Institutional Context of Multinational Management (Business Environment)

1. Institutional Context ofMultinational Management(Business Environment) Chapter 3

2. Factors in theBusiness Environment • Economic systems, privatization, and nationalization • Laws and regulations that affect business • Level of industrialization • Religion • Education • Culture

3. Economic Systems • Capitalist/market economy: production is decentralized to private owners • Owners perform activities to make profits • Socialist/command economy: production resources are owned by the state • Production decisions centrally coordinated • Mixed economy: combines aspects of capitalist and socialist economies – wide variety of mixed economies

4. Economic Systems (2) • When government is more involved in the economy, there will be more regulations and restrictions on business • Social goals, such as full employment, may be more important • Example: It is more expensive to terminate employees or close a business facility in Europe than in the United States. • Index of Economic Freedom compares the level of government regulation in different countries

5. Exhibit 3.2: Selected Country Scores on Index of Economic Freedom

6. Privatization • Privatization is the sale of government-controlled enterprises to private investors • Methods of privatization • Issue stock in the enterprise • Sell the enterprise to a company • Sell the enterprise to individual investors

7. Privatization (2)Reasons for Privatization • In developed countries, privatization helps companies become more competitive in the global economy. • Developing countries often privatize companies to get more rapid economic growth. • Many former Communist countries privatized theirenterprises to make the transition to a market economy. This is one condition that countries must meet to join the European Union (EU). • China now has a mixed economy, with both public and private enterprises.

8. Post-Communist • Members of the EU • Poland • Hungary • The Czech Republic • Slovakia • Slovenia • Estonia • Latvia • Lithuania • Bulgaria • Romania • Candidates • Croatia • Macedonia • Croatia

9. Privatization Issues inTransition Economies • Foreign investment was often needed to replace obsolete equipment and facilities. • Some companies had to invest in infra-structure, such as roads and sewer lines. • Privatized firms employed fewer people, which caused high unemployment • Labor was often inexpensive. • Workers were sometimes suspicious of business and hard to motivate. • Enterprises devoted to military production often could not be made profitable and had to close.

10. Nationalization • Nationalization is the conversion of a private enterprise to government ownership. • The government may or may not pay the company's stockholders or investors for the enterprise. • When no payment is made, the conversion is called expropriation.

11. Nationalization in Russia • Russia privatized its energy industry in the 1990's and recently re-nationalized most of it. • Russia just forced Shell and several other western companies to a controlling interest in the Sakhalin 2 oil project to the government energy monopoly (Gazprom) • Russia has large oil reserves and the world's largest reserve of natural gas

12. Nationalization in South America • Most government enterprises in South America were privatized in the 1980's. • Socialist presidents have been elected in Bolivia, Ecuador, Venezuela, and Nicaragua. • Venezuela just announced that it will privatize the telecommunication and electrical industries. • Will compensation will be paid? • Venezuela is likely to nationalize other industries. • Bolivia and Ecuador have also nationalized some companies.

13. Industrialization • Pre-industrial society: agriculture dominates the economic environment • Industrial society: dominance of the secondary or manufacturing sectors • Post-industrial society: emphasis on the service sectors

14. Exhibit 3.4: Distribution of Production Activities by Sectors

15. Implications of Industrialization • There is a direct correspondence between industrialization and economic development • Industrial societies favor growth and innovation • Favorable environment for business • Industrial societies present significant market size and growth

16. Industrialization • Pre-industrial countries provide cheap labor and untapped markets • People are often highly motivated to achieve a better life • Post-industrial societies • Emphasis on quality-of-life as opposed to economic achievement

17. Religion • Christianity, Islam, Hinduism, or Buddhism are followed by almost 71% of the world’s population • Religion affects ethics and worker behavior • Know the implications of Islam, Hinduism, and Buddhism for business

18. Importance of Education • Gives an idea of the skill level of workers in any society • The more educated, the more skills workers have • Companies look at educational attainment scores to determine the nature of the workforce

19. Organizations Alike: Globalization and Convergence • Globalization is pushing organizations to be more similar • Global customers and products • Growing levels of industrialization and economic development • Global competition and global trade

20. Globalization and Convergence • Other convergence forces • Cross-border mergers, acquisitions, and alliances • Cross-national mobility of managers • Internationalization of business education • Caution: customers in different customers still have somewhat different preferences and needs.