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OTTO-VON-GUERICKE-UNIVERSITY MAGDEBUR G BEIJING NORMAL UNIVERSITY. Prof. Dr. Birgitta Wolff, Marjaana Rehu, M.A. Otto-von-Guericke-University, Germany. Basics of International Management. 1. Globalization of Economic Activities 2. Institutional Environment of International Business

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Basics of international management l.jpg

OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG

BEIJING NORMAL UNIVERSITY

Prof. Dr. Birgitta Wolff, Marjaana Rehu, M.A.

Otto-von-Guericke-University, Germany

Basics of International Management


Outlook l.jpg

1. Globalization of Economic Activities

2. Institutional Environment of International Business

3. Business Risks from a New Institutional Economics Perspective

4. Multinational Corporations

5. Entering Foreign Markets: Choosing the Organizational Form

6. External Growth Strategies

7. International HR Management

8. Cross-Cultural Business Negotiations

9. Project: The Ruritanian Electronics Negotiation

Outlook


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1. Globalization of Economic Activities

The Theory of Absolute Advantage

Adam Smith [1776]

The Theory of Comparative Advantage

David Ricardo [1819]

The Theory of Factor Proportions

Eli Heckscher and Bertil Ohlin

The Competitive Advantage of Nations

Michael Porter

(Czinkota/Ronkainen/Moffett (2000), International Business. Update 2000, Fort Worth et al., p. 156.)


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1.1 Motives for Firms to go International

1. Globalization of Economic Activities

(according to Czinkota et al. [2000], p. 368)


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1.2 Drivers of Globalization

1. Globalization of Economic Activities

What drives Globalization?

A Technological Triggers

B Institutional Triggers


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1.2.2Drivers of Globalization: Institutional Change

1. Globalization of Economic Activities

Hill, C. W. L. (2000): International Business, 3thd ed., Boston et al.


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1.2.2Drivers of Globalization: Institutional Change

1. Globalization of Economic Activities

Hill, C. W. L. (2000): International Business, 3thd ed., Boston et al.


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Institutional Framework

 „Framework effects“

ShiftParameters

Strategic

 „The same“ management tools might induce different effects in different environments.

Contractual Governance

BehavioralAttributes

EndogenousPreferences

 Behavioral expectations can vary much more when crossing framework borders.

Individual

2. Institutional Environment of International Business

Three layers of analysis

[Cf. Williamson (1996), The institutions and governance of economic development and reform, in: Williamson, O. E. (1996), The mechanisms of governance, New York, p. 326.]


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2.1 Explicit Institutional Environment

InstitutionalEnvironment

 „refers to the background constraints, or ‚rules of the game‘“

formal, explicitrules

informal, oftenimplicit rules

2. Institutional Environment of International Business

e.g.constitutions,laws

e.g.social conventions,norms

The institutional environment forms the framework in which human actiontakes place. It defines property rights and how they can be transferred.

[cf. Klein, P. G. (2000), The New Institutional Economics, p. 3, http://encyclo.findlaw.com/0530book.pdf, pp. 458 ff.;cf. Wolff, B. (1999): Anreizkompatible Reorganisation von Unternehmen, Stuttgart, p. 197 ff.]


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2.2 Implicit Institutional Environment

Expectations

Expectations

Expectations

Expectations

about Partner‘s Behavior

about Partner‘s Behavior

about Partner‘s Behavior

about Partner‘s Behavior

Asymmetric Information on Partner‘s

Asymmetric Information on Partner‘s

Asymmetric Information on Partner‘s

Asymmetric Information on Partner‘s

Environment

Environment

Environment

Environment

Preferences/Capabilities

Preferences/Capabilities

Preferences/Capabilities

Preferences/Capabilities

1. Realize:

Known Differences

Known Differences

Known Differences

Known Differences

Unknown Differences

Unknown Differences

Unknown Differences

Unknown Differences

¹

(‚Ignorance‘)

(‚Ignorance‘)

(‚Ignorance‘)

(‚Ignorance‘)

(‚Ignorant Ignorance‘)

(‚Ignorant Ignorance‘)

(‚Ignorant Ignorance‘)

(‚Ignorant Ignorance‘)

g

f

1

1

Create Awareness

Create Awareness

Create Awareness

Create Awareness

(Learning)

(Learning)

(Learning)

(Learning)

2. Identify:

2. Identify:

Exact Definition of Problem

Exact Definition of Problem

Exact Definition of Problem

Exact Definition of Problem

D

D

= ?

= ?

2. Institutional Environment of International Business

Impact of different frameworks on expectations about another player‘s behavior

gx=your decision in x

fx=your decision in x

1. Realize:

1. Realize:

g1(g0)

f1(g0)

¹

¹

g

f

1

1

2. Identify:

D

= ?


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2.2 Implicit Institutional Environment

2. Institutional Environment of International Business

Reducing risks resulting from diverging expectations


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2.2 Implicit Institutional Environment

2. Institutional Environment of International Business

InstitutionalEnvironment

formal, explicitrules

informal, oftenimplicit rules

dominant principle

solves problems ofcoordination and motivation by altering the payoff structure in eachgame

solves problems of coordination and motivation by repeating the game (social rewards and sanctions)

Formal rules and informal rules are not necessarily substitutes, but complements.They influence each other.


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2.3 Institutional Frameworks in

a Globalized World

WTO, World Bank, IMF, UNCTAD, OECD, DAC,BIS, EFTA, EBRD, G10, G7, Paris Club, Group 77, ...

ASEAN

EU

2. Institutional Environment of International Business

A common „roof“ for world trade?

cf. e.g. Tayeb, M. (2000), International Business. Theories, Policies and Practices, Harlow et al. p. 69 ff.


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3. Business Risks from a New Institutional Economics Perspective

Terminology: Difference between uncertainty and risk

  • Uncertainty:*- caused by many factors, with unpredictable outcomes,

  • immeasurable,- no possibility to assign proba- bilities

Risk:*

- measurable (often financial) effect of uncertainty,- high levels of uncertainty in- crease risk,- possibility to calculate probabilities

„the possibility of suffering harmor loss, or a course involving un-certain danger or hazard“**

[* cf. Tayeb, M. (2000), International Business. Theories, Policies and Practices, Harlow et al. p. 344 f.; ** Eitemann et al. (2001), Multinational Business Finance,5th ed., p. 470.]


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3.1 Endogenous Risks Perspective

Institutional Framework

Source ofexogenous risks

Source ofexogenous risks

ShiftParameters

Strategic

Contractual Governance

Source ofendogenous risks

BehavioralAttributes

EndogenousPreferences

Individual

3. Business Risks from a New Institutional Economics Perspective

Possible sources of risks by levels


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3.1 Endogenous Risks Perspective

3. Business Risks from a New Institutional Economics Perspective

Roots of risks: Asymmetric information and specific investment

[cf. e.g. Wolff (1995), Contractual Problems in Market Relations, in: Bernitz/Hallström (eds.), Principles ..., Stockholm.]


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3.2 Exogenous Risks Perspective

Institutional Framework

Source ofexogenous risks

ShiftParameters

Strategic

Contractual Governance

Source ofendogenous risks

BehavioralAttributes

EndogenousPreferences

Individual

Source ofexogenous risks

3. Business Risks from a New Institutional Economics Perspective

Recap: Possible sources of risks by levels


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3.2 Exogenous Risks Perspective

PoliticalRisk

CulturalRisk

Types ofexogenous risks ininternational Business

EconomicRisk

3. Business Risks from a New Institutional Economics Perspective

Explicit

Implicit


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Financial Community Perspective

Owners

Political Groups

Activist Groups

Govern-ments

Customers

Firm

Customer Advocate Groups

Suppliers

Unions

Competitors

Trade Associ-ations

Employers

4. Multinational Corporations

What shapes an multinational corporation?

 corporationas a nexus ofcontracts


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4.1. What exactly is a Multinational Corporation? Perspective

4. Multinational Corporations

Multinational corporation

 „enterprises that own or control production or service facilities outside the country in which they are based“ (United Nations in Czinkota et al.: 395)

  • quantitative criteria

  • must have operations in at least two

  • countries (sometimes subsidiaries in

  • even 6 or more countries are required)

  • proportion of overall revenue generated abroad: 25-30 percent is most often cited

  • involvement in foreign markets should be substantial enough to make a difference in decision making or

  • the owners of the corporation must be of

  • several nationalities

  • qualitative criteria

  • management must consider the firm as multinational and must act accordingly (view their domestic operations as part of worldwide operations)

  • ...


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4.1. What exactly is a Multinational Corporation? Perspective

4. Multinational Corporations

Property rights allocation as a determinant of governance structure

[cf. Picot, A./Wolff, B. (1994), Institutional economics of public firms and administrations, in: JITE, Vol. 150, No. 1 (March),

p. 218.]


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4.2 Creating Competitive Advantage Perspective

4. Multinational Corporations

What is a competitive advantage?

  • something that is extremely important to the customer

  • refers to the fact that some companies perform better than other ones even though they act in the same environment

Creation of competitive advantages?

  • creation and securing of sustainable success of an company/corporation

Orientationtowards markets

Orientationtowards resources

  • evaluation of environmental opportunities andthreats: PORTER‘s five competitive forces

  • evaluation of the country‘s competitiveness

  • resource-based view

  • core competencies


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4.2.1Porter‘s Five-Forces-Model Perspective

PotentialEntrants

explicit and implicitinstitutional framework

Threat of newentrants

Bargaining powerof buyers

MultinationalCorporation

Suppliers

Buyers

Bargaining powerof suppliers

Substitutes

Threat of substituteproducts or services

endogenous andexogenous risks

4. Multinational Corporations

[cf. Porter, Michael E. (1998a): The Competitive Advantage of Nations, Hampshire, London. p. 4

Porter, M. E. (1998b): Competitive Strategy. Techniques for Analysing Industries and Competitors, New York. p,. 4ff


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4.2.2 Role of Home Countries for Competitive Perspective

Advantage: Porter‘s »Diamond«

Chance

Firm Strategy,Structure andRivalry

Homecountry

FactorConditions

DemandConditions

firms gain competitiveadvantage where their home base allows and supports the most rapid accumulation of specialized assets and skills

Govern-ment

Related andSupportingIndustries

4. Multinational Corporations


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Market entry Perspective

 involves twointerdependent decisions

Location?

Mode of control?

5. Entering Foreign Markets: Choosing the Organizational Form

Where:Choosing the right location

How:Choosing the right form


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Choice of Location Perspective

Firm specific variables

Framework variables

5. Entering Foreign Markets: Choosing the Organizational Form

Where: Choosing the right location

 location as a variable affecting global competitiveness of firms because of location bound assets

Resource SeekingMarket Seeking

Efficiency Seeking

Strategic Asset Seeking

Country risk analysis

 Exogenous risks


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Purchasing Perspective

Purchasing

R&D

R&D

Manufacturing

Manufacturing

Sales

Sales

Customer Service

Customer Service

Country

Suppliers

Customers

A

B

C

D

E

1. 2.

2. 1. 2. 1.

Support Level

Support Level

Legend: Weak Medium Strong

5. Entering Foreign Markets: Choosing the Organizational Form

Disintegration of the Value Chain

[Cf. Wiegand, R./Picot, A./Reichwald, R. (1997): Information, Organization and Management, Chichester et al, p. 363.]


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5.2 Alternative Modes of Foreign Entry Perspective

5. Entering Foreign Markets: Choosing

the Organizational Form

Alternative Modes of Foreign Market Entry

Internal strategies: Using your own assets

1. Exporting

2. Licensing

3. Franchising

4. Joint Ventures

5. Sales Office

6. Production Plant

7. Full Scale Subsidiaries

8. Turnkey contracts

External strategies: Combining your and your partners‘ assets

Corporate Networks

Strategic Alliances ( „International Management II“)

Reference: Hill (2000)


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Adverse PerspectiveSelection

Moral Hazard

T0

T2

T3

T1

A+B strike a deal(contract)

A pro-duces

B sells abroad

B collects the profit and pays A (fixed amount)

5.2 Alternative Modes of Foreign Entry

5. Entering Foreign Markets: Choosing the Organizational Form

1. Export:Domestic production and administrative control,

Example: Selling Miele washing machines in Russia A: Miele Corp; B: local appliance store

Time


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Adverse PerspectiveSelection

Moral Hazard

Time

T0

T2

T3

T1

A +B strike a deal

A delivers product concept

B pro-duces and sells

B collects the profit and pays A (fixed amount for the license)

5.2 Alternative Modes of Foreign Entry

5. Entering Foreign Markets: Choosing the Organizational Form

2. Licensing:A licensor grants the rights to intangible property to another entity (the licensee) for a specified period; the licensor receives a fee.

Example: Selling cell phone technoloy to a Chinese Mobil Phone Company A: Motorola Corp.; B: Chinese partner


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T Perspective0

T2

T3

T1

A +B strike a deal

A delivers business concept

B pro-duces and sells

B collects the profit and pays A (fixed amount for the franchise)

AdverseSelection

Moral Hazard

5.2 Alternative Modes of Foreign Entry

5. Entering Foreign Markets: Choosing the Organizational Form

3. Franchising:Involves longer-term commitments than licensing; is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchiser agree to abide by strict rules as to how it doesbusiness.

Example: Selling McDonalds Franchise to a German entrepreneur A: McDonalds Corp.; B: German partner

Time


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Hold-Up Perspective (A: risk; esp. if B is player and arbitrator/rule maker at the same time)

Adverse Selection

Moral Hazard

T0

T2

T3

T1

A+B strike a deal

A+B invest

A+B share the profit

A+B pro-duce and sell

5.2 Alternative Modes of Foreign Entry

5. Entering Foreign Markets: Choosing the Organizational Form

4. Joint VentureEntails establishing a firm that is jointly owned by two or more otherwise independent firms (most typical is „50/50 venture“)

Example: Starting brick factory in China A: Austrian Corp.; B: German partner


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T Perspective0

T2

T1

A produces at home, transports to foreign sales office, and sells

A collects profits and transfers them ‚home‘

A invests abroad

5.2 Alternative Modes of Foreign Entry

5. Entering Foreign Markets: Choosing the Organizational Form

5. Sales Office

Example: DaimlerChysler opens a car shop in Egypt A: DC

Country Hold-Up

(may not be allowed to retrieve inv.)

Country hold-up(A maybe not allowed to export profits)


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T Perspective0

T2

T1

A invests abroad

A produces and sells

A collects profits and transfers them `home`

5.2 Alternative Modes of Foreign Entry

5. Entering Foreign Markets: Choosing the Organizational Form

6. Production Plant

Example: DaimlerChysler opens a car factory in South Africa A: DC

Country Hold-Up

(may not be allowed to retrieve inv.)

Country hold-up(maybe not allowed to export profits)


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T Perspective0

T2

T1

A creates A‘

A‘ producesand sells

A‘ collects profits and transfers them to A (not internal)

5.2 Alternative Modes of Foreign Entry

5. Entering Foreign Markets: Choosing the Organizational Form

7. Full-Scale Subsidiary:The firm owns 100 percent of the stock; two possible ways: setting up a new operation or acquiring an established firm.

Country Hold-Up

(may not be allowed to retrieve inv.)

Country Hold-Up(maybe not allowed to export profits)


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5.2 Alternative Modes of Foreign Entry Perspective

5. Entering Foreign Markets: Choosing the Organizational Form

8. Turnkey Contract:The contractor agrees to handle every detail of the project for a foreign client including the training of operating personnel.

Example: Selling a power plant to Chinese Energy Corporation A: Siemens Corp.; B: Chinese partner

Adverse Selection

Hold Up

Moral Hazard

T4

T0

T2

T3

T1

A +B strike a deal

A delivers completetechnology

B learns

B collects the profit and pays A (fixed amount for the project)

End of project, B produces and sells


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5.2 Alternative Modes of Foreign Entry Perspective

5. Entering Foreign Markets: Choosing the Organizational Form

[Hill (2000), p. 443.]


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5.2 Alternative Modes of Foreign Entry: Perspective Opportunities and Risks

Domestic [%]

100

1. Export

2. Licensing

3. Franchising

4. Joint Venture & Strategic Alliances

5. Sales Office

6. Production Plant

7. Full Scale Subsidiary

8. Turnkey Contract

100

0

Foreign [%]

5. Entering Foreign Markets: Choosing

the Organizational Form

Property rights allocation in expansion strategies


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6. External Growth Strategies Perspective

Many

Franchising

Licensing

Consortium

Number of Partners

Strategic Alliance

Joint Venture

Modified from: Daniels, J. D./Radebaugh, L. H. (2000): International

Business: Environments and Operations, 9th ed., p. 497.

Sales Office

None

Prod. Plant

Export

Subsidiary

OWNERSHIP CONTINUUM

Equity

(more ownership)

Nonequity

(less ownership)

Sharing


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6. External Growth Strategies Perspective

Joint Venture

T0

T2

T3

Time

T1

A+B make a

deal to cooperate in project

(e.g. 50:50)

A+B negotiate P

Price P due:A+B collect

and share (½  each)

A+B deliver their contributions (½ C each)

Corporate Alliance

T0

T2

T3

T1

Time

A+B make a

deal to cooperate in project

A+B negotiate PA and PB

A+B collect

and and divide

PA and PB

A+B deliver their contri-butions at cost CA and CB

Example: Subway System in Singapore


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6.1 Potential Benefits of Perspective Collaborative Ventures

6. External Growth Strategies

Benefits of Corporate

Collaborations

Shared

Risks

Shared Knowledge

and Expertise

Synergy &

Competitive Advantage

Easier Market Entry

modified from: Griffin, R. W./Pustay, M. W. (1999): International Business. A Managerial Perspective, 2nd ed., p. 453.


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6.2 Advantages and Disadvantages of Perspective

Corporate Collaborations

6. External Growth Strategies


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6.3 PerspectivePotential Pitfalls of Corporate Collaborations

6. External Growth Strategies

Challenges

„Textbook Problem“:

Incompati-

bility of

Partners

Access to

Information

Distribu-

tion of

Earnings

Loss of

Autonomy*

Incompati-

bility of

Partners

(modified from: Griffin, R. W./Pustay, M. W. (1999): International Business. A Managerial Perspective, 2nd ed., p. 469.)

* Further Ref.: www.cio.com/archive/enterprise/101599_ic_content.html

Adverse

Selection

Moral

Hazard

Moral

Hazard

Hold-Up

‚Normal

Uncertainty‘

Economic Problem:

Better

Forecasting,

Sufficient

Flexibility

Signaling,

Screening

Property

Rights

Allocation

Property

Rights

Allocation

‚Hostages‘,

Integration


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7. PerspectiveInternational HR Management

How do institutional frameworks influence work relations and, thus, HRM-practices?

Institutional Framework

ShiftParameters

Strategic

A Business Economist‘s Field of Interest

Corporate Governance

Behavioral Attributes

EndogenousPreferences

Source: Williamson (1994), p. 326

Individual Characteristics


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7.1 Perspective How Intercountry Differences Affect HRM

7. International HR Management

Cultural factors

Differing cultures require different HR practices among a firm’s subsidiaries, e.g. implementation of different incentive plans. ( Hofstede)

Culture

(implicit framework)

Labor cost factors

Worldwide diffe-rences in hourly compensation costs, hours worked per week, severance pays, vacation time, etc.

Economic factors

E.g.: Productivity and efficiency in SOEs in contrast to firms competing in a market (e.g. full employment at the expense ofefficiency)

Intercountry Differences Affect HRM

Law

(explicit

framework)

Industrial relations factors

Relationships between worker, union, and employer (e.g. codetermination and participation in Germany or USA)

Source: Dessler, G. (2000), Human Resource Management, 8th ed., Upper Saddle River (Prentice-Hall), pp. 614 ff.


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7.2 PerspectiveInternational Staffing Policy

7. International HR Management

International staffing policies

  • Ethnocentric-oriented

  • firms

  • Key management positions are filled by parent-country nationals

  • Reasons:

  • Lack of qualified local senior managers

  • Maintain unified corpo- rate culture and tighter control

  • Transfer of firm’s core competencies

  • Example:

  • Dutch national financial controllers at Royal Dutch Shell worldwide

  • Geocentric-orientedfirms

  • Best suited person, regard-less of nationality, is transferred to any appropriate open position

  • Reasons:

  • Most efficient use of HR resources of the firm

  • Building stronger and consistent culture

  • Building of team spirit and bonds between team members

  • Example:

  • General Electric Corp.

  • Polycentric-orientedfirms

  • Host-country nationals in foreign subsidiariesheadquarter with parent-country nationals.

  • Reasons:

  • Reduction of cultural mis- understandings locally in comparison to expatriates

  • Usually less expensive

  • Example:

  • Volkswagen AG

Source: Dessler, G. (2000), pp. 623 f.


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8.1 Perspective The Structure of Bargaining

8. Cross-Cultural Business Negotiations

  • Two players: Player A, Player B

  • Options in the negotiation process: “Agreement” or “Non-Agreement”

  • No PD!

Player B

Agreement

Non-Agreement

Agreement

Player A

Non-Agreement

 Negotiation will be beneficial, if both players can win by reaching field I.


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8.1 Perspective The Structure of Bargaining

8. Cross-Cultural Business Negotiations

The Negotiation Process – What should be considered?

Bargaining Power

  • Defined by next best option („outside option“): What is at stake?

  • Most likely different for each partner

  • Can be manipulated

Reasons for Non-Agreement

Motivation:

Non-agreement payoff is best for me

Remedies:

„Transfers“ within bargaining space (i.e. space defined by players‘ outside options)

  • Coordination:

  • Ambiguity and/or uncertainty of payoffs (one-sided or bilateral information deficits, „irrationality“)

  • Remedies:

    • Adequate communication

    • Better predictions

    • Prognostic tools


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8.1 Perspective The Structure of Bargaining

8. Cross-Cultural Business Negotiations

The Bargaining Process – What should be considered?

Player B

Agreement

Non-Agreement

Agreement

Player A

Non-Agreement

  • Should the players enter negotiations?

  • What are the players‘ outside options? (Bargaining Power)

  • Which transfer is required to reach an agreement? (What is the transfer space?)


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 20 Perspective

 18

 18

 14

Answer:

  • Yes, they should enter negotiations, because the agreement is socially desirable.

8.1 The Structure of Bargaining

8. Cross-Cultural Business Negotiations

  • Should the players enter negotiations?

Player B

Agreement

Non-Agreement

Agreement

Player A

Non-Agreement


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8.1 Perspective The Structure of Bargaining

8. Cross-Cultural Business Negotiations

  • What are the players‘ outside options? (Bargaining Power)

Player B

Agreement

Non-Agreement

Agreement

Non-Agreement

Player A

 Bargaining Power: Defined by next best option („outside option“): What is at stake?

A‘s Perspective:

a) A‘s choice: Agreement

Options for player B: Agreement (10) or Non-Agreement (12)

 Result: B chooses ‚Non-Agreement‘ (12) Player A gets (6)

b) A‘s choice: Non-Agreement

Options for player B: Agreement (5) or Non-Agreement (12)

 Result: B chooses ‚Non-Agreement‘ (12) Player A gets (2)


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8.1 Perspective The Structure of Bargaining

8. Cross-Cultural Business Negotiations

  • What are the players‘ outside options? (Bargaining Power)

Player B

Agreement

Non-Agreement

Agreement

Non-Agreement

Player A

B‘s Perspective:

a) B‘s choice: Agreement

B‘s choice of ‚Agreement‘ is dominated by ‚Non-Agreement‘  12 > 10 or 5

 Result: Player A‘s choice of ‚Non-Agreement‘ (13)is not feasible.

b) B‘s choice: Non-Agreement

Options for player A: Agreement (6) or Non-Agreement (2)

 Result: Player A chooses ‚Agreement‘ (6) Player B gets (12)


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8.1 Perspective The Structure of Bargaining

8. Cross-Cultural Business Negotiations

  • What are the players‘ outside options? (Bargaining Power)

Player B

Non-Agreement

Agreement

Agreement

Player A

Non-Agreement

Conclusion

  • Player B will never agree, because he/she gains 12 whatever the other partner will do.

  • Field III is dominated by field II  A should agree (6 > 2)

  • The payoff 13 for A will never be reached  not binding/no feasible outside option for A best feasible outside option for A: 2

  • Feasible outside option for B in this game: Payoff 12


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( Perspective 20)

( 18)

( 18)

( 14)

8.1 The Structure of Bargaining

8. Cross-Cultural Business Negotiations

  • What could be done to motivate both partners to agree?

Player B

  • Which transfer is required to reach an agreement?

Non-Agreement

Agreement

t = 3

  • At least 2 should be transferred!

Agreement

Player A

  • What is the transfer space?

Non-Agreement

  •  20: 20 – 18 = 2

  • B: 10 – 6 = 4

  • A: 10 – 12 = -2

Player B

Results: Choice of ‚Agreement‘

  • A is better off: gains 7 instead of 6

Player A

  • B is better off: gains 13 instead of 12

  • Agreement is socially desirable ()


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  • What is the nature of the problem?

  • Can I resolve it in isolation, or does it require (or allow) me to address other problems as well?

  • What are my interests?

  • What do I have at stake on and off the table in this negotiation?

  • Which interests are essential?

  • What are my bargaining goals?

  • What do I want out of the negotiations?

  • What am I prepared to settle for?

  • Is bargaining feasible?

  • What are the interests and goals of the other side?

  • Is there likely to be enough overlap with mine to warrant bargaining?

8.2 Three Phases of the Bargaining Process

8. Cross-Cultural Business Negotiations

1) Pre-Bargaining

Source: Lebow, R. N. (1996): The Art of Bargaining, Baltimore & London (J. Hopkins Univ. Press), pp. 4/5.


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  • Given the nature of the bargaining situation, which strategy is most appropriate?

  • Should I use it alone or in tandem with another strategy?

  • Increase your Leverage

  • What resources and advantages do I have?

  • What can I do to increase my advantages, diminish the other side‘s advantages, or convince the other side of my advantages?

  • Frame a Proposal

  • What kind of offer or counteroffer do I want to make?

  • How is it conditioned by my bargaining strategy?

  • Explain and Justify your Demands

  • Why are my demands legitimate and reasonable?

  • Pin Down Important Details

  • Do I want an agreement in principle or an agreement in detail?

  • Have I reached a written agreement on all details that are important to me?

8.2 Three Phases of the Bargaining Process

8. Cross-Cultural Business Negotiations

2) Bargaining


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8.2 PerspectiveThree Phases of the Bargaining Process

8. Cross-Cultural Business Negotiations

3) Postbargaining

  • Ratify the Agreement

  • Does my agreement need ratification?

  • What kind of terms will I need to gain ratification?

  • Is there anything else I can do to increase the chances of ratification?

  • Implement the Agreement

  • Is my agreement self-executing?

  • If not, what requirements does it have?

  • Have I secured those requirements in my agreement, in so far as it is possible to do so?


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8.3 PerspectiveThe “Harvard”-Concept of Negotiating

8. Cross-Cultural Business Negotiations

1. The Problem:

 Do not bargain over positions.

2. The Method:

  • Separate the people from the problem

  • Focus on interests, not positions

  • Invent options for mutual gain

  • Insist on using objective criteria

3. What if they are more powerful?

 Develop your BATNA (Best Alternative To a Negotiated Agreement)

Source: Fisher, R./Ury, W. (1991): Getting to Yes. Negotiating Agreement Without Giving In, 2nd edition, New York etc. (Penguin Books).


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8.3 PerspectiveThe “Harvard”-Concept of Negotiating

8. Cross-Cultural Business Negotiations

1) Preparation:

  • Interests: yours and theirs

  • Options: yours and theirs

  • Standards: identify „fair“ procedure (e.g. referring to market price)

  • Alternatives: BATNA (Best Alternative to a Negotiated Agreement)

  • Proposals: should be better than other side‘s BATNA

  • Rehearse: talk it over with someone else

Source: Ury, W. (1991): Getting past No. Negotiating Your Way From Confrontation to Cooperation, New York etc. (Bantam Books).


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8.3 PerspectiveThe “Harvard”-Concept of Negotiating

8. Cross-Cultural Business Negotiations

2) Negotiating

  • Barriers to Cooperation

    • Your reaction

    • Their reaction

    • Their position

    • Their dissatisfaction

    • Their power

  • Corresponding Strategy

    • Don’t react: Go to the balcony

    • Don’t argue: Step to their side

    • Don’t reject: Reframe

    • Don’t push: Build them a golden bridge

    • Don’t escalate: Use power to educate


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8.3 PerspectiveThe “Harvard”-Concept of Negotiating

8. Cross-Cultural Business Negotiations

Specifics of Cross-Cultural Business Negotiations

Insufficient recognition…

… of the role of host government in the negotiation process

… of the nature and characteristics of the role of government in (more or less) centrally planned economies

… of the difference between approval at one level and implementation of such approval at other levels of the government

… of the relatively low status assigned to business-persons in many countries

Source: Hendon/Hendon/Herbig (1996), pp. 15-76, 231-242.

… of the role of the negotiator in accommodating the conflicting interests ofhis group with those of opposing groups

… of the loci of decision-making authority

… of the economic and political criteria in the decision-making process

… of the strength of competitors

… and attention to training executives in the art of negotiations


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Hofstede (1980) defines four dimensions of culture: Perspective

Individualism vs. collectivism

Masculinity vs. femininity

High uncertainty avoidance vs. low uncertainty avoidance

High power distance vs. low power distance

Examples:

Germans: high uncertainty avoidance, small power distance, high individualism, masculine

Americans: weak uncertainty avoidance, small power distance, high individualism, masculine

8.3 Dimensions of Cultures

8. Cross-Cultural Business Negotiations


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8. Perspective Cross-Cultural Business Negotiations

Specifics of Cross-Cultural Business Negotiations (cont.)

Insufficient attentionto saving face of the opponent

Insufficient understanding of the role of personal relations and personalities in the decision-making process

Insufficient planning for internal commu-nication and decisions

Interference by headquarters

Common mistakes made when negotiating overseas

Insufficient allocation/attention of time for negotiations

Failure to place yourself in the other person’s shoes

Insufficient knowledgeof the host country – including history, culture, government, status of business, image of foreigners

Insufficient understanding of different waysof thinking

Insufficientattention to planning for changing negotiation strengths

Source: Hendon/Hendon/Herbig (1996), pp. 15-76, 231-242.


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9. Perspective Project: The Ruritanian Electronics Negotiation

Background

Ruritanian Electronics (A multicultural Computer manufacturer in the Republic of Ruritania)

Management

 Ruritanian

Workforce

50 % Feefifofians

50 % Abadabenise‘

  • Management has to negotiate a new annual labor contract with (the two parts of) the workforce

  • Personnel managers, Feefifofians, and Abadabenise‘ have different aims and culture profiles

  • Each party has something to win or loose (See instructions in the reading pack!)

Problem:

The Negotiation

You – as representatives of your culture – will negotiate an annual labor contract with the firm’s management (Personnel Managers)


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9. Perspective Project: The Ruritanian Electronics Negotiation

  • Team meeting: Preparation of the negotiation

  • Prepare the readings (Instructions) carefully!

  • Handout: Abadabinese‘; Feefifofians‘, or Personnel managers‘ score sheet

  • Schedule team meetings:

  • Define your own bargaining position by setting your goals according to your community‘s culture

  • Plan how you want to conduct the negotiation process. You will not be able to define your own strategy without anticipating your opponents’ goals and strategies.

  • Remember: If your negotiations do not end in an agreement top management is likely to sell the business and you all might get dismissed.


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9. Perspective Project: The Ruritanian Electronics Negotiation

The Negotiation:

You - as representatives of your culture - will negotiate an annual labor contract with the firm’s management.

“Postbargaining”: Discussion of Results

 Have some slides ready to present and explain your strategy!