Cultural differences

1. International Business(Entry Strategy – Foreign Direct Investment)Erasmus programmeIILecturer Dr Pavlos Dimitratos pdimitr@aueb.gr

2. Cultural differences • Culture is of paramount importance to internationalization • The relationship between culture and country can be ambiguous due to possible existence of subcultures • Social systems and values differ between countries also (e.g. the individual vs. the group) • Social strata, social mobility and class consciousness can considerably differ between countries (e.g. USA vs. India)

3. Cultural differences (cont’d) • Religion affects ethical standards and beliefs towards consumption, business and entrepreneurship in any country • E.g. the protestant work ethic supports the fundamental beliefs of capitalism • Islam is mainly concerned with social justice and is critical of those who earn profit through the exploitation of others

4. Cultural differences (cont’d) • Spoken and unspoken language are also part of culture • E.g. different interpretations of the word ‘liberal’ • Gestures, symbols and colors around the world

5. Cultural differences (cont’d) • Culture in the workplace • Hofstede’s four dimensions • Power distance: how a society deals with the fact that people are equal in physical and intellectual capabilities (e.g. Denmark vs. India) • Individualism vs. collectivism: focuses on the relationship between the individual and his/her fellows (e.g. USA vs. Thailand)

6. Cultural differences (cont’d) Hofstede’s four dimensions (cont’d): • Uncertainty avoidance: the degree to which different cultures socialize their members into accepting ambiguous situations and tolerating uncertainty (e.g. Japan vs. Great Britain) • Masculinity vs. feminity: deals with the relationship between gender and work roles (e.g. Netherlands vs. Mexico)

7. Two main foreign entry modes • Exports (trade) • Foreign direct investment (FDI) • FDI occurs when a firm invests directly in value-added activities in a foreign country • Once a firm engages in FDI, it becomes a multinational (MNE) • Foreign portfolio investment is investment in foreign financial instruments whereby no significant equity stake in a foreign business entity takes place

8. Two main foreign entry modes (con’d) • Licensing (franchising) represents a hybrid between exports and FDI • In licensing we have the exporting of intangibles • FDI can be joint ventures (strategic alliances) or wholly owned subsidiaries • FDI can occur through mergers/acquisitions or greenfield investments

9. Choice between entry modes… • Depends on… • Transportation costs (may dictate the use of FDI) • Market imperfections • Impediments to exporting (tariffs and other trade barriers) • Impediments to the sale of know-how stemming from the firm’s technological, marketing or management know-how. In those cases, the firm will prefer FDI to protect its valuable know-how and/or exert tight control in its foreign activities and/or because of no amenability to licensing • Most useful theory in explaining choice of entry modes

10. Choice between entry modes… (cont’d) • Depends on… • Following competitors (Knickerbocker) • The evolution of the international product life cycle (Vernon) • The stage of the firm’s international growth (Johanson and Vahlne) • The higher the experience/knowledge the firm acquires abroad, the more likely an FDI mode is • Location-specific advantages (Dunning) • Fit of firm’s resources with foreign country’s advantages • This viewpoint helps explain the direction of FDI

11. Exporting • Advantages • Low costs • May help a firm achieve experience curve and location economies • Disadvantages • Lack of control • Lack of involvement in the foreign market

12. Licensing (franchising) • Advantages • No development costs and risks associated with opening a foreign market • Disadvantages • Limited control over value-added activities required for realizing experience curve and location economies • The firm cannot efficiently coordinate strategic moves across countries • Risk associated with licensing know-how

13. Joint venture (strategic alliance) • Advantages • Benefit from a local partner’s knowledge • Share the development costs and risks of opening a foreign market • Politically acceptable • Disadvantages • Give control over critical competencies to foreign partners • No tight control compared with subsidiaries (lack of global strategic coordination) • May be hard to manage over time

14. Wholly owned subsidiaries • Advantages • Control and protection of valuable core competencies • Ability to engage in international strategic coordination, and realize location and experience economies • Disadvantages • High cost • Exposure to high risk • Mini-case discussion

15. FDI • Majority of FDI takes place through Mergers & Acquisitions rather than Greenfield investments - why? • M&A are quicker to execute • M&A may preempt competitors • In M&A firms acquire valuable strategic assets • Internationalized firms believe they can increase the efficiency of the acquired unit and thus may be less risky

16. FDI (cont’d) • Yet, M&A may fail because • Firms may overpay for the assets of the acquired firm • There can be a clash of cultures between the two firms • Of difficulties in the management of relationship • Of inadequate pre-acquisition screening

17. Other entry decisions • Which markets/countries to enter (Erasmus programme I) • Timing of entry (first mover vs. late mover) • Scale of entry / strategic commitments

18. The political economy of FDI • FDI has been viewed in a continuum ranging from an instrument of imperialist domination to an instrument for allocating production to most efficient locations. • Somewhere in the middle lies the view of the ‘pragmatic nationalism’ whereby FDI is viewed as having both benefits and costs (e.g. France in the 1980s) • Mini-case discussion

19. Benefits of FDI to the host country • Resource transfer effects (capital, technology, management) • Employment effects (direct and indirect) • Balance of payments effects (initial investment, substitution of imports, exports to other countries) • Effect on competition and economic growth

20. Costs of FDI to the host country • Adverse effects on competition (could monopolize the market) • Adverse effects on balance of payments (repatriation of earnings, imports from home/abroad) • Threat to national sovereignty and autonomy

21. Benefits of FDI to the home country • Effects on balance of payments (repatriation of earnings, exports from home) • Employment effects (demand for home-country goods) • Learning of valuable skills from foreign market exposure • Economic diplomacy

22. Costs of FDI to the home country • Effects on balance of payments • Employment effects • Home/ host countries can encourage or discourage FDI through a variety of policies • The WTO (World Trade Organization) has also become involved in regulations governing FDI

23. Readings • Hill, chapters 3, 6, 7 & 14 Recommended: • Johanson J., and Vahlne J.-E. (1977), “The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments”, Journal of International Business Studies, 8(1), 23-32. • Root F.R. (1987), Entry Strategies for International Markets, Lexington, MA: Lexington Books. • Young S., Hamill J., Wheeler C., and Davies J.R. (1989), International Market Entry and Development, Englewood Cliffs, NJ: Prentice-Hall.