1. Basics of International Management OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING NORMAL UNIVERSITY Prof. Dr. Birgitta Wolff, Marjaana Rehu, M.A. Otto-von-Guericke-University, Germany

2. 2 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Outlook 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

3. 3 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 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 1. Globalization of Economic Activities (Czinkota/Ronkainen/Moffett (2000), International Business. Update 2000, Fort Worth et al., p. 156.)

4. 4 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 1. Globalization of Economic Activities 1.1 Motives for Firms to go International What motivates companies to expand their operations internationally? Proactive Motives [firm-initiated strategic change] Reactive Motives [firms response and adoption to changes imposed by outside environment] Profit advantage Competitive pressures Unique products Overproduction Technological advantage Declining domestic sales Exclusive information (Ongoing!) Excess capacity Managerial commitment Saturated domestic markets Tax benefit Proximity to customers and ports Economies of scale (according to Czinkota et al. [2000], p. 368)

5. 5 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 1. Globalization of Economic Activities 1.2 Drivers of Globalization What drives Globalization? A Technological Triggers B Institutional Triggers

6. 6 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 1. Globalization of Economic Activities 1.2.2 Drivers of Globalization: Institutional Change Hill, C. W. L. (2000): International Business, 3thd ed., Boston et al. ad A. Technological Triggers  Transport  goods  raw material  humans  Information and Communication Technology  information  know-how  monitoring control

7. 7 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 1. Globalization of Economic Activities 1.2.2 Drivers of Globalization: Institutional Change Hill, C. W. L. (2000): International Business, 3thd ed., Boston et al. ad B. Institutional Triggers  Legal changes  e. g. declining trade and investment barriers - less protectionism (tariffs, subsidies, regulations or quotas), because of WTO, ETC - less capital restrictions  Political changes  revolutions, new governments, wars...  Consumer tastes  changing preferences and tastes; growing acceptance of standardized - consumer electronic goods, - automobiles, - computers, - calculators  growing „individualization“

8. 8 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 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.] Institutional Framework Contractual Governance Individual Behavioral Attributes Shift Parameters Strategic Endogenous Preferences  „Framework effects“  „The same“ management tools might induce different effects in different environments.  Behavioral expectations can vary much more when crossing framework borders.

9. 9 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 2. Institutional Environment of International Business [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.]  „refers to the background constraints, or ‚rules of the game‘“ Institutional Environment formal, explicit rules informal, often implicit rules e.g. constitutions, laws e.g. social conventions, norms The institutional environment forms the framework in which human action takes place. It defines property rights and how they can be transferred. 2.1 Explicit Institutional Environment

10. 10 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 2. Institutional Environment of International Business Impact of different frameworks on expectations about another player‘s behavior 2.2 Implicit Institutional Environment 1. Realize: g 1  f 1 Expectations about Partner‘s Behavior Asymmetric Information on Partner‘s Environment Preferences/Capabilities Known Differences (‚Ignorance‘) Unknown Differences (‚Ignorant Ignorance‘) Create Awareness (Learning) Exact Definition of Problem 2. Identify:  = ? 1. Realize: g 1  f 1 Expectations about Partner‘s Behavior Asymmetric Information on Partner‘s Environment Preferences/Capabilities Known Differences (‚Ignorance‘) Unknown Differences (‚Ignorant Ignorance‘) Create Awareness (Learning) Exact Definition of Problem 2. Identify:  = ? 1. Realize:  Expectations about Partner‘s Behavior Asymmetric Information on Partner‘s Environment Preferences/Capabilities Known Differences (‚Ignorance‘) Unknown Differences (‚Ignorant Ignorance‘) Create Awareness (Learning) Exact Definition of Problem Expectations about Partner‘s Behavior Asymmetric Information on Partner‘s Environment Preferences/Capabilities Known Differences (‚Ignorance‘) Unknown Differences (‚Ignorant Ignorance‘) Create Awareness (Learning) Exact Definition of Problem 2. Identify:  = ? g x =your decision in x f x =your decision in x g 1 (g 0 )f 1 (g 0 )

11. 11 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 2. Institutional Environment of International Business Reducing risks resulting from diverging expectations 2.2 Implicit Institutional Environment

12. 12 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 2. Institutional Environment of International Business Institutional Environment formal, explicit rules informal, often implicit rules solves problems of coordination and motivation by altering the payoff structure in each game 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. dominant principle 2.2 Implicit Institutional Environment

13. 13 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 2. Institutional Environment of International Business 2.3 Institutional Frameworks in a Globalized World EU ASEAN WTO, World Bank, IMF, UNCTAD, OECD, DAC, BIS, EFTA, EBRD, G10, G7, Paris Club, Group 77,... A common „roof“ for world trade? cf. e.g. Tayeb, M. (2000), International Business. Theories, Policies and Practices, Harlow et al. p. 69 ff.

14. 14 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 3. Business Risks from a New Institutional Economics Perspective Terminology: Difference between uncertainty and risk [* cf. Tayeb, M. (2000), International Business. Theories, Policies and Practices, Harlow et al. p. 344 f.; ** Eitemann et al. (2001), Multinational Business Finance, 5 th ed., p. 470.] 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 harm or loss, or a course involving un- certain danger or hazard“**

15. 15 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 3. Business Risks from a New Institutional Economics Perspective 3.1 Endogenous Risks Possible sources of risks by levels Institutional Framework Contractual Governance Individual Behavioral Attributes Shift Parameters Strategic Endogenous Preferences Source of endogenous risks Source of exogenous risks

16. 16 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 3. Business Risks from a New Institutional Economics Perspective 3.1.2 Adverse Selection3.1.3 Moral Hazard3.1.4 Hold-Up Reason for risk Asymmetrical information status One-sided specific investment Reason for the asymmetrical information status Lack of information regarding quality of good or service Action cannot be monitored and/or result cannot be evaluated (Information status is not the problem) Time of occurrence in relation to signing of contract Ex anteEx post Theoretical con- tractual approach to solving problem Selection mechanisms (or reduce information asymmetry) Incentive systems (or reduce information asymmetry: ‘Monitoring’) Vertical integration or implementation of mutual dependencies (or avoid specific investments) Examples Signaling via certificates Screening via contract menus or tests Bonus payments Job design and decentralization Team formation Co-ownership Manipulating ‘outside options’ (or establish accounting system) Unified resource ownership Exchanging ‘hostages’ by providing some form of security (or use alternative tech- nology, or redefine task) Roots of risks: Asymmetric information and specific investment [cf. e.g. Wolff (1995), Contractual Problems in Market Relations, in: Bernitz/Hallström (eds.), Principles..., Stockholm.] 3.1 Endogenous Risks

17. 17 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 3. Business Risks from a New Institutional Economics Perspective Recap: Possible sources of risks by levels Institutional Framework Contractual Governance Individual Behavioral Attributes Shift Parameters Strategic Endogenous Preferences Source of endogenous risks Source of exogenous risks 3.2 Exogenous Risks

18. 18 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 3. Business Risks from a New Institutional Economics Perspective 3.2 Exogenous Risks Types of exogenous risks in international Business Political Risk Cultural Risk Economic Risk Implicit Explicit

19. 19 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 4. Multinational Corporations What shapes an multinational corporation?  corporation as a nexus of contracts Firm Political Groups Govern- ments Suppliers Competitors Trade Associ- ations Employers Unions Customer Advocate Groups Owners Financial Community Activist Groups Customers

20. 20 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 4. Multinational Corporations Multinational corporation 4.1. What exactly is a 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) -...

21. 21 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 4. Multinational Corporations Property rights allocation as a determinant of governance structure Type of firm Staticdynamic Allocation of property rights Transferability of rights ControlProfitLiabilitySale Enterprise with single ownership Entrepreneur Entrepreneur (even private assets) Entrepreneurunlimited Corporation without workers‘ codetermination ManagementShareholders unlimited Corporation with statutory co- determination Management/ Employees Shareholders/ Employees Shareholders unlimited Worker-managed firm Workers/ Management Workersnon-transferable State-owned firm Politicians/ Management „State“ limited (law) Public Administration Politicians/ Public Servants „State“ non-transferable (law) [cf. Picot, A./Wolff, B. (1994), Institutional economics of public firms and administrations, in: JITE, Vol. 150, No. 1 (March), p. 218.] 4.1. What exactly is a Multinational Corporation?

22. 22 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 4. Multinational Corporations 4.2 Creating Competitive Advantage 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? Orientation towards markets creation and securing of sustainable success of an company/corporation Orientation towards resources - evaluation of environmental opportunities and threats: PORTER‘s five competitive forces - evaluation of the country‘s competitiveness - resource-based view - core competencies

23. 23 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 4. Multinational Corporations 4.2.1Porter‘s Five-Forces-Model Multinational Corporation SuppliersBuyers Substitutes Potential Entrants Bargaining power of buyers Threat of substitute products or services Bargaining power of suppliers Threat of new entrants explicit and implicit institutional framework endogenous and exogenous risks [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

24. 24 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 4. Multinational Corporations 4.2.2 Role of Home Countries for Competitive Advantage: Porter‘s »Diamond«  firms gain competitive advantage where their home base allows and supports the most rapid accumulation of specialized assets and skills Home country Firm Strategy, Structure and Rivalry Related and Supporting Industries Demand Conditions Factor Conditions Chance Govern- ment

25. 25 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form Market entry Location?Mode of control?  involves two interdependent decisions Where: Choosing the right location How: Choosing the right form

26. 26 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Where: Choosing the right location  location as a variable affecting global competitiveness of firms because of location bound assets Choice of Location Firm specific variablesFramework variables Resource Seeking Market Seeking Efficiency Seeking Strategic Asset Seeking Country risk analysis  Exogenous risks 5. Entering Foreign Markets: Choosing the Organizational Form

27. 27 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Disintegration of the Value Chain [Cf. Wiegand, R./Picot, A./Reichwald, R. (1997): Information, Organization and Management, Chichester et al, p. 363.] 5. Entering Foreign Markets: Choosing the Organizational Form

28. 28 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form 5.2 Alternative Modes of Foreign Entry 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)

29. 29 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form 1. Export: D omestic production and administrative control, Example: Selling Miele washing machines in Russia A: Miele Corp; B: local appliance store T0T0 T1T1 T2T2 T3T3 A+B strike a deal (contract) A pro- duces B sells abroad B collects the profit and pays A (fixed amount) Moral Hazard Adverse Selection Time 5.2 Alternative Modes of Foreign Entry

30. 30 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 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 Time T0T0 T1T1 T2T2 T3T3 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) Moral Hazard Adverse Selection 5.2 Alternative Modes of Foreign Entry

31. 31 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 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 does business. Example: Selling McDonalds Franchise to a German entrepreneur A: McDonalds Corp.; B: German partner T0T0 T1T1 T2T2 T3T3 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) Moral Hazard Adverse Selection Time 5.2 Alternative Modes of Foreign Entry

32. 32 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form 4. Joint Venture Entails 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 T0T0 T1T1 T2T2 T3T3 A+B strike a deal A+B invest A+B pro- duce and sell A+B share the profit Moral Hazard Hold-Up (A: risk; esp. if B is player and arbitrator/rule maker at the same time) Adverse Selection 5.2 Alternative Modes of Foreign Entry

33. 33 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form T0T0 T1T1 T2T2 A invests abroad A produces at home, transports to foreign sales office, and sells A collects profits and transfers them ‚home‘ Country hold-up (A maybe not allowed to export profits) 5. Sales Office Example: DaimlerChysler opens a car shop in Egypt A: DC 5.2 Alternative Modes of Foreign Entry Country Hold-Up (may not be allowed to retrieve inv.)

34. 34 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form 6. Production Plant Example: DaimlerChysler opens a car factory in South Africa A: DC T0T0 T1T1 T2T2 A invests abroad A produces and sells A collects profits and transfers them `home` Country Hold-Up (may not be allowed to retrieve inv.) Country hold-up (maybe not allowed to export profits) 5.2 Alternative Modes of Foreign Entry

35. 35 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form 7. Full-Scale Subsidiary: T he firm owns 100 percent of the stock; two possible ways: setting up a new operation or acquiring an established firm. T0T0 T1T1 T2T2 A creates A‘ A‘ produces and sells A‘ collects profits and transfers them to A (not internal) Country Hold-Up (maybe not allowed to export profits) 5.2 Alternative Modes of Foreign Entry Country Hold-Up (may not be allowed to retrieve inv.)

36. 36 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form 8. Turnkey Contract: T he 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 T0T0 T1T1 T2T2 T3T3 A +B strike a deal A delivers complete technology B learnsB collects the profit and pays A (fixed amount for the project) Adverse Selection Moral HazardHold Up 5.2 Alternative Modes of Foreign Entry T4T4 End of project, B produces and sells

37. 37 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form ExportingAbility to realize location and experience curve economies High transport costs Trade barriers Problems with local marketing agents FranchisingLow development costs and risks Lack of control over quality Inability to engage in global strategic coordination LicensingLow development costs and risks Lack of control over quality Inability to realize location and experience curve economies Inability to engage in global strategic coordination Turnkey contractsAbility to earn returns from process technology skills in countries where FDI is restricted Creating efficient competitors Lack of long-term market presence Entry ModeAdvantageDisadvantage [Hill (2000), p. 443.] 5.2 Alternative Modes of Foreign Entry

38. 38 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 5. Entering Foreign Markets: Choosing the Organizational Form 5.2 Alternative Modes of Foreign Entry: Opportunities and Risks Property rights allocation in expansion strategies 100 Domestic [%] Foreign [%] 0 100 1. Export 2. Licensing 3. Franchising 4. Joint Venture & Strategic Alliances 5. Sales Office 6. Production Plant 7. Full Scale Subsidiary 8. Turnkey Contract

39. 39 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Number of Partners Many None Sales Office Prod. Plant Subsidiary Consortium Joint Venture Licensing Franchising Strategic Alliance Export OWNERSHIP CONTINUUM Modified from: Daniels, J. D./Radebaugh, L. H. (2000): International Business: Environments and Operations, 9 th ed., p. 497. Equity (more ownership) Sharing Nonequity (less ownership) Tight controlMedium controlLittle control 6. External Growth Strategies

40. 40 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Corporate Alliance Example: Subway System in Singapore T0T0 T1T1 T2T2 T3T3 A+B make a deal to cooperate in project A+B negotiate P A and P B A+B collect and and divide P A and P B A+B deliver their contri- butions at cost C A and C B Time T0T0 T1T1 T2T2 T3T3 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) Joint Venture Time 6. External Growth Strategies

41. 41 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 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, 2 nd ed., p. 453. 6.1 Potential Benefits of Collaborative Ventures 6. External Growth Strategies

42. 42 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. TypeAdvantagesDisadvantages Wholly Owned Sub- sidiary (WOS) Protection of technology/ know-how Right to decide about all further steps in global strategy Ability to realize location and experience curve economies No moral hazard problem with partner High costs and risks of setting up over- seas operations Country-specific hold-up problem (Restrictions on money transfer e.g. profits/investment by the host country) Adverse selection problem Joint Venture (shared owner- ship) Access to local partner`s know-how In some countries: only politically feasible solution to enter a market Less capital required (shared between partners) Shared business risk Less country-specific hold-up risk than in WOS Lack of control over technology/know- how Potential imcompatibility of partners Diluted incentives to invest Adverse selection, moral hazard, and hold-up problem Strategic Alliance Shared costs/risks of R&D (products/processes) Joint complementary skills and assets that neither partner could (at lower cost) develop on her own Greater chance to establish technological industry standards Undiluted incentives to invest Less country-specific hold-up risk than in WOS Less moral hazard risk than in JV Loss of autonomy Potential incompatibility of partners Adverse selection, and hold-up problem 6.2 Advantages and Disadvantages of Corporate Collaborations 6. External Growth Strategies

43. 43 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 6.3 Potential Pitfalls of Corporate Collaborations Challenges Incompati- bility of Partners Access to Information Distribu- tion of Earnings Loss of Autonomy* Incompati- bility of Partners Adverse Selection Moral Hazard Moral Hazard Hold-Up‚Normal Uncertainty‘ Signaling, Screening Property Rights Allocation Property Rights Allocation ‚Hostages‘, Integration Better Forecasting, Sufficient Flexibility (modified from: Griffin, R. W./Pustay, M. W. (1999): International Business. A Managerial Perspective, 2 nd ed., p. 469.) * Further Ref.: www.cio.com/archive/enterprise/101599_ic_content.html „Textbook Problem“: Economic Problem: 6. External Growth Strategies

44. 44 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Institutional Framework Corporate Governance Individual Characteristics A Business Economist‘s Field of Interest Strategic Endogenous Preferences Behavioral Attributes Shift Parameters Source: Williamson (1994), p. 326 7. International HR Management How do institutional frameworks influence work relations and, thus, HRM-practices? explicitimplicit

45. 45 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Industrial relations factors Relationships between worker, union, and employer (e.g. codetermination and participation in Germany or USA) 7.1 How Intercountry Differences Affect HRM Cultural factors Differing cultures require different HR practices among a firm’s subsidiaries, e.g. implementation of different incentive plans. (  Hofstede) Economic factors E.g.: Productivity and efficiency in SOEs in contrast to firms competing in a market (e.g. full employment at the expense of efficiency) Labor cost factors Worldwide diffe- rences in hourly compensation costs, hours worked per week, severance pays, vacation time, etc. Intercountry Differences Affect HRM Source: Dessler, G. (2000), Human Resource Management, 8 th ed., Upper Saddle River (Prentice-Hall), pp. 614 ff. Culture (implicit framework) Law (explicit framework) 7. International HR Management

46. 46 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 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 Polycentric-oriented firms Host-country nationals in foreign subsidiaries headquarter with parent-country nationals. Reasons: Reduction of cultural mis- understandings locally in comparison to expatriates Usually less expensive Example: Volkswagen AG Geocentric-oriented firms 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. 7.2 International Staffing Policy International staffing policies Source: Dessler, G. (2000), pp. 623 f. 7. International HR Management

47. 47 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. I. ? / ? (Compromise) II. ? / ? (A gives in to B) IV. ? / ? (B gives in to A) III. ? / ? (None gives in) Player A Player B Agreement Non- Agreement  Negotiation will be beneficial, if both players can win by reaching field I. 8. Cross-Cultural Business Negotiations 8.1 The Structure of Bargaining Two players: Player A, Player B Options in the negotiation process: “Agreement” or “Non-Agreement” No PD!

48. 48 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. The Negotiation Process – What should be considered? Defined by next best option („outside option“): What is at stake? Most likely different for each partner Can be manipulated Reasons for Non-Agreement Bargaining Power Coordination: Ambiguity and/or uncertainty of payoffs (one-sided or bilateral information deficits, „irrationality“)  Remedies: Adequate communication Better predictions Prognostic tools Motivation: Non-agreement payoff is best for me  Remedies: „Transfers“ within bargaining space (i.e. space defined by players‘ outside options) 8. Cross-Cultural Business Negotiations 8.1 The Structure of Bargaining

49. 49 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A.  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?) The Bargaining Process – What should be considered? I. 10 / 10 II. 6 / 12 IV. 13 / 5 III. 2 / 12 Player A Player B Agreement Non- Agreement 8. Cross-Cultural Business Negotiations 8.1 The Structure of Bargaining

50. 50 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A.  Should the players enter negotiations? I. 10 / 10 II. 6 / 12 IV. 13 / 5 III. 2 / 12 Player A Player B Agreement Non- Agreement Answer: Yes, they should enter negotiations, because the agreement is socially desirable.  20  18  14 8. Cross-Cultural Business Negotiations 8.1 The Structure of Bargaining

51. 51 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A.  What are the players‘ outside options? (Bargaining Power) I. 10 / 10 II. 6 / 12 IV. 13 / 5 III. 2 / 12 Player A Player B Agreement Non- Agreement  Bargaining Power: Defined by next best option („outside option“): What is at stake? A‘s Perspective:  Result: B chooses ‚Non-Agreement‘ (12)  Player A gets (2) Options for player B: Agreement (10) or Non-Agreement (12)  Result: B chooses ‚Non-Agreement‘ (12)  Player A gets (6) a) A‘s choice: Agreement b) A‘s choice: Non-Agreement Options for player B: Agreement (5) or Non-Agreement (12) 8. Cross-Cultural Business Negotiations 8.1 The Structure of Bargaining

52. 52 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A.  What are the players‘ outside options? (Bargaining Power) I. 10 / 10 II. 6 / 12 IV. 13 / 5 III. 2 / 12 Player A Player B Agreement Non- Agreement B‘s Perspective: a) B‘s choice: Agreement b) B‘s choice: Non-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. Options for player A: Agreement (6) or Non-Agreement (2)  Result: Player A chooses ‚Agreement‘ (6)  Player B gets (12) 8. Cross-Cultural Business Negotiations 8.1 The Structure of Bargaining

53. 53 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A.  What are the players‘ outside options? (Bargaining Power) I. 10 / 10 II. 6 / 12 IV. 13 / 5 III. 2 / 12 Player A Player B Agreement 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 8. Cross-Cultural Business Negotiations 8.1 The Structure of Bargaining

54. 54 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A.  What could be done to motivate both partners to agree?  Which transfer is required to reach an agreement?  What is the transfer space? AgreementNon-Agreement Agreement I. 7 / 13 II. 6 / 12 Non- Agreement IV. 13 / 5 III. 2 / 12 Player A Player B A is better off: gains 7 instead of 6 Results: Choice of ‚Agreement‘ At least 2 should be transferred! (  20)(  18) (  14)(  18) B is better off: gains 13 instead of 12 Agreement is socially desirable (  ) I. 10 / 10 II. 6 / 12 IV. 13 / 5 III. 2 / 12 Player A Player B Agreement Non- Agreement t = 3  20: 20 – 18 = 2 B: 10 – 6 = 4 A: 10 – 12 = -2 8. Cross-Cultural Business Negotiations 8.1 The Structure of Bargaining

55. 55 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 1) Pre-Bargaining Source: Lebow, R. N. (1996): The Art of Bargaining, Baltimore & London (J. Hopkins Univ. Press), pp. 4/5. What is the problem?  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. Cross-Cultural Business Negotiations 8.2 Three Phases of the Bargaining Process

56. 56 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 2) Bargaining Select a Bargaining Strategy  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?  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? Pin Down Important Details 8. Cross-Cultural Business Negotiations 8.2 Three Phases of the Bargaining Process

57. 57 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A.  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? 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 8. Cross-Cultural Business Negotiations 8.2 Three Phases of the Bargaining Process

58. 58 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Source: Fisher, R./Ury, W. (1991): Getting to Yes. Negotiating Agreement Without Giving In, 2 nd edition, New York etc. (Penguin Books). 1. The Problem:  Do not bargain over positions. 2. The Method: people Separate the people from the problem interests Focus on interests, not positions options Invent options for mutual gain criteria Insist on using objective criteria 3. What if they are more powerful?  Develop your BATNA (Best Alternative To a Negotiated Agreement) 8. Cross-Cultural Business Negotiations 8.3 The “Harvard”-Concept of Negotiating

59. 59 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Source: Ury, W. (1991): Getting past No. Negotiating Your Way From Confrontation to Cooperation, New York etc. (Bantam Books). 1) Preparation: 1.Interests: yours and theirs 2.Options: yours and theirs 3.Standards: identify „fair“ procedure (e.g. referring to market price) 4.Alternatives: BATNA (Best Alternative to a Negotiated Agreement) 5.Proposals: should be better than other side‘s BATNA 6.Rehearse: talk it over with someone else 8. Cross-Cultural Business Negotiations 8.3 The “Harvard”-Concept of Negotiating

60. 60 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 2) Negotiating Barriers to Cooperation 1.Your reaction 2.Their reaction 3.Their position 4.Their dissatisfaction 5.Their power Corresponding Strategy 1.Don’t react: Go to the balcony 2.Don’t argue: Step to their side 3.Don’t reject: Reframe 4.Don’t push: Build them a golden bridge 5.Don’t escalate: Use power to educate 8. Cross-Cultural Business Negotiations 8.3 The “Harvard”-Concept of Negotiating

61. 61 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Specifics of Cross-Cultural Business Negotiations Source: Hendon/Hendon/Herbig (1996), pp. 15-76, 231-242. … of the nature and characteristics of the role of government in (more or less) centrally planned economies … of the relatively low status assigned to business-persons in many countries … and attention to training executives in the art of negotiations Insufficient recognition… … of the role of the negotiator in accommodating the conflicting interests of his group with those of opposing groups … of the loci of decision-making authority … of the strength of competitors … of the difference between approval at one level and implementation of such approval at other levels of the government … of the role of host government in the negotiation process … of the economic and political criteria in the decision-making process 8. Cross-Cultural Business Negotiations 8.3 The “Harvard”-Concept of Negotiating

62. 62 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Hofstede (1980) defines four dimensions of culture: 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. Cross-Cultural Business Negotiations 8.3 Dimensions of Cultures

63. 63 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Specifics of Cross-Cultural Business Negotiations (cont.) Source: Hendon/Hendon/Herbig (1996), pp. 15-76, 231-242. Common mistakes made when negotiating overseas Failure to place yourself in the other person’s shoes Insufficient allocation/ attention of time for negotiations Insufficient understanding of the role of personal relations and personalities in the decision-making process Insufficient knowledge of the host country – including history, culture, government, status of business, image of foreigners Insufficient attention to saving face of the opponent Insufficient attention to planning for changing negotiation strengths Interference by headquarters Insufficient planning for internal commu- nication and decisions Insufficient understanding of different ways of thinking 8. Cross-Cultural Business Negotiations

64. 64 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 9. Project: The Ruritanian Electronics Negotiation You – as representatives of your culture – will negotiate an annual labor contract with the firm’s management (Personnel Managers) Background Ruritanian Electronics (A multicultural Computer manufacturer in the Republic of Ruritania) Management  Ruritanian Workforce 50 % Feefifofians50 % 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!) The Negotiation Problem:

65. 65 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Schedule team meetings: 1.Define your own bargaining position by setting your goals according to your community‘s culture 2.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. 3.Remember: If your negotiations do not end in an agreement top management is likely to sell the business and you all might get dismissed. Team meeting: Preparation of the negotiation Prepare the readings (Instructions) carefully! Handout: Abadabinese‘; Feefifofians‘, or Personnel managers‘ score sheet 9. Project: The Ruritanian Electronics Negotiation

66. 66 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. 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! 9. Project: The Ruritanian Electronics Negotiation

67. 67 International Management Beijing 2002 Prof. Dr. Birgitta Wolff Marjaana Rehu, M.A. Thanks for your attention and good luck in your future careers!