1. In theory, ______ means poor countries reduce unemployment, wealthy countries get cheaper labor, and workers earn far more aboard than they could at home. In practice, the brokers who make the labor deals have incentives and opportunities to gouge the workers they control. This is one element of globalization that demonstrates the need for firms to develop their own codes of ethical conduct for foreign operations.
a. debt bondage b. foreign contract work c. uncertainty avoidance
d. the U.S. Foreign Corrupt Practices Act of 1977
Many firms and industry groups have developed their own code of conduct for foreign operations. For example, the American Apparel Manufacturers Association (AAMA), whose members include Sara Lee, Jockey International, and VF, requires members to pay the existing minimum wage, maintain certain minimum safety standards, and avoid the use of child labor.
Companies such as Nike, GAP, and Adidas have formed the Joint Initiative on Corporate Accountability and Worker Rights, or JOIN, to monitor their foreign suppliers for abuses.51 Some companies, such as Ikea (see Management Close-Up 2.2), have their own internal monitor-ing process to ensure that suppliers across the globe comply with the firm’s ethical standards.
Nevertheless, firms continue to face many ethical issues when they go overseas in search of cheaper labor. These include child labor issues, gender discrimination issues, unsafe working conditions, and environmental contamination, among others.52At the same time that globaliza-tion continues to increase dramatically, abuses by some multinaglobaliza-tional firms and governments have given globalization a bad name for many, even though it has improved the economic condi-tions of many countries around the world.
CONCLUDING THOUGHTS
FOCUSING ON THE FUTURE: Using Management Theory in Daily Life
Managing in a Global Environment
Bruce Humphrys serves in a general manager capacity for a nonprofit technical organization. As the Executive Director of Compatible Technology International (CTI), he must encourage his employees—a group of volunteer engineers, food scientists, and technicians—to create food processing tools that can be used in underdeveloped nations all over the world. To create products that will be used, rather than aban-doned, Bruce has to take into consideration the general business environment, legal systems, the country’s economic environment, and cultural environments. Take the case of the breadfruit dryer, for instance.
One of Bruce’s senior food scientists, George Ewing, saw a need to give people in Haiti a way to dry breadfruit. Fresh breadfruit is a vegetable similar to squash. It has a very short shelf-life; fruit lasts only a day or so after being harvested. But when breadfruit is dried, it can be turned into a flour which keeps well and enriches both the islanders’ diet and their economy. Fortunately, Ewing met Camille George, a profes-sor at the University of St. Thomas in St. Paul, Minnesota, at a political lunch. She had the expertise in heat transfer technology to help him create a simple breadfruit drying machine.
If Professor George and her students had been tasked with creating a food dryer for use in Minneapolis, their job might have been simple. But obviously, this was not the case. How could these engineers deter-mine if their invention was meeting the needs of clients a half a world away? They knew that they would have to test their product extensively, and take the general business environment, the legal systems, the eco-nomic environment, and the cultural environment of their clients into account when doing so.
General Business Environment
Because Haiti is a country in turmoil, the general business environment was less favorable than it is in other parts of the world. The former President, Jean-Bertrand Aristide, resigned from office in 2004, which opened the door for the interim government to take steps to encourage foreign investments. But there is still a great deal of political turmoil in the area, and the Haitian government continues to be unstable. In fact, although a trip to Haiti was scheduled to test an initial food dryer design, it had to be cancelled. Instead, Professor George and her students traveled to the island of St. Vincent, where climate conditions were sim-ilar but the general business environment was much more stable.
Legal Environment
Like the general business environment, the legal environment in Haiti is difficult and complex. While on the sur-face, Haiti is a democracy, with a civil law system based on the Napoleonic Code, in practice, the Haitian legal environment is often chaotic. There is widespread corruption, and disputes are often resolved through bribery and favoritism. Steps are being taken to modernize the legal system and make Haiti more open to foreign investors, At the beginning of the chapter we posed some questions
pertaining to Playmobil’s operations in Germany. Now that you have had the opportunity to read the chapter, it’s time to revisit those questions. Playmobil’s example shows the reliance on foreign markets is becoming increasingly necessary, and possible, as firms capitalize on opportunities beyond their borders. Firms without a global vision are more likely to experience a major competitive disadvantage. To earn profits, Playmobil has chosen to expand its markets beyond Germany and even Europe, and strengthen its sales presence in the United States, Latin America, and Asia as well. This globalization of business is fueling unprecedented economic growth in many parts of the world.
The competitive landscape is more complex than ever, and globalization presents many additional challenges. This chapter has dealt with the unique issues and problems firms face in the
global environment, but the roots of many decisions that multinational firms make still lie at home. A stagnant or declining birth rate and a slowing economy in Germany have cut into the markets for many consumer products, forcing many German companies like Playmobil to look elsewhere for customers.
Together, their decisions have helped make Germany the biggest merchandise exporter in the world, boosting corporate profits and the German stock market to new highs.
For Playmobil to consider making a deeper investment abroad, such as a licensing agreement or joint venture to move manufacturing to China, for example, the firm would want to be assured of quality control and the kind of logistical flexibility that management now wields over its domestic manufacturing operations. The cost of obtaining these safeguards would have to be outweighed by labor cost savings.
but at this time, changes are not fully in place. Fortunately for Bruce Humphrys, CTI is a nonprofit organiza-tion, and therefore not bound by as many legal restrictions as a for-profit organization would be.
Economic Environment
Haiti is a developing country, with high levels of poverty and a poor infrastructure. The 2010 earthquake that killed almost 200,000 people in the Haitian capital, Port-au-Prince, has only made a dire situation even more extreme. Jobs are scarce, and the average Haitian worker supports up to six other people at any one time. If an invention is to benefit the Haitian people, it is imperative that it be simple, useful, and use few natural resources (such as fuel). For example, CTI developed a food grinder that is nothing more than a metal cylin-der with a blade at the bottom and a crankshaft. Setting up the grincylin-der is simple, and powering it requires nothing more than the ability to turn the crankshaft. The breadfruit dryer developed by CTI was solar pow-ered and consisted of little more than wood and plastic sheeting, so it would be easy to build and transport.
Cultural Environment
Culture, is the final, key ingredient in determining whether or not a CTI project will work. Humphrys tells the following story about how culture impacted a CTI project in Guatemala: “Our guys visited a group of Guatemalan women hand-shelling corn. They saw the hard time they were having, how labor-intensive the shelling was, and on the spot they developed a sheller. The sheller consisted of a piece of wood with a hole in the middle. The women pushed the ear of com through the hole, shaving the kernels from the cob.
When the engineers passed out their device, the women said thanks and put the sheller to work. But when the volunteers returned to that village several months later, they found the group still hand-cutting kernels from corn. The women told them, ‘Thanks for your invention, it’s much easier. But this is the time we use to talk about men, school, and kids, and your device makes our work too fast for that.’” Extensive conver-sations and tests with the women of St. Vincent showed that there were no obvious cultural problems with the breadfruit dryer, but interestingly enough, a different problem emerged.
George and her group of engineering students found that the dryer was not going to work in Haiti—it dried the outside of the breadfruit without drying the inside, causing the fruit to spoil. It turned out that breadfruit dried better when placed directly in the sun, where the island breezes provided continuous air-flow. The good news was that during the testing process, the women of St. Vincent suggested another way to put the dryers to work making money for the islanders. It seems that Italian restaurants in the United States demand red pepper flakes that are just one color—a dark red. The dryers allowed flakes to uniformly dry to exactly that color, and the islanders in St. Vincent are now using them to improve their economy.
Sources: G. Smith “Cereal socialism in Venezuela,” BusinessWeek, 2010, March 29, 46–51; B. Steverman, “The action stays offshore,”
BusinessWeek, 2010, January 4, 60–64; C. Forelle, “Haitian resource stymied amid chaos,” Wall Street Journal, 2010, February 1, A-2;
Jean Thilmany, “Managing across Cultures,” Mechanical Engineering, February 2005, http://www.memaga2ine.org/
backissues/feb05/features/mngcult/mngcult.html; U.S. Department of State, 2005 Investment Climate Statement—Haiti, March 2006, http://www.state.gov/e/eb/ifd/2005/42043.htm.
Summary of Learning Objectives
Firms increasingly compete in a global market characterized by high uncertainty, many players, and great complexity. This chapter’s discussion will help you in your future career as a manager, as a member of a work team, or as an individual to succeed in this new global environment. The material presented to meet each of the chapter’s learning objectives stated at the outset of the chapter is summarized below.
1
Describe the changing pattern of international business.• Changing world output and world trade picture. The United States no longer dominates the world economy. Large U.S. multinationals no longer dominate international business. Centrally planned economies are opening to Western businesses, and national barriers to labor markets are folding (particularly in knowledge intensive industries).
• Changing demographics. The population in industrialized countries is getting older, and immi-gration is growing worldwide.
• Lower trade barriers. While some protectionism is still present and perhaps receiving growing political support in some areas, lower trade restrictions are now the norm.
• Greater market integration. Economic integration between groups of countries is growing, and today there are 37 such agreements, compared to 11 in the 1980s. Of these, the greatest level of integration has been achieved by the European Union composed of 27 countries.
• Converging global consumer preferences. Consumer tastes and preferences are becoming more similar around the world.
• More globalization of production. A growing number of firms spread their production around the world in order to realize savings, particularly in labor costs.
• Rapid technological innovations. Advances in communications, information processing, and transportation are making it much easier to conduct business across geographical boundaries.
• Greater cultural diversity. To be effective, firms need to learn to adapt to an increasingly diverse set of customers, employees, and ways of doing business.
2
Identify major factors affecting international business.• General business environment. You must consider all factors that might influence the costs, benefits, and risks of operating in particular world areas or countries.
• Legal systems. The firm must be able to comply with vastly different rules and regulations around the world.
• Economic environment. The firm must consider a host of economic factors that can vary from one time period to another and across countries. These include differences in per capita income, inflation, exchange rates, taxation, licensing agreements, and royalties.
• Cultural environment. To succeed internationally, firms and their members must be sensitive to cul-tural differences and be willing to adapt products, services, and management practices to those differences. Some well-known cultural aspects that might influence management practices and that vary across countries include prevalent ideas about appropriate power distance between superiors and subordinates, degree of individualism, uncertainty avoidance, and masculinity–
femininity in a culture, and whether a culture has a long- versus short-term orientation.
3
Determine key decisions firms face when contemplating foreign expansion.• Which countries to enter. In general, countries are more attractive from a business perspective when the size of the domestic market is large, purchasing power is high or likely to increase in the future, the firm’s products are appropriate for a particular country market, and there is a positive business climate.
• When to enter particular countries. There are both advantages and disadvantages to being one of the first ones in a particular market. Being first can help a firm solidify its position in that mar-ket. However, this also involves greater investment in opening a new market and there is greater uncertainty since the firm cannot benefit from the experience of other firms that were there first.
• What the scale of involvement should be. The magnitude of the commitment to a foreign country increases as the investment in that country rises. In general, the scale of involvement is lowest if the firm is only exporting products and services into a country and highest if the firm owns and operates a plant in that country.
4
Differentiate the various ways firms can enter foreign markets.• Exporting. Used primarily by firms entering international markets for the first time. In this mode, all manufacturing takes place within the domestic borders, which may result in foreign competitors enjoying significant cost advantages.
• Turnkey. Used by firms that prefer to receive payment for designing and building a plant that is then handed over to locals.
• Licensing. The firm generates profits in the form of a fee or royalty by granting rights to manufacture and sell a product in another country.
• Franchising. Similar to licensing, except franchising is used primarily for services.
• Joint ventures and strategic alliances. This approach allows quick access to international markets by establishing new entities in conjunction with local firms.
• Wholly owned subsidiaries. The deepest level of foreign involvement, whereby the multina-tional finances and manages the foreign facility, gives the firm maximum control over the foreign facility, but also incurs all the costs and risks of the foreign venture.
5
Identify alternative ways of managing a foreign operation.• Ethnocentric approach. Foreign subsidiary is managed by personnel sent from the home office or by expatriates.
• Polycentric approach. Foreign subsidiary is managed by hiring individuals from each country in which subsidiaries are located.
• Geocentric approach. Multinational recruits personnel regardless of nationality. Many of these individuals are likely to be third country nationals—employees who are not citizens of the multi-national’s home country nor the country where the foreign subsidiary is located.
6
Recognize the key human resource policies that firms can develop to help expatriates succeed.• Selection. Choose expatriates who are sensitive to cross-cultural differences, including a consid-eration of how the candidate’s spouse and family might respond to the foreign assignment.
• Training. Provide cross-cultural training that sensitizes candidates to what they may confront in the foreign assignments.
• Career development. Ensure that the expatriate perceives the foreign assignment as part of a long-term career path within the company.
• Compensation. Maintain parity with the standard of living at home and provide additional incentives if expatriate successfully accomplish the foreign assignment.
7
Understand the ethical and social responsibility implications of doing business in different countries.• Norms vary by country and a major concern for firms operating internationally is defining ethical behavior.
• Although competitors may abide by a different set of rules, U.S. firms must comply with regulations that prohibit the payment of bribes.
• Firms develop their own codes of conduct or may follow codes drawn up by international organizations.
Discussion Questions
1. If you were CEO of a medium-sized U.S. manufacturing firm, which of the changing patterns of international business identified in this chapter would concern you most? Explain.
2. Do you think there should be a large common market from Alaska to Tierra del Fuego, similar to the European Union? Why or why not?
3. What do you think accounts for the success of Ikea (see Management Close-Up 2.2) around the world? Can other struggling U.S. retailers such as K-Mart and Sears imitate Ikea’s success? Explain your answer.
4. Which of the two perspectives concerning the use of ethics hotlines described in Management Close-Up 2.3
seem more reasonable to you (i.e., the European versus the American perspectives)? Explain your answer.
5. If you were the owner of a small but rapidly growing high-tech firm making sophisticated computer chips for medical equipment, which mode of entry would you pre-fer for entering foreign markets? Explain.
6. Do you think an international firm should have local man-agers in all important posts? Why or why not?
7. Is a firm justified in paying a bribe if it believes a com-petitor will do so to win an important contract? Explain.