.

Compromise solutions such as “pattern standardization” have also been proposed (Peebles, Ryans, and Vernon, 1978). In this case, a global promotional theme or positioning is developed, but execution is adapted to the local market. Similarly, it has been pointed out that even where a standardized product is marketed in a number of countries, its positioning may be adapted in each market (Keegan, 1969). Conversely, the positioning may be uniform across countries, but the product itself adapted or modified.

Although this debate first emerged in the 1960s, it has recently taken on a new vigor with the widely publicized pronouncements or proponents of “global standardization” such as Professor Levitt and Saatchi and Saatchi. Levitt, for example, in his provocative article (1983) stated:

A powerful force (technology) now drives the world toward a single converging commonality. The result is a new commercial reality - the explosive emergence of global markets for globally standardized products, gigantic world-scale markets of previously unimagined magnitudes.

Corporations geared to this new reality generate enormous economies of scale in production, distribution, marketing, and management. When they translate these into equivalently reduced world prices, they devastate competitors that still live functionally in the disabling grip of old assumptions about how the world now works.

The sweeping and somewhat polemic character of this argument has sparked a number of counterarguments as well as discussion of conditions under which such a strategy may be most appropriate. It has, for example, been pointed out that the potential for standardization may be greater for certain types of products such as industrial goods or luxury personal items targeted to upscale consumers, or products with similar penetration rates (Huszagh, Fox, and Day, 1985). Opportunities for standardization are also likely to occur more frequently among industrialized nations, and especially the Triad countries, where customer interests as well as market conditions are likely to be more similar than among developing countries (Hill and Still, 1983; Huszagh, Fox, and Day, 1985; Ohmae, 1985).

The role of corporate philosophy and organizational structure in influencing the practicality of implementing a strategy of global standardization has also been recognized (Quelch and Hoff, 1986). Here, it has been noted that few companies pursue the extreme position of complete standardization with regard to all elements of the marketing mix, and business functions such as R & D, manufacturing, and procurement in all countries throughout the world. Rather, some degree of adaptation is likely to occur relative to certain aspects of the firm’s operations or in certain geographic areas. In addition, the feasibility of implementing a standardized strategy will depend on the autonomy accorded to local management. If local management has been accustomed to substantial autonomy, considerable opposition may be encountered in attempting to introduce globally standardized strategies.

An examination of such counterarguments suggests that there are a number of dangers in espousing a philosophy of global standardization for all products and services, and in relation to all markets worldwide. Furthermore, there are numerous difficulties and constraints to implementing such a strategy in many markets, stemming from external market conditions (such as government and trade regulation, competition, the marketing infrastructure, etc.), as well as from the current structure and organization of the firm’s operations.

The rationale underlying the philosophy of global products and brands is next examined in more detail, together with its inherent limitations.

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The Global Standardization Philosophy: The Underlying Assumptions

An examination of the arguments in favor of a strategy of global products and brands reveals three key underlying assumptions:

1. Customer needs and interests are becoming increasingly homogeneous worldwide.

2. People around the world are willing to sacrifice preferences in product features, functions, design and the like for lower prices at high quality.

3. Substantial economies of scale in production and marketing can be achieved through supplying global markets.

(Levitt, 1983)

There are, however, a number of pitfalls associated with each of these assumptions. These are discussed here in more detail.

Homogenization of the World Wants. A key premise of the philosophy of global products is that customers’ needs and interest are becoming increasingly homogeneous worldwide. But while global segments with similar interests and response pattern may be identified in some product markets, it is by no means clear that this is a universal trend. Furthermore, there is substantial evidence to suggest an increasing diversity of behavior within countries and the emergence of idiosyncratic country-specific segments.

Lack of Evidence of Homogenization. In a number of product markets ranging from watches, perfume, handbags, to soft drinks and fast foods, companies have successfully identified global customer segments and developed global products and brands targeted to these segments. These include such stars as Rolex, Omega, and Le Baume & Mercier watches, Dior, Patou, or Yves St. Laurent perfume. But while these brands are highly visible and widely publicized, they are often, with a few notable exceptions, such as Classic Coke or McDonald’s, targeted to a relatively restricted upscale international customer segment (Ohmae, 1985).

Numerous other companies, however, adapt lines to idiosyncratic country preferences and develop local brands or product variants targeted to local market segments. The Findus frozen food division of Nestlé, for example, markets fish cakes and fish fingers in the UK, but beef bourguinon and coq au vin in France, and vitello con funghi and braviola in Italy. Their line of pizzas marketed in the UK includes cheese with ham and pineapple topping on a French bread crust. Similarly, Coca-Cola in Japan markets Georgia, cold coffee in a can, and Aquarius, a tonic drink, as well as Classic Coke and Hi-C.

Growth of Intra-Country Segmentation Price Sensitivity. Furthermore, there is a growing body of evidence which suggests substantial heterogeneity within countries. In the U.S., for example, the VALS study has identified nine value segments (Mitchell, 1983), while other studies have identified major differences in behavior between regions and subcultural segments (Kahle, 1986; Garreau, 1981; Wallendorf and Reilly, 1983; Saegert, Moore, & Hilger 1985). Lifestyle approaches such as the Yankelovich Monitor (Beatty, 1985) or the customized AIO approach (Wells, 1975) have also identified different lifestyle segments both generally and relative to specific product markets.

Many other countries are also characterized by substantial regional differences as well as different lifestyles and value segments. The Yankelovich Monitor and AIO approaches have, for example, been applied in a number of countries throughout the world (Broadbent and Segnit, 1973; the RISC Observer No. 1 & 2, 1986). In some cases, this has resulted in the identification of some common segments across countries, but country-specific segments have also emerged (Douglas and Urban, 1977; Boote, 1982/3). Lifestyle segmentation studies conducted by local research organizations in other countries also reveal a variety of lifestyle profiles (Hakuhodo, 1985).

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Similarly, in industrial markets, while some global segments, often consisting of firms with international operations, can be identified, there also is considerable diversity within and between countries. Often local businesses constitute an important market segment and, especially in developing countries, may differ significantly in technological sophistication, business, philosophy and strategy, emphasis on product quality, and service and price, from large multinationals (Hill and Still, 1984; Chakrabarti, Feinman, and Fuentivilla, 1982).

The evidence thus suggests that the similarities in customer behavior are restricted to a relatively limited number or target segments, or product markets, while for the most part, there are substantial differences between countries. Proponents of standardization counter that the international marketer should focus on similarities among countries rather than differences. This may, however, imply ignoring a major part of a local market and the potential profits that may be obtained from tapping other market segments.

Universal Preference for Low Price at Acceptable Quality. Another critical component of the argument for global standardization is that people around the world are willing to sacrifice preferences in product features, functions, design and the like for lower prices assuming equivalent quality. Aggressive low pricing for quality products which meet the common needs of customers in markets around the world is believed to further expand the global markets facing the firm. Although an appealing argument, this has three major problems.

Lack of Evidence of Increases. Evidence to suggest that customers are universally willing to trade off specific product features for a lower price is largely lacking. While in many product markets there is invariably a price-sensitive segment, there is no indication that this is on the increase. On the contrary, in many product and service markets, ranging from watches, personal computers, household appliances, to banking and insurance, an interest in multiple product features, product quality and service appears to be growing.

For example, findings from the PIMS project overwhelmingly suggest that product quality is the driving force behind successful marketing strategies not only in the U.S., but also in other developed countries (Douglas and Craig, 1983; Gale, Luchs, and Rosenfeld, 1986). In industrial markets, insofar as global market segments consist of multinational corporations, they may be more concerned with the ability to supply and service their operations worldwide than with the price. Similarly, in consumer markets where global market segments consist of upscale affluent customers, they are likely to look for distinctive prestige, high-quality products such as Cartier watches and handbags and Godiva chocolates. Consequently, it is arguable that world customers are less price sensitive than other customers.

Low Price Positioning Is a Highly Vulnerable Strategy. Also, from a strategic point of view, emphasis on price positioning may be undesirable especially in international markets, since it offers no long-term competitive advantage. A price-positioning strategy is always vulnerable to new technological developments which may lower costs, as well as to attack from competitors with lower overhead and lower operating or labor costs. Government subsidies to local competitors may also undermine the effectiveness of a price-positioning strategy. In addition, price-sensitive customers typically are not brand or source loyal.

Standardized Low Price Can Be Overpriced in Some Countries and Underpriced in Others. Finally, a strategy based on a combination of a standardized product at a low price, when implemented in countries that vary in their competitive structure, as well as the level of economic development, is likely to result in products that are overdesigned and overpriced for some markets and underdesigned and underpriced for others. There is, for example, substantial evidence to suggest that where markets in developing countries p. 29 are price sensitive, a strategy of product adaptation and simplification may be the most effective (Hill and Still, 1984). Cost advantages may also be negated by transportation and distribution costs as well as tariff barriers and/or price regulation (Porter, 1980; 1985).

Economies of Scale of Production and Marketing. The third assumption underlying the philosophy of global standardization is that a key force driving strategy is product technology, and that substantial economies of scale can be achieved by supplying global markets. This does, however, neglect three critical and interrelated points: (a) technological developments in flexible factory automation enable economies of scale to be achieved at lower levels of output and do not require production of a single standardized product, (b) cost of production is only one and often not the critical component in determining the total cost of the product, and (c) strategy should not be solely product-driven but should take into account the other components of a marketing strategy, such as positioning, packaging, brand name, advertising, P.R., consumer and trade promotion and distribution.

Developments in Flexible Factory Automation. Recent developments in flexible factory automation methods have lowered the minimum efficient scale of operation and have thus enabled companies to supply smaller local markets efficiently, without requiring operations on a global scale. However, diseconomies may result from such operations due to increased transportation and distribution costs, as well as higher administrative overhead and additional communication and coordination costs.

Furthermore, decentralization of production and establishment of local manufacturing operations enable diversification of risk arising from political events, fluctuations in foreign exchange rates, or economic instability. Recent swings in foreign exchange rates, coupled with the growth of offshore sourcing, having underscored the vulnerability of centralizing production in a single location. Government regulations relating to local component and/or offset requirements create additional pressures for local manufacturing. Flexible automation not only implies that decentralization of manufacturing and production may be cost-efficient but also makes minor modifications in products of models in the latter stages of production feasible, so that a variety of model versions can be produced without major retooling. Adaptations to product design can thus be made to meet differences in preferences from one country to another without loss of economies of scale.

Production Costs Are Often a Minor Component of Total Cost. In many consumer and service industries, such as cosmetics, detergents, pharmaceuticals, or financial institutions, production costs are a small fraction of total cost. The key to success in these markets is an understanding of the tastes and purchase behavior of target customers and distribution channels, and tailoring products and strategies to these rather than production efficiency. In the detergent industry, for example, mastery of mass-merchandising techniques and an effective brand management system is typically considered the key element in the success of the giants in this field, such as Procter and Gamble (P&G) or Colgate-Palmolive.

For many products, the establishment of an effective distribution network is often of prime importance in penetrating international markets. This is particularly the case for consumer products in countries where the absence or limited reach of mass-communication channels such as TV or magazines preclude the use of “pull” strategies. Distribution may also be crucial for products such as agricultural machinery, which require extensive after-sales service and maintenance. Furthermore, for some companies such as Avon with their Avon sales ladies network, or direct marketing insurance companies, distribution may constitute the crux of their marketing strategy and be a major component of their costs.

In these cases, the potential for scale economies arising from a standardization of operations may p. 30 be negligible or nonexistent. In some instances, greater efficiency in operational systems and procedure may result from experience in multiple country market environments, but, as noted previously, there may also be significant scale diseconomies.

The Standardization Philosophy Is Primarily Product-Driven. The focus on product and brand related aspects of strategy in discussions of global standardization is misleading since it ignores the other key marketing strategy variables. Strategy in international markets should also take into consideration other aspects of the marketing mix, and the extent to which these are standardized across country markets rather than adapted to local idiosyncratic characteristics. Thus, not only should the effectiveness of using standardized positioning strategy promotional and advertising campaigns be considered, but a standardized distribution system and uniform pricing should be considered as well. There are, however, often formidable barriers to such a strategy, which will be discussed subsequently.

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Requisite Conditions for Global Standardization

The numerous pitfalls in the rationale underlying the global standardization philosophy suggest that such a strategy is far from universally appropriate for all products, brands, or companies. Only under certain conditions is it likely to prove a “winning” strategy in international markets. These include: (a) the existence of a global market segment, (b) potential synergies from standardization, and (c) the availability of a communication and distribution infrastructure to deliver the firm’s offering to target customers worldwide.

Existence of Global Market Segments. As noted previously, global segments may be identified in a number of industrial and consumer markets. In consumer markets, these segments are typically luxury or premium-type products. Global segments are, however, not limited to such product markets, but also exist in other types of markets, such as motorcycle, record, stereo equipment, and computer, where a segment with similar needs and wants can be identified in many countries.

In industrial markets, companies with multinational operations are particularly likely to have similar needs and requirements worldwide. Where the operations are integrated or coordinated across national boundaries, as in the case of banks or other financial institutions, compatibility of operation systems and equipment may be essential. Consequently, they may seek vendors who can supply and service their operations worldwide, in some cases developing global contracts for such purchases. Similarly, manufacturing companies with worldwide operations may source globally in order to ensure uniformity in quality, service, and price of components and other raw materials throughout their operations.

Marketing of global products and brands to such target segments and global customers enables development of a uniform global image throughout the world. In some markets such as perfume, fashions, etc., association with a specific country of origin or a foreign image in general may carry a prestige connotation. In other cases, for example, Sony electronic equipment, McDonald’s hamburgers, Hertz or Avis car rental, IBM computers, or Xerox office equipment, it may help to develop a worldwide reputation for quality and service. Just as multinational corporations may seek uniformity in supply worldwide, some consumers who travel extensively may be interested in finding the same brand of cigarettes and soft drinks, or hotels in foreign countries. This may be particularly relevant in product markets used extensively by international travelers.

While the existence of a potential global segment is a key motivating factor for developing a global product and brand strategy, it is important to note that the desirability of such a strategy depends on the size and economic viability of the p. 31 segment in question, the strength of the segment's preference for the global brand, as well as the ability to reach the segment effectively and profitably.

Synergies Associated with Global Standardization. Global standardization may also have a number of synergistic effects. In addition to those associated with a global image noted above, opportunities may exist for the transfer of good ideas for products of promotional strategies from one country to another. For example, a new product or an effective promotional strategy developed in one country (not necessarily the country in which the product or brand originated) may be effectively exploited in other countries. For example, U.S. detergent companies have acquired or developed new, more effective detergent formulas and fabric softeners to cope with harder water conditions in European markets. These have subsequently been introduced into the U.S. home market. Similarly, promotional campaigns such as the Marlboro cowboy may also prove effective in several countries.

Global marketing also generates experience of operating in multiple and diverse environments. Experience gained in one foreign environment may thus be transferred to another country, or may facilitate more rapid adaptation to new environmental conditions, even if these have not been previously experienced. Consequently, the range of experience acquired may result in the introduction of operating efficiencies.

The standardization of strategy and operations across a number of countries may also enable the acquisition or exploitation of specific types of expertise which would not be feasible otherwise. Expertise in assessing country risk or foreign exchange risk, or in identifying and interpreting information relating to multiple country markets, may, for example, be developed.

Such synergies are not, however, unique to a strategy of global standardization, but may also occur wherever operations and strategy are coordinated or integrated across country markets (Takeuchi and Porter, 1985). In fact, only certain scale economies associated with product and advertising copy standardization and the development of a global image as discussed earlier are unique to global standardization.

Availability of an International Communication and Distribution Infrastructure. The effectiveness of global standardization also depends to a large extent on the availability of an international infrastructure of communications and distribution. As many corporations have expanded overseas, service organizations have followed their customers abroad to supply their needs worldwide.

Advertising agencies such as Saatchi and Saatchi, McCann Erickson and Young and Rubicam now have an international network of operations throughout the world, while many research agencies can also supply services in major markets worldwide. With the growing integration of financial markets, banks, investment firms, insurance and other financial institutions are also becoming increasingly international in orientation and are expanding the scope of their operations in world markets. The physical distribution network of shippers, freight forwarding, export and import agents-customs clearing, invoicing, and insurance agents is also becoming increasingly integrated to meet demand for international shipment of goods and services.

Improvements in telecommunications and in logistical systems have considerably increased capacity to manage operations on a global scale and hence facilitate adoption of global standardization strategies. The spread of telex and fax systems, as well as satellite linkages and international computer linkages, all contribute to the shrinking of distances and facilitate globalization of operations. Similarly, improvement in transportation systems and physical logistics such as containerization and computerized inventory and handling systems have enabled significant cost savings as well as reducing time required to move goods across major distances.

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Operational Constraints to Effective Implementation of a Standardization Strategy

While adoption of a standardized strategy may be desirable under certain conditions, there are a number of constraints that severely restrict the firm’s ability to develop and implement a standardized strategy. These include both external or environmental constraints, the nature of the marketing infrastructure, resource market conditions or the type of competition, as well as internal constraints that stem from the firm’s current strategy or organization of international operations.

External Constraints to Effective Standardization. The numerous external constraints that impede global standardization are well recognized and have been clearly identified in the classic discussion by Buzzell (1968). Here, four major categories are highlighted, namely: (a) governmental and trade restrictions, (b) differences in the marketing infrastructure, such as the availability and effectiveness of promotional media, (c) the character of resource markets, and differences in the availability and costs of resources, and (d) differences in competition from one country to another.

Governmental and Trade Restrictions. Government and trade restrictions, such as tariff and other trade barriers, product, pricing or promotional regulation, frequently hamper standardization of the product line, pricing, or promotion strategy. Tariffs, or quotas on the import of key materials, components, or other resources may, for example, affect production costs and thus hamper uniform pricing or alternatively result in the substitution of other components and modifications in product design. Local content requirements or compensatory export requirements, which specify that products contain a certain proportion of components manufactured locally or that a certain volume of production is exported to offset imports of components or other services, may have a similar impact.

Regulation of business practices may also affect the feasibility of standardization. In Japan, for example, in many product markets such as electronics and food, product design and composition must conform to standards established by the relevant trade body, necessitating adaptation by foreign companies. Similarly, severe advertising regulation in countries such as Germany and Switzerland has restricted the use of many campaigns successful in other countries.

The existence of cartels such as the European steel cartel, or the Swiss chocolate cartel, may also impede or exclude standardized strategies in countries covered by these agreements. In particular, they may affect adoption of a uniform pricing strategy as the cartel sets prices for the industry. Cartel members may also control established distribution channels, thus preventing use of a standardized distribution strategy. Extensive grey markets in countries such as India, Hong Kong, and South America may also affect administered pricing systems and require adjustment of pricing strategies. For example, Wilkinson’s attempt to market its line of razor blades in India suffered greatly from price undercutting in the grey market.

The Nature of the Marketing Infrastructure. Differences in the marketing infrastructure from one country to another may hamper use of a standardized strategy. These may, for example, include differences in the availability and reach of various promotional media, in the availability of certain distribution channels or retail institutions, or in the existence and efficiency of the communication and transportation network. Such factors may, therefore, require considerable adaptation of strategy of local market conditions.

The type of media available as well as their reach and effectiveness differ from country to country. For example, TV advertising, while a major medium in the U.S., Japan and Australia, is not permitted in Scandinavian countries. Where TV advertising is permitted, it may reach only a limited number of households due to limited ownership of TVs, as for example in South Africa, Nigeria, p. 33 or Indonesia. Similarly, in countries with high levels of illiteracy, the effectiveness of print media is severely limited. Conversely, in some countries certain media are particularly effective or unique to the country. These include the circular street advertising to be found in Paris, or the neon advertising common in Japan.

The nature of the distribution system and structure also differs significantly from one country to another. While in the U.S. supermarkets account for the major proportion of food sales, in other countries there are virtually no supermarkets, and Mom and Pop-type stores predominate. This severely limits the effectiveness of a “pull” type strategy and ability to use “in store” promotions or display to stimulate customer interest. Even in industrialized nations such as Japan, Italy, Belgium, Portugal, and Spain, more than 75 percent of retail sales are done through small retailers. Again, discount outlets common in many industrialized nations may not exist in other countries, which may restrict a company’s ability to use an aggressive price penetration strategy.

The physical and communications infrastructure also varies from country to country. Inadequate mail service (as, for example, in Brazil or Italy) will limit the effectiveness of direct mail promotion. A poor or ill-maintained road network may necessitate use of alternative modes of transportation, such as rail or air. Inaccessibility of outlying rural areas due to the nature of the physical terrain in countries such as Canada, Australia, and Peru may also require the design of logistical systems specifically adapted to their unique conditions.

Interdependencies with Resource Markets. Yet another constraint to the development of standardized strategies is the nature of resource markets and their operation in different countries throughout the world, as well as the interdependency of these markets with marketing decisions. Availability and cost of raw materials, as well as labor and other resources in different locations, will not only affect decisions regarding sourcing of and hence the location of manufacturing activities but can also affect marketing strategy decisions such as product design. For example, in the paper industry, availability of cheap local materials such as jute and sugar cane may result in their substitution for wood fiber. Similarly, the relative cost of paper versus plastic materials may affect product packaging decisions. In Europe, use of plastic rather than paper is more common than in the U.S. due to differences in the relative cost of the two materials.

Cost differentials relative to raw materials, labor, management, and other inputs may also influence the trade-off relative to alternative marketing mix strategies. For example, high packaging cost relative to physical distribution may result in use of cheaper packaging with a shorter shelf-life and more frequent shipments. Similarly, low labor costs relative to media may encourage a shift from mass media advertising to labor intensive promotion, such as personal selling and product demonstration.

Availability of capital, technology, and manufacturing capabilities in different locations will also affect decisions about licensing, contract manufacturing, joint ventures, and other “make-buy” types of decisions for different markets, as well as decisions about countertrade, reciprocity, and other long-term relations.

The Nature of the Competitive Structure. Differences in the nature of the competitive situation from one country to another may also suggest the desirability of adaptation strategy. Even in markets characterized by global competition, such as agricultural equipment and motorcycles, the existence of low-cost competition in certain countries may suggest the desirability of marketing stripped-down models or lowering prices to meet such competition. Even where competitors are predominantly other multinationals, preemption of established distribution networks may encourage adoption of innovative distribution methods or direct distribution to short-circuit an entrenched position. Thus, the existence of global competition does not necessarily imply a need for global standardization.

All such aspects thus impose major constraints p. 34 on the feasibility and effectiveness of a standardized strategy, and suggest the desirability or need to adapt to specific market conditions.

Internal Constraints to Effective Standardization. In addition to such external constraints on the feasibility of a global standardization strategy, there are also a number of internal constraints which may need to be considered. These include compatibility with the existing network of operations overseas, as well as opposition or lack of enthusiasm among local management toward a standardized strategy.

Existing International Operations. Proponents of global standardization typically take the position of a novice company with no operations in international markets, and hence fail to take into consideration the fit of the proposed strategy with current international activities. In practice, however, many companies have a number of existing operations in various countries. In some cases, these are joint ventures or licensing operations or involve some collaboration in purchasing, manufacturing, or distribution with other companies. Even where foreign manufacturing and distribution operations are wholly owned, the establishment of a distribution network will typically entail relationships with other organizations, as for example, an exclusive distributor agreement.

Such commitments may be difficult if not impossible to change in the short run, and may constitute a major impediment to adoption of a standardized strategy. If, for example, a joint venture with a local company has been established to manufacture and market a product line in a specific country or region, resistance from the local partner (or government authorities) may be encountered if the parent company wishes to shift production or import components from another location. Similarly, a licensing contract will impede a firm from supplying the products covered by the agreement from an alternative location for the duration of the contract, even if it becomes more cost-efficient to do so.

Conversely, the establishment of an effective dealer or distribution network in a country or region may constitute an important resource to a company. The addition of new products to the product line currently sold or distributed by this network may therefore provide a more efficient utilization of company resources than expanding to new countries or geographic regions with the existing product line, as this would require substantial investment in the establishment of new distribution networks.

In addition, overseas subsidiaries may currently be marketing not only core products and brands from the company’s domestic business, but may also have added or acquired local or regional products and brands in response to local market demand. P&G, for example, acquired Domestos, an established local brand of household cleanser in the UK, and added it to its product line in a number of other European markets. In some cases, therefore, introduction of a global product or brand may be likely to cannibalize sales of local or regional brands.

Advocates of standardization thus need to take into consideration the evolutionary character of international involvement, which may render a universal strategy of global products and brands suboptimal. Somewhat ironically, the longer the history of a multinational corporation’s involvement in foreign or international markets and the more diversified and far-flung its operations, the more likely it is that standardization will not lead to optimal results.

Local Management Motivation and Attitudes. Another internal constraint concerns the motivation and attitudes of local management with regard to standardization. Standardized strategies tend to facilitate or result in centralization in the planning and organization of international activities. In particular, product development and positioning as well as key promotional themes are likely to be developed at corporate headquarters. Especially if input from local management is limited, this may result in a feeling that strategy is “imposed” by p. 35 corporate headquarters and/or not adequately adapted nor appropriate in view of specific local market characteristics and conditions. Local management is likely to take the view, “it won’t work here - things are different,” which will reduce their motivation to implement a standardized strategy effectively.

Standardization tends to conflict with the principle of local management responsibility. Emphasis on local management autonomy stems from the advantages traditionally associated with decentralization and a concern with encouraging local entrepreneurship. The establishment of a standardized strategy by corporate headquarters may therefore reduce the overall effectiveness of the firm. It also restricts local management’s ability to adapt to local market-competitive conditions, for example, in promotion or distribution decisions, which can result in suboptimal reactions to competition.

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A Framework for Classifying Global Strategy Options

This review of the rationale underlying “global standardization” thus suggests that it’s appropriate only in relation to certain product markets or market segments under certain market environment conditions, and dependent on company objectives and structure. The adoption of a global perspective should not therefore be viewed as synonymous with a strategy of global products and brands. Rather for most companies, such a perspective implies consideration of a broad range of strategic options of which standardization is merely one.

In essence, a global perspective implies planning strategy relative to markets worldwide rather than on a country-by-country basis. This may result in the identification of opportunities for global products and brands and/or integrating and coordinating strategy across national boundaries to exploit potential synergies of operating on an international scale. Such opportunities should, however, be weighed against the benefits of adaptation to idiosyncratic customer characteristics.

The development of an effective global strategy thus requires a careful examination of all alternative international strategic options in terms of standardization versus adaptation open to the firm. These are, however, vast in number given the range of possible geographic areas, countries, market segments, product variants, and marketing strategies to be considered. It is, therefore, helpful to classify these options based on the degree of standardization. A continuum can thus be identified, ranging from “pure standardization” to “pure differentiation,” where most options fall into the intermediate category of mixed or “hybrid” strategies. This is shown in Chart 1.

In the extreme case of pure standardization, all dimensions of marketing strategy are standardized or uniform throughout the world. In practice, as noted previously, not only is such a strategy fraught with problems, but it is rarely likely to be feasible in relation to all elements of the mix. The other extreme is that of totally differentiated strategy, in which each component of the mix is adapted to the specific idiosyncratic customer and environmental characteristics in each country. Management in each country thus develops its own strategy independently, with no coordination across countries nor attempt to identify any commonality from one country to another.

In between these two extremes is a set of mixed or hybrid options including some standardized and some differentiated components. Here, a variety of different patterns may be identified. These include those in which some components of the mix are standardized, while others are adapted to local market factors; those where strategies are standardized across regions or cluster of countries; strategies standardized by market segment; as well as combinations of the above.

For example, as shown in Chart 2, some components of the marketing mix, product, or advertising copy are standardized across countries, but others, such as distribution policy or pricing, are adapted to specific country or environmental characteristics. For example, companies marketing global products or brands may pursue different distribution or pricing policies in each country.

p. 36

CHART 1

The Standardization-Differentiation Continuum

Column headings: Standardization - global strategy | Cluster of countries | Differentiation - separate strategy for each country

[Chart description: in the original, strategies 1 and 2 are straight vertical lines joining all six points in their columns; strategy 3 is a zigzag line through the points listed above. Labels under the lines read: "1. Pure "standardization" strategy", "3. An illustrative mixed strategy", "2. Pure differentiation strategy".]

Apple Computers, for example, while selling a standardized product line worldwide, has different positioning, promotional, and distribution strategies in each country.

Another option is to standardize strategy across regions or clusters of countries. Ford, for example, develops different models for its European operations as compared with the U.S. market. The Fiesta, Granada, and Taurus models were all initially developed for the European market, as were the positioning strategy and promotional themes.

Alternatively, strategies might be standardized by customer segments. Revlon, for example, targets its Charlie line to working women worldwide, using the same positioning strategy and advertising copy. Almay cosmetics targets its line to the global segment of women with sensitive or delicate skin throughout the world.

Combinations of these alternatives can also be adopted. For example, a company might market a standardized or uniform product worldwide but adapt its promotional strategy for different countries or regions. For example, P&G sells its Pampers brand of diapers worldwide, but the promotional strategy is adapted to different geographic regions. Similarly, Kellogg’s Corn Flakes is sold worldwide, but in some regions, such as Latin America and the Far East, promotional themes are standardized, while in other areas, such as Europe, promotional themes, packaging, and distribution strategies are specific to each country. Again, Virginia Slims is targeted to “liberated” women throughout the world, but in Japan, the advertising copy is changed from “You’ve Come a Long Way Baby” to “Oh, So Slim and Sexy” (translation from Japanese).

In addition to such options which all assume a worldwide strategy, companies may also target specific and unique product markets and segments in a given geographic region or country. In the detergent market, for example, a company may market its line of powdered detergents worldwide, its liquid detergents and softeners in industrialized countries, and for the developing countries, develop p. 37 a line of synthetic detergents and bar soaps. Similarly in India, a major segment of the tooth cleansing market consists of black and white tooth-cleansing powders. Multinationals such as P&G and Colgate have each developed a brand of white tooth-cleansing powder to tap this market.

CHART 2

Key Dimensions of Global Marketing Strategy

Positioning
├── Global ──> Product
│              ├── Global ──> Brand name
│              │              ├── Global ──> Packaging
│              │              │              ├── Global ──> Pricing
│              │              │              │              ├── Global ──> Advertising & P.R.
│              │              │              │              │              ├── Global ──> Customer & trade promotion
│              │              │              │              │              │              ├── Global ──> Distribution
│              │              │              │              │              │              └── Non-global
│              │              │              │              │              └── Non-global
│              │              │              │              └── Non-global
│              │              │              └── Non-global
│              │              └── Non-global
│              └── Non-global ──> Brand name
└── Non-global ──> Product
                   ├── Global
                   └── Non-global

[Chart description: a decision tree of 3-D boxes descending diagonally from "Positioning" at top right to "Distribution" at bottom left; each box splits into a "Global" branch (leading to the next box) and a "Non-global" branch. The second "Brand name" box hangs off the Non-global branch of the first "Product" box; the second "Product" box (under Non-global positioning) shows only its two branch labels, "Global" and "Non-global".]

A firm’s international operations are thus likely to be characterized by a mix of strategies, including not only global products and brands, but also some regional products and brands and some national products and brands. Similarly, some target segments may be global, others regional, and others national. Hybrid strategies of this nature thus enable a company to take advantage of the benefits of standardization and potential synergies from operating on an international scale, while at the same time not losing those afforded by adaptation to specific country characteristics and customer preferences. Guidelines and an approach for developing such a strategy based on a dynamic portfolio perspective have been proposed (Wind and Douglas, 1987). These take into consideration the company’s existing network of operations, the current mix of products and brands, and their competitive positioning in each country, in designing an effective global marketing strategy.

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EXHIBIT 1 A Standardized Global Strategy Checklist

If yes to all 4, consider global

Conclusion

The main thesis of this paper is that the design of an effective global marketing strategy does not necessarily entail the marketing of standardized products and global brands worldwide. While such a strategy may work for some companies and certain product lines, for other companies and other product markets adaptation to local or regional differences may yield better results. The key to success is rather a careful analysis of the forces driving toward globalization as well as the obstacles to this approach, and assessment, based on the company’s strengths and weaknesses, of where the most attractive opportunities and the company’s differential advantage in exploiting these appear to lie.

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p. 186

THE NATURE AND ANALYSIS OF POLITICAL RISK

Applied to international management, political risk is the likelihood that an MNC's foreign investment will be constrained by a host government's policies. Such risk is of particular concern to companies entering Third World countries or doing business with governments that, at least until now, have not encouraged direct foreign investment (where outside countries own the means of production). For example, the newly emerged countries in Eastern Europe are highly unstable and therefore quite risky for MNCs doing business there. The same can be said for countries such as China,(1) Mexico,(2) Saudi Arabia, and the Balkan nations.(3)

Some U.S. companies are being forced to renegotiate their contracts in Russia and accept less favorable terms.(4) U.S., Japanese, and European banks now find they must write off some of their loans to Third World countries and restructure the remaining debt, because these governments no longer are willing to make payments on the current loan portfolio. In other cases, multinationals have found that a rapid turn of events has left them with large losses. For example, the Chinese massacre in Tiananmen Square in 1989 resulted in many MNCs' pulling their people out of the country and closing their offices both there and in Hong Kong, which reverts to the PRC in 1997. The Iraqi invasion of Kuwait resulted in the destruction of MNC assets in that country. The lesson from these events is clear: Political climate can change quickly, and safe investments can become high-risk investments overnight.

Some specific reasons why MNCs fear political risk include expropriation or nationalization of property or resources, inconvertibility of currency, war damage, civil-strife damage, breach of contract for political reasons, limits on remittance, government interference with terms of a contract, discriminatory taxation, and loss of copyright protection.(5) Figure 7-1 reports the relative levels of loss from these types of causes; as shown, foreign investors recently have suffered losses in a wide number of countries and geographic regions. This is why it is so important that MNCs carefully assess political risk.

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Macro and Micro Analysis of Political Risk

Firms evaluate political risk in a number of ways. One is through macro political risk analysis, which reviews major political decisions that are likely to affect all enterprises in the country. Recent elections in France, for example, gave the conservatives new power and certainly will influence political risk in that country. Political swings to the left can create even more problems. For example, when Michael Manley was prime minister of Jamaica a number of years ago, the country took a decided swing to the left, and U.S. investment dropped to a trickle. Manley's subsequent election defeat resulted in a government that was much more capitalistic in orientation. With Manley's return to power in the late 1980s, however, foreign firms maintained their presence in Jamaica, because Manley had moved sharply to the middle of the political continuum. Because favorable policies have remained in effect after his departure from government in the early 1990s, the political risk in Jamaica has remained low. In contrast, the Philippines continues to present a fairly high political risk area, despite the removal of the Marcos government. The Aquino government was unable to create a stable political environment for investment, and the new government that took office in 1992 is just starting to reverse this trend.

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FIGURE 7-1: LOSSES TO FOREIGN INVESTORS BECAUSE OF SOCIOPOLITICAL CAUSES: 1987-1992

What is drawn: a horizontal bar chart. Vertical list of 43 countries (alphabetical, top to bottom); horizontal axis "Index of loss" from 0 to 10 in steps of 1; each country has a shaded bar ending at a whole number; countries with no loss show "0" and no bar. Legend box top right: "Index of loss".

Values as read from the bars (whole numbers):

Highest: Czechoslovakia and Yugoslavia (9), Saudi Arabia and Vietnam (7), Zaire (5). Egypt = 3.

Source (as printed): Llewellyn D. Howell and Brad Chaddick, "Model of Political Risk for Foreign Investment and Trade: An Assessment of Three Approaches," Columbia Journal of World Business, Fall 1994, p. 75. (c) 1994, Columbia Journal of World Business. Reprinted with permission.

p. 188

Another example of a macro consideration of political risk is an analysis of what would happen to a company's investment if opposition government leaders were to take control. Many U.S. companies in Iran failed to forecast the fall of the Shah and rise of Khomeini. As a result, they lost their investment. Because of this Iranian experience and the situation in Iraq under militant dictator Saddam Hussein, however, many multinationals now are very reluctant to invest very heavily in most Middle Eastern countries. In the early 1990s, the government of Iran appeared to be interested in attracting foreign investment, but there is still a great deal of concern that this region is too politically explosive. Eastern Europe appears to be a better bet, as seen by the millions of dollars that MNCs have poured into countries such as Hungary and Poland. This geographic region also is regarded as politically risky, however, as shown in the Bosnian conflict, the breakup of Czechoslovakia, and the political instability in Poland.(6) As a result, many multinationals have been tempering their expansion plans in Eastern Europe.

Whereas macro analysis looks at the whole country [underlined in pen: "macro analysis looks at the whole country"], micro political risk analysis is directed toward government policies and actions [underlined in pen: "directed toward government policies and actions"] that influence selected sectors of the economy or specific foreign businesses in the country. These policies often take the form of industry regulation, taxes on specific types of business activity, and local content laws. The essence of these actions is that some businesses are treated differently from others. A good recent example was the Clinton administration's threat to implement trade sanctions against Japanese luxury cars in the United States. Faced with the loss of a major market, Japanese negotiators eventually agreed that their country's automakers would buy more U.S. parts, that their government would take steps to open its market for repair parts and encourage domestic auto dealers to sell more U.S. cars, and that Toyota, Honda, and Mitsubishi all would build more facilities in the United States.(7) These terms should help to reduce the U.S. trade imbalance with Japan. This latest round of negotiations likely will not be the last, however, as the United States continues to seek greater access to the Japanese auto market.(8) One reason is because the Europeans have been quite successful in negotiating a managed trade agreement with the Japanese, and the United States would like to do the same. For example, while Japanese firms dominate almost 30 percent of the U.S. market, their share of the European market is a mere 11 percent, and the Europeans have negotiated successfully for large quotas of European-made parts in Japanese cars built in Europe.(9)

Another example of micro political risk is provided by countries in South America that face an indebtedness crisis [underlined in pen: "Another example of micro political risk is provided by countries in South America that face an indebtedness crisis"] and have introduced a variety of policies to promote exports and discourage imports. MNCs that feel they cannot abide by these policies will stay out; however, some that are looking for a location from which to produce and export goods will view these same government policies as very attractive. Table 7-1 lists criteria that MNCs could use to evaluate the degree of political risk. [underlined in pen: "Table 7-1 lists criteria that MNCs could use to evaluate the degree of political risk"]

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Analyzing the Expropriation Risk

Expropriation is the seizure of businesses with little, if any, compensation to the owners. Such seizures of foreign enterprises by developing countries were quite common in the old days. In addition, some takeovers were caused by indigenization laws, which required that nationals hold a majority interest in the operation. [underlined in pen: "by indigenization laws, which required that nationals hold a majority interest in the operation"]

Pages 189-210: RAW machine OCR (tesseract), NOT proofread

Added 23 Oct 2026 by the main session after the proofreading agent was stopped by the API content filter at p. 189. Lines were joined into paragraphs automatically; page headers, figure labels and boxed sidebars can be garbled (the sidebar 'Sometimes It's All Politics' and Table 7-2 scores are badly read). PDF page 6 was a blurred bleed-through page and is skipped. For exact wording, check the PDF page image.

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CHAPTER 7; MANAGING POLITICAL RISK AND NEGOTIATIONS 189

A GUIDE TO EVALUATION OF POLITICAL RISK

External factors affecting subject country Prospects for foreign conflict Relations with border countries Regional instabilities Alliances with major and regional powers Sources of key raw materials Major foreign markets Policy toward United States U.S. policy toward country Internal groupings (points of power): Government in power _ . Key agencies and officials Legislative entrenched bureaucracies

Policies, economic, financial, social, labor, etc.

Other important groups: Unions and labor movements Military, special groups within military Families Business and financial communities Intelligentsia Students Religious groups Media Regional and local governments Social and environmental activists Cultural, linguistic, and ethnic groups Separatist movements Foreign communities

Pending legislation Potential competitors and customers Attitude toward private sector Internal factors Power networks Power struggles amongst elites Political parties (in and out of power): Ethnic confrontations Policies Regional struggles Leading and emerging personalities Economic factors affecting stability (consumer inflation, price Internal power struggles and wage controls, unemployment, supply shortages, Sector and area strengths taxation, etc.)

Anti-establishment movements

Factors affecting a specific project (Custom-designed for each project)

Future prospects for retaining or gaining power

Note: information in the table is an abridged version of Probe's Political Agenda Worksheet, which may serve as a guide for corporate executives initiating their own political evaluations. Probe International is located in Stamford, Conn. Source: Benjamin Weinger, “What Executives Should Know about Political Risk," Management Review, January 1992, p. 20.

In the main, expropriation is more likely to occur in non-Western governments that are poor, relatively unstable, and suspicious of foreign multinationals.

Some firms are more vulnerable to expropriation than others. Those at greatest risk often are in extractive, agricultural, or infrastructural industries such as utilities and transportation because of the importance of these industries to the country. In addition, large firms often are more likely targets than small firms, because more is to be gained by expropriating from large firms.

MNCs can take a wide variety of strategies to minimize their chances of expropriation. They can bring in local partners. They can limit the use of high technology so that if the firm is expropriated, the country cannot duplicate the technology. They also can acquire an affiliate that depends on the parent company for key areas of the operation, such as financing, research, and technology transfer, so that no practical value exists in seizing the affiliate.

The Role of Operational Profitability in Risk Analysis

Although expropriation is a major consideration, most MNCs are more directly concerned with operational profitability.'° Will they be able to make the desired return on investment?" A number of government regulations can have

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p. 190

190 PART3: INTERNATIONAL MANAGEMENT: STRATEGY AND FUNCTIONS

/ EEE ce ed TG EP

A THREE-DIMENSIONAL FRAMEWORK FOR ASSESSING POLITICAL RISK

Conglomerate |

Vertical

General Investments

Horizontal y x rae ys | ‘ ~ i: Transfer Operational Ownership Control Political Risks

Source: David A. Schmidt, “Analyzing Political Risk,” Business Horizons, July-August 1986, p. 50. Copyright 1986 by the Foundation for the School of Business at Indiana University. Used with permission.

a negative impact on their profitability."* Requiring MNCs to use domestic suppliers instead of bringing in components or raw materials from other companyowned facilities or purchasing them more cheaply in the world market is one such regulation. Another is a restriction on the amount of profit that can be taken out of the country. A third is the wages and salaries that must be paid to the employees. Despite these difficulties, MNCs have become very interested in designing models and frameworks for helping them to better understand and manage their political risk.

MANAGING POLITICAL RISK

For well over two decades, businesses have been looking for ways to manage their political risk."? Quite often, the process begins with a detailed analysis of the var- _ ious risks with which the MNC will be confronted, including development of a comprehensive framework that identifies the various risks and then assigns a quantitative risk or rating factor to them.

Developing a Comprehensive Framework

A comprehensive framework for managing political risk should consider all political risks and identify those that are most important. Schmidt has offered a three-dimensional framework that combines political risks, general investments, and special investments." Figure 7-2 illustrates this framework, and the following sections examine each dimension in detail.

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MANAGEMENT IN A

CHAPTER 7: MANAGING POLITICAL RISK AND NEGOTIATIONS 191

Political Risks Political risks can be broken down into three basic categories: transfer risks, operational risks, and ownership-control risks. Transfer risks stem from government policies that limit the transfer of capital, payments, production, people, and technology in or out of the country. Examples include tariffs on exports and imports as well as restrictions on exports, dividend remittance, and capital repatriation. Operational risks result from government policies and procedures that directly constrain the management and performance of local operations. Examples include price controls, financing restrictions, export commitments, taxes, and localsourcing requirements. Ownership-control risks are brought about by government policies or actions that inhibit ownership or control of local operations. Examples include foreign ownership limitations, pressure for local participation, confiscation, expropriation, and abrogation of proprietary rights. For a more detailed example, see “International Management in Action: Sometimes It’s All Politics.”

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ponermeer

4492 PARTS:

INTERNATIONAL MANAGEMENT: STRATEGY AND FUNCTIONS

General Nature of Investment The general nature of investment examines whether the company is making a conglomerate, vertical, or horizontal investment (see Figure 7-2). In a conglomerate investment, the goods or services produced are not similar to those produced at home. These types of investments usually are rated as high risk, because foreign governments see them as providing fewer benefits to the country and greater benefits to the MNC than other investments. Vertical investments include the production of raw materials or intermediate goods that are to be processed into final products. These investments run the risk of being taken over by the government because they are export-oriented, and governments like a business that helps it to generate foreign capital. Horizontal investments involve the production of goods or services that are the same as those produced at home. These investments typically are made with an eye toward satisfying the host country’s market demands. As a result, they are not ay likely to be takeover targets.

Special Nature of Investment The special nature of foreign direct investment relates to the sector of economic activity, technological sophistication, and pattern of ownership. There are three sectors of economic activity: (1) the primary sector, which consists of agriculture, forestry, and mineral exploration and extraction; (2) the industrial sector, consisting of manufacturing operations; and (3) the service sector, which includes transportation, finance, insurance, and related industries. Technological sophistication consists of science-based industry and non-sciencebased industry; the difference between the two is that science-based indust quires the continuous introduction of new products and/or processes. Patterns of ownership relate to whether the business is wholly or partially owned.

The special nature of foreign direct investments can be categorized as one of five types (see Figure 7-2). Type I is the highest-risk venture; type V is the lowest-

~risk venture. This risk factor is assigned based on sector, technology, and owner-

ship. Primary sector industries usually have the highest risk factor, service sector industries have the next highest, and industrial sector industries have the lowest. Firms with technology that is not available to the government should the firm be taken over have lower risk than those with technology that is easily acquired. Wholly owned subsidiaries have higher risk than partially owned subsidiaries.

Using a framework similar to that provided in Figure 7-2 helps MNCs to manage their political risks. A way to complement this framework approach is to give specific risk ratings to various criteria.

Quantifying the Variables in Managing Political Risk

Some MNCs attempt to manage political risk through a quantification process that identifies important factors and then compares the results from different geographic locales. This comparison allows them, for example, to identify how risky a venture is in Argentina versus Russia.

Factors that typically are quantified reflect the political and economic environment, domestic economic conditions, and external economic conditions. Each factor is given a minimum and maximum score, and the person(s) responsible for making the evaluation will determine the score for each. When this process is com-, plete, a total risk evaluation number is computed by simply adding the individual » scores. Table 7-2 provides an example of a quantitative list of political risk criteria.

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CHAPTER 7; MANAGING POLITICAL RISK AND NEGOTIATIONS 193

me ea

CRITERIA FOR QUANTIFYING POLITICAL RISK

Minimum

Scores

Maximum

. Stability of the political system

. Imminent internal conflicts

. Threats to stability emanating from the outside world . Degree of control of the economic system

Reliability of the country as a trading partner

. Constitutional guarantees . Effectiveness of public administration . Labor relations and social peace

Size of population

Per capita income

Economic growth during previous 5 years Prospective growth during next 3 years

Inflation during previous 2 years

Accessibility of domestic capital market to foreigners Availability of high-quality local labor

Possibility of giving employment to foreign nationals Availability of energy resources

Legal requirements concerning environmental protection Traffic system and communication

Restrictions imposed on imports Restrictions imposed on exports Restrictions imposed on foreign investments in the country

Major area Criteria Political and economic 1 environment 2 3 4 5. 6 7 8 Domestic economic 9. conditions 10. VW, 12. 13. 14, 15. * 16. 17. 18. 19. External economic 20. relations 21, 22. 23.

24. 25. 26. 27. 28. 29. 30.

Freedom to set up or engage in partnerships

Legal protection for brands and products

Restrictions imposed on monetary transfers

Revaluations against the DM during previous 5 years Development of the balance of payments

Drain on foreign funds through oil and other energy imports International financial standing

Restrictions imposed on the exchange of local money into foreign currencies

NOWWNNNAWAWAN ND NHNANNNAONWANN DA OWONDAOOCO

14 14 12

9 12 12 12 15

8 10 7 10 10 7 8 8 14 8 14

_ oO

_ OMRON DWOWOO CO

Source: Adapted from E. Dichtl and H. G. Kogimayr, “Country Risk Ratings,” Management International Review, vol. 26, no. 4, 1986, p. 6. Used

with permission.

Formulating Appropriate Responses

Once political risk has been analyzed by either the framework or quantitative approach, or both, the MNC then will attempt to manage the risk further by minimizing or limiting it through carefully formulated responses. Two such common approaches are the use of relative bargaining power and the use of integrative as well as protective and defensive techniques.

Relative Bargaining Power The theory behind relative bargaining power is quite simple. The firm works to maintain a stronger bargaining power position than that of the host country. A good example is when the firm has proprietary technology that will be unavailable to the host country if the operation is expropriated or the firm is forced to abide by government decisions that are

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- qd

“3: INTERNATIONAL MANAGEMENT: STRATEGY AND FUNCTIONS

RELATIVE BARGAINING POWER OVER TIME

High Subsidiary's bargaining power D Ss | , , Qemmeeeees Sse66£ é Intervention > | gretstsssss occurs £ c & = & Host nation's bargaining power Low Initial investment

Time

Source: Adapted from Thomas A. Pointer, “Political Risk: Managing Government Intervention,” in Paul W. Beamish, J. Peter Killing, Donald J. LeCraw, and Harold Crookell, International Management: Text and Cases (Homewood, IL: Irwin, 1991), p. 125.

unacceptable to it. Over time, of course, this technology may become common, and the firm will lose its bargaining power. To prevent this from happening, however, the firm will work to develop new technology that again establishes the balance of power in its favor. As long as the host country stands to lose more than it will gain by taking action against the company, the firm has successfully minimized its political risk by establishing an effective bargaining position. Figure 7-3 provides an example. As long as the MNC’s bargaining power remains at or above the diagonal line, the government will not intervene. At point E in the figure, however, this power declines, and the host country will begin to intervene.

Integrative as well as Protective and Defensive Techniques Another way that MNCs attempt to protect themselves from expropriation and/or minimize government interference in their operations is to use integration and theimplementa- __ tion of protective and defensive techniques. Integrative techniques are designed 1 to help the overseas operation become part of the host country’s infrastructure.

The objective is to be perceived as “less foreign” and thus unlikely to be the target

of government action. Some of the most integrative techniques include: (1) deveioping good i ith the host government and other local political groups;

(2) producing as much of the product locally as possible with the use of incountry suppliers and subcontractors, thus making it a “domestic” product’*;

(3) creating joint ventures” and hiring local people to manage and run the operation; (4) doing as much local research and development as possible; and (5) de- Veloping effecti “management relations.

Protective and defensive techniques are designed to discourage the host government from interfering in operations. In contrast to the integrative techniques, these actually encourage nonintegration of the enterprise in the local environment. Examples include: (1) doing as little local manufacturing as possible and conducting all research and development outside the country; (2) limiting

© CamScanner

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USE OF INTEGRATIVE AND PROTECTIVE AND DEFENSIVE TECHNIQUES BY FIRMS IN SELECT INDUSTRIES

High 20 -

: 8 = (11, 14) = Low or stable technology o © Moderate 10+ ° 2 (7, 10) Unified logistic, = Advanced labor transmission > management skill (16, 6) 2 6 =

(14, 3) Dynamic high technology Low 1 a 1 10 20 Low Moderate High

Protective/Defensive Techniques

Source: Adapted from Ann Gregory, “Firm Characteristic and Political Risk Reduction in Overseas Ventures,” National Academy of Management Proceedings, 1982, p. 77. Used with permission.

the responsibility of local personnel and hiring only those who are vital to the operation; (3) raising capital from local banks and the host government as well as outside sources; and (4) diversifying production of the product among a number of countries. _

en should a company use integrative techniques? Under what conditions should it employ protective and defensive techniques? Gregory has suggested that this choice will be heavily influenced by characteristics such as the firm’s technology, management skills, and logistics and labor transmission.” In all, four basic can be descri ing these characteristics.

e first type consists of dynamic, high-technology firms that have unique knowledge that the host country would like. Computer companies are a good example. As seen in Figure 7-4, these firms do not rely very much on integrative techniques. They attempt to keep their distance from the host country and rely heavily on protective and defensive strategies.

The second type consists of firms with low or stable technology. These companies make products that require little innovation or use relatively unsophisticated technology. Steel firms are an example. As seen in Figure 7-4, these firms typically use both high integration and high protective and defensive strategies, although they generally rely more on integration than the defensive approach.

The third type consists of firms whose managers need to be highly skilled. For example, food production firms require advanced marketing and management skills to be competitive. These ‘companies typically use a balanced approach of

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,96 PART3: INTERNATIONAL MANAGEMENT. STRATEGY AND FUNCTIONS

integration and protective and defensive techniques, but they are less concerned with either than low or stable technology firms are.

The fourth type consists of companies characterized by highly labor-intensive products, high value in relation to weight and/or volume, and the need for a strong global marketing system for selling the product. Sewing machine companies are an example. Firms in this category tend to rely more heavily on protective and defensive measures than any of the other three groups and to employ only moderate concern for integrative techniques (again, see Figure 7-4.)

The strategic response that a firm takes in managing its political risk will be influenced by a variety of factors besides the firm’s technology, management skills, logistics, and labor transmission. Others include the nature of the industry, local conditions in the host country, and philosophy of the management. Whatever variables are considered, however, firms are going to use a combination of integrative and protective and defensive techniques.

MANAGING INTERNATIONAL NEGOTIATIONS

Closely related to managing political risk, but deserving special attention, is managing negotiations. Negotiation is the process of bargaining with one or more parties to arrive at a solution that is acceptable to all. Negotiation often follows assessing political risk and can be used as an approach to conflict management. If the risk is worth it, then the MNC must negotiate with the host country to secure the best possible arrangements. The MNC and the host country will discuss the investment the MNC is prepared to make in return for certain guarantees and/or concessions. The initial range of topics typically includes critical areas such as hiring practices, direct financial investment, taxes, and ownership control. Negotiation also is used in creating joint ventures with local firms and in getting the operation off the ground. After the firm is operating, additional areas of negotiation often include expansion of facilities, use of more local managers, additional imports or exports of materials and finished goods, and recapture of profits.

On a more macro level of international trade are the negotiations conducted between countries. The current balance-of-trade problems between the United States and Japan are one example. The massive debt problems of Third World countries and the opening of trade doors with Eastern European countries are other current examples.”

The Negotiation Process

There are several basic steps that can be used in managing the negotiation process.”* Regardless of the issues or personalities of the parties involved, this process typically begins with planning.

Planning Planning starts with the negotiators’ identifying those objectives they would like to attain. Then, they explore the possible options for reaching these objectives. Research shows that the greater the number of options, the greater the chances for successful negotiations.” While this appears to be an obvious statement, research also reveals that many negotiators do not alter their strategy when negotiating across cultures.” Next, consideration is given to areas of common ground between the parties. Other major areas include: (1) the setting of limits on

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A Peruvian's raised eyebrow means “money” or “pay me.”

Peru is located on the west coast of South America. It is the third-largest nation on the continent (only Brazil and Argentina have more area), and it covers almost 500,000 square miles (about 14 percent of the size of the United States). The land has enormous contrasts, with a desert (drier than the Sahara), the towering snow-capped Andes Mountains, sparkling grass-covered plateaus, and thick rain forests. Peru has approximately 23 million people, of which about 20 percent live in Lima, the capital. More Indians (one-half the population) live in Peru than any other country in the Western Hemisphere. The ancestors of Peru's Indians are the famous Incas, who built a great empire. The rest of the population is mixed, and a small percentage is white. The economy depends heavily on agriculture, fishing, mining, and services. GNP is around $22 billion, and per-capita income is about $1000. At present, the economy is in poor shape. Much of this has been the result of poor economic planning and decision making by the government. High inflation and a gigantic foreign debt continue to plague the country.

Although the poor economic conditions make Peru an unattractive investment target for multinationals, a large New York bank currently is considering making a $25 million loan to the owner of a Peruvian fishing fleet. The owner wants to refurbish the fleet and add one new ship.

During the 1970s, the Peruvian government nationalized a number of industries and factories and

206 = PARTS: INTERNATIONAL MANAGEMENT: STRATEGY AND FUNCTIONS

In the International Spotlight Peru

began running them for the profit of the state. In most cases, these state-run ventures became disasters. In the late 1970s, the fishing fleet owner was given back his ships and allowed to operate his business as before. Since then, he has managed to remain profitable, but the biggest problem is that his ships are getting old and he needs an influx of capital to make repairs and add new technology. As he explained it to the New York banker: “Fishing is no longer just an art. There is a great deal of science involved. And to keep costs low and be competitive on the world market, you have to have the latest equipment for both locating as well as catching and then loading and unloading the fish.” Having reviewed the fleet owner’s operation, the large multinational bank believes that the loan is justified. The financial institution is concerned, however, that the Peruvian government might step in during the next couple of years and again take" over the business. If this were to happen, it might take an additional decade for the loan to be repaid. If the government were to allow the fleet owner to operate the fleet the way he has over the last decade, the loan could be repaid within 7 years. Right now, the bank is deciding the specific terms of the agreement. Once these have been worked out, either a loan officer will fly down to Lima and close the deal or the owner will be asked to come to New York for the signing. Whichever approach is used, the bank realizes that final

p. 207

adjustments in the agreement will have to be made on the spot. Therefore, if the bank sends a representative to Lima, the individual will have to have the authority to commit the bank to specific terms. These final matters should be worked out within the next 10 days.

1, What are some current issues facing Peru? What is the climate for doing business in Peru today?

CHAPTER 7: MANAGING POLITICAL RISK AND NEGOTIATIONS 207

2, What type of political risks does this fishing company need to evaluate? Identify and de-

scribe them,

3. What types of integrative and protective and de-

fensive techniques can the bank use?

4, Would the bank be better off negotiating the

loan in New York or in Lima? Why?

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208 PART3: INTERNATIONAL MANAGEMENT: STRATEGY AND FUNCTIONS

You Be the International Management Consultant

Going to Gdansk

When Poland made the necessary reforms to move toward a market economy, Andrzej Jaworski from Chicago, Illinois, began thinking this might be an excellent place to set up an overseas operation. Andrzej and his two brothers own a firm that produces specialized computer chips. The company has a series of patents that provide legal protection and allow it to dominate a small but growing segment of the computer market. Their sales estimates reached $147 million within 3 years, but they believe that this could rise to $200 million if they were to expand internationally. They have thought about setting up a plant in Belgium so that they could take advantage of the European market growth. They would prefer Poland, however, because their parents grew up there before leaving for the United States in 1948. “We feel that we know the Poles because we have grown up in a Polish household here in the midwest,” Andrzej explained to his banker. “We would like to see if the government would allow us to set up a small plant in Gdansk, train the necessary workers, and then export our product into the European Community.”

One of the primary reasons that Andrzej believes that the Polish government would be agreeable to the plan is that not only is Poland trying to move more toward a market economy, but the

country has foreign debt, inflation, and outmoded technology. A state-of-the-art plant could help to reduce unemployment and provide an inflow of needed capital. However, the banker is concerned that because of the political risks and uncertainty in Eastern Europe in general and Poland in particular, the company may either lose its investment through government expropriation or find itself unable to get profits out of the country. Given that the company will have to invest approximately $20 million, the venture could seriously endanger the company’s financial status.

Andrzej understands these risks but believes that with the help of an international management consultant, he can identify and minimize the problems. “I’m determined to push ahead,” he told the banker, “and if there is a good chance of making this project a success, I’m going to Gdansk.”

1. What are some of the political risks that Andrzej’s firm will face if he decides to go ahead with this venture? Identify and describe two or three.

2. Using Figure 7-2, what strategy would you rec-

ommend that the firm use? Why?

3. In his negotiations with the government, what

suggestions or guidelines would you offer to Andrzej? Identify and describe two or three.

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,96 PART3: INTERNATIONAL MANAGEMENT. STRATEGY AND FUNCTIONS

integration and protective and defensive techniques, but they are less concerned with either than low or stable technology firms are.

The fourth type consists of companies characterized by highly labor-intensive products, high value in relation to weight and/or volume, and the need for a strong global marketing system for selling the product. Sewing machine companies are an example. Firms in this category tend to rely more heavily on protective and defensive measures than any of the other three groups and to employ only moderate concern for integrative techniques (again, see Figure 7-4.)

The strategic response that a firm takes in managing its political risk will be influenced by a variety of factors besides the firm’s technology, management skills, logistics, and labor transmission. Others include the nature of the industry, local conditions in the host country, and philosophy of the management. Whatever variables are considered, however, firms are going to use a combination of integrative and protective and defensive techniques.

MANAGING INTERNATIONAL NEGOTIATIONS

Closely related to managing political risk, but deserving special attention, is managing negotiations. Negotiation is the process of bargaining with one or more parties to arrive at a solution that is acceptable to all. Negotiation often follows assessing political risk and can be used as an approach to conflict management. If the risk is worth it, then the MNC must negotiate with the host country to secure the best possible arrangements. The MNC and the host country will discuss the investment the MNC is prepared to make in return for certain guarantees and/or concessions. The initial range of topics typically includes critical areas such as hiring practices, direct financial investment, taxes, and ownership control. Negotiation also is used in creating joint ventures with local firms and in getting the operation off the ground. After the firm is operating, additional areas of negotiation often include expansion of facilities, use of more local managers, additional imports or exports of materials and finished goods, and recapture of profits.

On a more macro level of international trade are the negotiations conducted between countries. The current balance-of-trade problems between the United States and Japan are one example. The massive debt problems of Third World countries and the opening of trade doors with Eastern European countries are other current examples.”

The Negotiation Process

There are several basic steps that can be used in managing the negotiation process.”* Regardless of the issues or personalities of the parties involved, this process typically begins with planning.

Planning Planning starts with the negotiators’ identifying those objectives they would like to attain. Then, they explore the possible options for reaching these objectives. Research shows that the greater the number of options, the greater the chances for successful negotiations.” While this appears to be an obvious statement, research also reveals that many negotiators do not alter their strategy when negotiating across cultures.” Next, consideration is given to areas of common ground between the parties. Other major areas include: (1) the setting of limits on

p. 197

single-point objectives, such as deciding to pay no more than $10 million for the factory and $3 million for the land; (2) dividing issues into short- and long-term considerations and deciding how to handle each; and (3) determining the sequence in which to discuss the various issues.”

Interpersonal Relationship Building The second phase of the negotiation process involves getting to know the people on the other side. This “feeling out” period is characterized by the desire to identify those who are reasonable and those who are not. In contrast to negotiators in many other countries, those in the United States often give little attention to this phase; they want to get down to business immediately, which often is an ineffective approach. Adler notes:

Effective negotiators must view luncheon, dinner, reception, ceremony, and tour invitations as times for interpersonal relationship building, and therefore as key to the negotiating process. When American negotiators, often frustrated by the seemingly endless formalities, ceremonies, and “small talk,” ask how long they must wait before beginning to “do business,” the answer is simple: wait until your opponents bring up business (and they will). Realize that the work of conducting a successful negotiation has already begun, even if business has yet to be mentioned.»

Exchanging Task-Related Information In this part of the negotiation process, each group sets forth its position on the critical issues. These positions often will change later in the negotiations. At this point, the participants are trying to find out what the other party wants to attain and what it is willing to give up.

Persuasion This step of negotiations is considered by many to be the most important. No side wants to give away more than it has to, but each knows that without giving some concessions, it is unlikely to reach a final agreement. The success of the persuasion step often depends on: (1) how well the parties understand each other’s position; (2) the ability of each to identify areas of similarity and differences; (3) the ability to create new options; and (4) the willingness to work toward a solution that allows all parties to walk away feeling they have achieved their ob-

jectives.

Agreement The final phase of negotiations is the granting of concessions and hammering out a final agreement. Sometimes, this phase is carried out piecemeal, and concessions and agreements are made on issues one at a time. This is the way those from the United States like to negotiate. As each issue is resolved, it is removed from the bargaining table and interest focused on the next. Asians ana Russians, on the other hand, tend to negotiate a final agreement on everything, and few concessions are given until the end.” Simply put, to negotiate effectively in the international arena, it is necessary to understand how cultural differences between the parties affect the process.”

Cultural Differences Affecting Negotiations

In negotiating effectively, it is important to have a sound understanding of the other side’s culture. This includes consideration of areas such as communication patterns, time orientation, and social behaviors. A number of useful steps can help in this process.” One negotiation expert recommends the following:

CHAPTER 7: MANAGING POLITICAL RISK AND NEGOTIATIONS 197

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PART 3:

INTERNATIONAL MANAGEMENT: STRATEGY AND FUNCTIONS

1. Do not identify the counterpart’s home culture too quickly. Common cues (e.g. name, physical appearance, language, accent, location) may be unreliable. The counterpart probably belongs to more than one culture.

2. Beware of the Western bias toward “doing.” In Arab, Asian, and Latin groups, ways of being (e.g., comportment, smell), feeling, thinking, and talking can shape relationships more powerfully than doing.

3. Try to counteract the tendency to formulate simple, consistent, stable images. Not many cultures are simple, consistent, or stable.

4. Do not assume that all aspects of the culture are equally significant. In Japan, consulting all relevant parties to a decision is more important than presenting a gift.

5. Recognize that norms for interactions involving outsiders may differ from those for interactions between compatriots.

6. Do not overestimate your familiarity with your counterpart’s culture. An American studying Japanese wrote New Year's wishes to Japanese contacts in

basic Japanese characters, but omitted one character. As a result, the message became “Dead man, congratulations.””

USS. negotiators have a style that often differs from that of negotiators in many other countries. Americans believe it is important to be factual and objective. In addition, they often make early concessions to show the other party that they are flexible and reasonable. Moreover, U.S. negotiators typically have authority to bind their party to an agreement, so if the right deal is struck, the matter can be resolved quickly. This is why deadlines are so important to Americans. They have come to do business, and they want to get things resolved immediately.

A comparative example would be the Arabs, who in contrast to Americans, with their logical approach, tend to use an emotional appeal in their negotiation style. They analyze things subjectively and treat deadlines as only general guidelines for wrapping up negotiations. They tend to open negotiations with an extreme initial position. However, the Arabs believe strongly in making concessions, do so throughout the bargaining process, and almost always reciprocate an opponent’s concessions. They also seek to build a long-term relationship with their bargaining partners. For these reasons, Americans typically find it easier to negotiate with Arabs than with representatives from many other regions of the world.”

Before beginning any negotiations, negotiators should review the negotiating style of the other parties. (Table 7-3 provides some insights regarding negotiation styles of the Americans, Japanese, Arabs, and Mexicans.) This review should help to answer certain questions: What can we expect the other side to say and do? How are they likely to respond to certain offers? When should the most important matters be introduced? How quickly should concessions be made, and what type of reciprocity should be expected? These types of questions help effectively prepare the negotiators. In addition, the team will work on formulating negotiation tactics. The accompanying sidebar, “Negotiating with the Japanese,” demonstrates such tactics, and the following discussion gets into some of the specifics.”

Negotiation Tactics

A number of specific tactics are used in international negotiating. The following discussion examines some of the most common.”

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CHAPTER 7: MANAGING POLITICAL RISK AND NEGOTIATIONS 199

Y 7.4 ee

NEGOTIATION STYLES FROM A CROSS-CULTURAL PERSPECTIVE

Element United States Japanese Arabians Mexicans Group composition Marketing onented Function oriented Committee of Friendship oriented specialists Number involved 2-3 4-7 4-6 2-3 Space orientation Confrontational; Display harmonious Status Close, friendly competitive relationship Establishing rapport Short period; direct to Longer period; until Long period; until Longer period; task harmony trusted discuss family Exchange of Documented; step- Extensive; concen- Less emphasis on Less emphasis on information by-step; multimedia trate on receiving technology, more on technology, more on side relationship relationship Persuasion tools Time pressure; loss of Maintain relationship Go-between; Emphasis on family saving/making money references; intergroup hospitality and on social conconnections cems; goodwill measured in generations Use of language Open, direct, sense Indirect, appreciative, Flattery, emotional, Respectful, gracious of urgency cooperative religious First offer Fair +5 to 10% +10 to 20% +20 to 50% Fair Second offer Add to package; -5% -10% Add an incentive sweeten the deal Final offer package Total package Makes no further , 25% Total concessions Decision-making Top management Collective Team makes reéom- Senior manager and process team mendation secretary Decision maker Top management Middle line with team Senior manager Senior manager team consensus Risk taking Calculated personal Low group Religion based Personally responsible responsibility responsibility

Source: Lillian H. Chaney and Jeanette S. Martin, Intercultural Business Communication © 1995, pp. 183-184. Reprinted by permission of Prentice Hall, inc. Englewood Cliffs, New Jersey.

Location Where should negotiations take place? If the matter is very important, most businesses will choose a neutral site. For example, U.S. firms negotiating with companies from the Far East will meet in Hawaii. South American companies negotiating with European firms will meet halfway, in New York City. A number of benefits derive from using a neutral site. One is that each party has limited access to its home office for receiving a great deal of negotiating information and advice and thus gaining an advantage on the other. A second is that the cost of staying at the site often is quite high, so both sides have an incentive to conclude their negotiations as quickly as possible. (Of course, if one side enjoys the facilities and would like to stay as long as possible, the negotiations could drag on.) A third is that most negotiators do not like to return home with nothing to show for their efforts, so they are motivated to reach some type of agreement.

Time Limits Time limits are an important negotiation tactic when one party is under a time constraint. This is particularly true when this party has agreed to

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QE , #

00) PART 2. INTERNATIONAL MANAGEMENT. STRATEGY AND FUNCTIONS

Negotiating with the Japanese

Some people believe that the most effective way of getting the Japanese to open up their markets to the United States is to use a form of strong-arm tactics, such as putting the country on a list of those to be targeted for retaliatory action. Others believe that this approach will not be effective, because the interests of the United States and Japan are intertwined and we would be hurting ourselves as much as them. Regardless of which group is right, one thing is certain: US. MNCs must learn how to negotiate more effectively with the Japanese. What can they do? Researchers have found that besides patience and a little table pounding, a number of important steps warrant consideration.

First, business firms need to prepare for their negotiations by learning more about Japanese culture and the “right” ways to conduct discussions. Those companies with experience in these matters report that the two best ways of doing this are to read books on Japanese business practices and social customs and to hire experts to train the negotiators. Other steps that are helpful include putting the team through simulated negotiations and hiring Japanese to assist in the negotiations.

Second, U.S. MNCs must learn patience and sincerity. Negotiations are a two-way street that require the

mutual co-operation and efforts of both parties. The U.S negotiators must understand that many times, Japanese negotiators do not have full authority to make on-thespot decisions. Authority must be given by someone at the home office, and this failure to act quickly should not be interpreted as a lack of sincerity on the part of the Japanese negotiators.

Third, the MNC must have a unique good or service. So many things are offered for sale in Japan that unless the company has something that is truly different, persuading the other party to buy it is difficult.

Fourth, technical expertise often is viewed as a very important contribution, and this often helps to win concessions with the Japanese. The Japanese know that the Americans, for example, still dominate the world when it comes to certain types of technology and that Japan is unable to compete effectively in these areas. When such technical expertise is evident, it is very influential in persuading the Japanese to do business with the company.

These four criteria are critical to effective negotiations with the Japanese. MNCs that use them report more successful experiences than those who do not.

meet at the home site of the other party. For example, U.S. negotiators who go to London to discuss a joint venture with a British firm often will have a scheduled return flight. Once their hosts find out how long these individuals intend to stay, the British can plan their strategy accordingly. The “real” negotiations are unlikely to begin until close to the time that the Americans must leave. The British know that their guests will be anxious to strike some type of deal before returning home, so the Americans are at a disadvantage.

Time limits can be used tactically even if the negotiators meet at a neutral site. For example, most Americans like to be home with their families for Thanksgiving, Christmas, and the New Year holiday. Negotiations held nght before these dates put Americans at a disadvantage, because the other party knows when the Americans would like to leave.

Buyer-Seller Relations How should buyers and sellers act? As noted earlier, Americans believe in being objective and trading favors. When the negotiations are over, Americans walk away with what they have received from the other party, and they expect the other party to do the same. This is not the way negotistors in many other countries think, however

The Japanese, for example, believe that the buyers should get most of what they want. On the other hand, they also believe that the seller should be taken care of through reciprocal favors. The buyer must ensure that the seller has not been

p. 201

“picked clean.” For example, when many Japanese firms first started doing business with large U.S. firms, they were unaware of U.S. negotiating tactics. As a result, the Japanese thought the Americans were taking advantage of them, whereas the Americans believed they were driving a good, hard bargain.

The Brazilians are quite different from both the Americans and Japanese. Researchers have found that Brazilians do better when they are more deceptive and self-interested and their opponents more open and honest than they are.’ Brazilians also tend to make fewer promises and commitments than their opponents, and they are much more prone to say no. However, Brazilians are more likely to make initial concessions. Overall, Brazilians are more like Americans than Japanese in that they try to maximize their advantage, but they are unlike Americans in that they do not feel obligated to be open and forthright in their approach. Whether they are buyer or seller, they want to come out on top.

Bargaining Behaviors

Closely related to the discussion of negotiation tactics are the different types of bargaining behaviors, including both verbal and nonverbal behaviors. Verbal behaviors are an important part of the negotiating process, because they can improve the final outcome. Research shows that the profits of the negotiators increase when they make high initial offers, ask a lot of questions, and do not make many verbal commitments until the end of the negotiating process. In short, verbal behaviors are critical to the success of negotiations.

Use of Extreme Behaviors Some negotiators begin by making extreme offers or requests. The Chinese and Arabs are examples. Some negotiators, however, begin with an initial position that is close to the one they are seeking. The Americans and Swedes are examples here.

Is one approach any more effective than the other? Research shows that extreme positions tend to produce better results. Some of the reasons relate to the fact that an extreme bargaining position: (1) shows the other party that the bargainer will not be exploited; (2) extends the negotiation and gives the bargainer a better opportunity to gain information on the opponent; (3) allows more room for concessions; (4) modifies the opponents’ beliefs about the bargainer’s preferences; (5) shows the opponent that the bargainer is willing to play the game according to the usual norms; and (6) lets the bargainer gain more than would probably be possible if a less extreme initial position had been taken.™

Although the use of extreme position bargaining is considered to be “un- American,” many U.S. firms have used it successfully against foreign competitors. When Peter Ueberroth managed the Olympic Games in the United States in 1984, he turned a profit of well over $100 million, and that was without the participation of Soviet bloc countries, which would have further increased the market potential of the games. In past Olympiads, sponsoring countries have lost hundreds of millions of dollars. How did Ueberroth do it? One way was by using extreme position bargaining. For example, the Olympic Committee felt that the Japanese should pay $10 million for the right to televise the games in that country, so when the Japanese offered $6 million for the rights, the Olympic Committee countered with $90 million. Eventually, the two sides agreed on $18.5 million. Through the effective use of extreme position bargaining, Ueberroth got the Japanese to pay over three times their original offer, an amount well in excess of the committee’s budget.

CHAPTER 7: MANAGING POLITICAL RISK AND NEGOTIATIONS 201

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202 PART3: INTERNATIONAL MANAGEMENT: STRATEGY AND FUNCTIONS

1 9 ae)

CROSS-CULTURAL DIFFERENCES IN VERBAL BEHAVIOR OF JAPANESE, U.S., AND BRAZILIAN NEGOTIATORS

Number of times tactic was used in a half-hour bargaining session

Behavior and definition Japanese United States Brazilian

Promise. A statement in which the source indicated 7 8 3 an intention to provide the target with a reinforcing

consequence which source anticipates target will

evaluate as pleasant, positive, or rewarding.

Threat. Same as promise, except that the reinforc- 4 4 2 ing consequences are thought to be noxious, un-

pleasant, or punishing.

Recommendation. A statement in which the source 7 4 5 predicts that a pleasant environmental conse-

quence will occur to the target. Its occurrence is

not under the source's control.

Warning. Same as recommendation except that the 2 1 1 consequences are thought to be unpleasant.

Reward. A statement by the source that is thought 1 2 2 to create pleasant consequences for the target.

Punishment. Same as reward, except that the con- 1 3 3 sequences are thought to be unpleasant.

Positive normative appeal. A statement in which the 1 1 0

source indicates that the target's past, present, or

future behavior was or will be in conformity with

social norms.

Negative normative appeal. Same as positive nor- 3 1 mative appeal, except that the target's behavior is

in violation of social norms.

Commitment. A statement by the source to the ef- 15 13 8 fect that its future bids will not go below or above a certain level. Self-disclosure. A statement in which the source re- 34 36 39 veals information about itself. Question. A statement in which the source asks the 20 20 22 target to reveal information about itself.

z Command. A statement in which the source sug- 8 6 14 gests that the target perform a certain behavior. First offer. The profit level associated with each 61.5 57.3 75.2 participant's first offer. Initial concession. The difference in profit between 6.5 7.1 9.4 the first and second offer. Number of no's. Number of times the word “no” 5.7 9.0 83.4

was used by bargainers per half-hour.

Source: Adapted from John L. Graham, “The Influence of Culture on the Process of Business Negotiations in an Exploratory Study,” Journal of International Business Studies, Spring 1983, pp. 84, 88. Used with permission.

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TABLE 7-5

CROSS-CULTURAL DIFFERENCES IN NONVERBAL BEHAVIOR OF JAPANESE, U.S., AND BRAZILIAN NEGOTIATORS

CHAPTER 7: MANAGING POLITICAL RISK AND NEGOTIATIONS 203

Number of times tactic was used in a half-hour bargaining session

Behavior and definition Japanese United States Brazilian Silent period. The number of conversational gaps 5.5 3.5 0

of 10 seconds or more per 30 minutes.

Facial gazing. The number of minutes negotiators 1.3 3.3 5.2 spend looking at their opponent's face per ran- minutes minutes minutes domly selected 10-minute period.

Touching. Incidents of bargainers' touching one Cc 0 47 another per half-hour (not including handshakes).

Conversational overlaps. The number of times (per - 12.6 10.3 28.6

10 minutes) that both parties to the negotiation would talk at the same time.

Source: Adapted from John L. Graham, “The Influence of Culture on the Process of Business Negotiations in an Exploratory Study,” Journal of Intemational Business Studies, Spring 1983, p. 84. Used with permission.

Promises, Threats, and Other Behaviors Another approach to bargaining is the use of promises, threats, rewards, self-disclosures, and other behaviors that are designed to influence the other party. These behaviors often are greatly influenced by the culture. Graham conducted research using Japanese, U.S., and Brazilian businesspeople and found that they employed a variety of different behaviors during a buyer-seller negotiation simulation.* Table 7-4 presents the results.

The table shows that Americans and Japanese make greater use of promises than Brazilians. The Japanese also rely heavily on recommendations and commitment. The Brazilians use a discussion of rewards, commands, and self-disclosure more than Americans and Japanese. The Brazilians also say no a great deal more and make first offers that have higher-level profits than those of the others. Americans tend to operate between these two groups, although they do make less use of commands than either of their opponents and make first offers that have lower profit levels than their opponents.

Nonverbal Behaviors Nonverbal behaviors also are very common during negotiations. These behaviors refer to what people do rather than what they say. Nonverbal behaviors sometimes are called the “silent language.” Typical examples include silent periods, facial gazing, tcuching, and conversational overlaps. As seen in Table 7-5, the Japanese tend to use silent periods much more often than either Americans or Brazilians during negotiations. In fact, in this study, the latter did not use them at all. The Brazilians did, however, make frequent use of other nonverbal behaviors. They employed facial gazing almost four times more often than the Japanese, and almost twice as often as the Americans. In addition, although the latter two groups did not touch their opponents, the Brazilians made wide use of this nonverbal tactic. They also relied heavily on conversational overlaps, employing them more than twice as often as the Japanese and almost three times as often as Americans. Quite obviously, the Brazilians rely very heavily on nonverbal behaviors in their negotiating.

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204 PART 3: INTERNATIONAL MANAGEMENT: STRATEGY AND FUNCTIONS

TABLE 7-6

CULTURE-SPECIFIC CHARACTERISTICS NEEDED BY INTERNATIONAL MANAGERS FOR EFFECTIVE NEGOTIATIONS

U.S. managers Preparation and planning skill Ability to think under pressure Judgment and intelligence Verbal expressiveness Product knowledge Ability to perceive and exploit power Integrity

Japanese managers Dedication to job Ability to perceive and exploit power Ability to win respect and confidence Integrity Listening skill Broad perspective Verbal expressiveness

Chinese managers (Taiwan) Persistence and determination Ability to win respect and confidence Preparation and planning skill Product knowledge Interesting Judgment and intelligence

Brazilian managers Preparation and planning skill Ability to think under pressure Judgment and intelligence Verbal expressiveness Product knowledge Ability to perceive and exploit power Competitiveness

- Source: Adapted from Nancy J. Adler, International Dimensions of Organizational Behavior, 2nd ed. (Boston: PWS-Kent Publishing, 1991), p. 187, and from material provided by Professor John Graham, School of Business Administration, University of Southern California, 1983.

The important thing to remember is that in international negotiations, people use a wide variety of tactics, and the other side must be prepared to counter or find a way of dealing with them. The response will depend on the situation. Managers from different cultures will give different answers. Table 7-6 provides some examples of the types of characteristics needed in effective negotiators. To the extent that international managers have these characteristics, their success as negotiators should increase.

SUMMARY OF KEY POINTS

1. Political risk is the likelihood that the foreign investment of a business will be constrained by a host government's policies. In dealing with this risk, companies conduct both macro and micro political risk analyses. Specific consideration is given to expropriation and operational profitability risk.

2. MNCs attempt to manage their political risk in two basic ways. One is by developing a comprehensive framework for identifying and describing these risks. This includes consideration of political, operational, and ownership-control risks. A second is by quantifying the variables that help constitute the risk.

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. Two common risk formulation strategies are the use of relative bargaining power and of

integrative as well as protective and defensive techniques. Figure 7-4 illustrates how firms in various industries use a combination of the integrative and the protective and defensive techniques in developing an overall response strategy.

. Negotiation is the process of bargaining with one or more parties to arrive at a solution

that is acceptable to all. This process involves five basic steps: planning, interpersonal relationship building, exchanging task-related information, persuasion, and agreement. The way in which the process is carried out often will vary because of cultural differences.

. There are a wide variety of tactics used in international negotiating. These include loca-

tion, time limits, buyer-seller relations, verbal behaviors, and nonverbal behaviors.

KEY TERMS

political risk , ownership-control risks

macro political risk analysis conglomerate investment

micro political risk analysis vertical investments

expropriation horizontal investments indigenization laws integrative techniques

transfer risks protective and defensive techniques operational risks negotiation

REVIEW AND DISCUSSION QUESTIONS

What types of political risk would a company entering Russia face? Identify and describe three. What types of political risk would a company entering France face? Identify and describe three. How are these risks similar? How are they different?

Most firms attempt to quantify their political risk, although they do not assign specific weights to the respective criteria. Why is this approach so popular? Would the companies be better off assigning weights to each of the risks being assumed? Defend your answer.

. If a high-tech firm wanted to set up operations in Iran, what steps might it take to en-

sure that the subsidiary would not be expropriated? Identify and describe three strategies that would be particularly helpful.

. If a company new to the international arena was negotiating an agreement with a po-

tential partner in an overseas country, what basic steps should it be prepared to implement? Identify and describe them.

. Wilsten, Inc., has been approached by a Japanese firm that wants exclusive production

and selling rights for one of Wilsten’s new, high-tech products. What does Wilsten need to know about Japanese bargaining behaviors to strike the best possible deal with this company? Identify and describe five.

PRACTICAL INTERNATIONAL MANAGEMENT ASSIGNMENT

Choose a critical business negotiating issue that currently is relevant for a U.S. MNC. Possible choices might include negotiations with an EU firm to establish a joint venture or with a Third World country to set up operations in that locale. Based on your choice of country, identify the negotiating tactics likely to be used by the other side and the response strategies that you would recommend if you were part of the negotiation team. Use the material in this chapter, the references cited, and additional library research to help you in this effort.

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