Essay on the International Environment (2954 Words)

Essay on the International Environment (2954 Words)!

Many factors influence and shape the environment in which the multinational and transnational companies function. Going international presents the manager with new and often perplexing problems and challenges.

Management’s ability to understand these challenges and adapt to the global environment has significant impact on the efficiency and effectiveness of the organization operating in a global environment. Some of the more important elements of the international environment which directly affect the operations of the multinational corporations are given below:

1. Political and Legal factors:

While the United States political system and structure is highly stable so that the national and economic policies do not change drastically, even with the change of the president or the governing party, some of the other countries have very turbulent political systems. The effectiveness of the multinational corporation would depend upon how well it moulds itself to accommodate such legal and political forces in the host country.

Accordingly, before making the investment, it is important and necessary to conduct a comprehensive analysis of the political environment and political risks. This involves gathering all the information and conducting an extensive and systematic analysis of the current political environment and stability and the future risks.

Political risks range from major events to relatively invisible ones. According to Benjamin Weiner.

“Political problems range from catastrophic events such as revolutions or war, through broad range of destabilizing issues including corruption, labour unrest, crooked elections, religious violence, coup d’etat and incompetent economic management by government agencies, and then on to narrow but nevertheless dangerous matters such as the political leverage of your competition or ethnic conflict within a specific work-site. All of these phenomenons spell trouble if not considered in advance.”

Some future political climates are difficult to predict. For example, when Shah of Iran fell and Ayatollah Khomeini took over, the assets of many American companies were seized. The economic activities of many companies exporting to former Yugoslavia came to a standstill in 1994 because of ethnic violence between Muslims and Christians in the regions of Bosnia.

In the light of such political power and authority in the host country, it is advisable that a multinational corporation develops a good rapport with the host country in a mutual exchange of benefits and not gets involved in the internal politics of the host country. It is in the interest of both the host country and the MNCs to accommodate each other as much as possible. According to Vern Trepstra.

“Most host governments accept the need for foreign investment. Many realize that they need the resources, technology, management skills, capital and foreign exchange that the foreign investment can bring.

But the governments increasingly want foreign investments on terms that maximize the contribution to national goals and minimize the threat to national security.” In addition to such political awareness, it is very important for the management of an international organization to study, analyze and respect the local laws pertaining to:

a) Any restrictions on importation of machinery, equipment and parts that can be purchased indigenously.

b) Any constraints on repatriation of profits or royalties from the host country and as to what parts of the earned profits must be retained and reinvested in the host country.

c) Degree of foreign ownership permitted. Most developing countries do not allow MNCs to hold more than 49 per cent of the share ownership so that the host country government or the local people become the majority shareholders, thus restricting the exercise of power of the corporation to policy formulation and strategic planning.

d) Regulations concerning working conditions, rights of workers and proportion of local workers that must be hired.

2. Economic Factors:

Based on the level of economic and industrial development, countries basically fall into two categories. First group known as “developed countries” is characterized by a high level of economic and industrial development as measured by industrial output and per capita income and so on. United States, countries of Western Europe, Canada, Australia and Japan fall in this category.

The second category is that of “developing countries,” also known as the “third world” and consists primarily of relatively poor nations as measured by low per capita income and low industrial development.

Most of the countries previously under communist regimes fall into this category, except perhaps Russia because of its vast natural resources and advanced military and space exploration development hardware along with its satellite supporting industries.

When we think or talk about multinational corporations, we think of their operations in developing countries, In fact 95 per cent of such companies are based in developed countries and about 75 per cent of foreign investment has been channeled to developed countries.

However, the developing countries, as they strive for economic development, provide the potential for tremendous expansion of current world markets. For example, in Pacific countries, the middle-class households with incomes of about 18 thousand dollars per year are expected to increase from a previous figure of about 15 million to nearly 73 million by the year 2000.

That means a boom in demands for such products as better housing, large appliances, telephones, television, and cars and so on. Accordingly, our discussion is primarily concerned with MNC operations in developing countries.

The economy of the host country plays an important role in the decisions of a multi-national organization. In addition to foreign exchange control policies, the organizations must consider the tax structure and tax policies of the host country. For example, in India, where only one percent of a total population of 900 million people pays taxes, corporate entities tend to be heavily taxed. However, recent tax reductions for corporations, both domestic as well as foreign, initiated by the Finance Ministry have encouraged foreign companies to be involved in the industrial growth of the country.

Some of the economic factors to be considered are:

a) GDP (Gross Domestic Product), income levels of the work force and the proportion of disposable income, saving habits of the population, economic growth trends, trends in industrial development inflation rate, interest rate and so on.

b) Any local financial resources available that would be necessary and helpful in further expanding the facilities of operations.

c) Any organized labour unions that could create problems in the form of strikes, demand for higher wages and additional fringe benefits.

d) Any economic planning agencies that would forecast the economic trends for the foreseeable future. India, for example, has Five Year Plans, sometimes extending these to ten years including forecasting the expected progress over a number of years in the future.

e) The infra-structure for support services providing for power and water availability, housing conditions, transportation and communications.

f) Stability of local currency and its acceptance outside the host country.

If any of these factors makes the operations economically risky, then some steps can be taken to reduce these risks. One way would be to go into a joint venture with local citizens. The joint ventures spread the responsibility and the adverse effects are minimized in case of political changes or policy changes. Also, they combine the financial and managerial resources of the organization where the local personnel are familiar with the local markets. Some other means of reducing these risks are:

(i) Entering into licensing agreements’ only:

This requires the transfer of technical know-how for a fixed fee or continuous royalty for as long as this technical knowledge is utilized.

(ii) Contracts to manage host country owned installations:

This involves lending the managerial know-how. This again is done by proper compensation for such services rendered.

(iii) Turn-key operations:

In this case, the entire project is undertaken by an organization and consists of designing, constructing, developing the unit and training personnel to operate the unit to the point where the “key” can be turned over to the local owners.

3. Socio-cultural environment:

Culture is the unique system of perceptions, beliefs, values, norms, patterns of behaviour and a code of conduct that influences the behaviour of certain people and is a common trait of that group of people.

To some degree, culture represents the national character and is a reflection of the institutional circles that people have built together. These institutions represent family, religion, literature, history, education and so on.

The person and his culture are so interwoven with each other that it is difficult to distinguish the individual from his cultural context. On the basis of cultural upbringing, the attitudes will differ concerning such subjects as work habits, risk taking, introducing or accepting change, value of time, concept of authority, material gain, employment of women workers, firing of less productive workers and so on.

For any organization to be successful in another country, it is very important and necessary to know, understand and respect the cultural aspects of the people of the host county. The following example illustrates this point.

“In Riyadh, Saudi Arabia, an American exporter once went to see a Saudi Arabian official. After entering the office, he sat on a chair and crossed his legs. With the sole of his shoe exposed to the Saudi host, an insult had been delivered.

Then he passed the documents to the host using his left land, which Muslims consider unclean. Lastly, he refused when offered coffee, suggesting criticism of Saudi hospitality. The price of this cultural misuse was the loss of 10 million dollars contract to a Korean better versed in Arab ways”.

Some of the dimensions of culture are:

a) Concept of power and authority:

Hofstede describes it as “Power Distance” (PD) and defines it as the extent to which a society accepts that the power in the organizations is distributed unequally so that the higher the level in the hierarchical structure, the more power the person yields. In some cultural environments, this classical style of management and the chain of command is more highly respected while in some other cultures, the participative management style is encouraged. India, for example, is high “power distance” society, while Austria, Denmark and Sweden are considered as low PD societies which emphasize equality in their organizations.

b) Language:

The language skill is the most important asset to acquire for any culturally sensitive international manager. It is very important to convey the right meaning to the natives is order to get the point across.

A classic example of mismeaning took place during President Carter’s visit to Poland in 1977. In his arrival speech he said “I am interested in Polish people’s desire for the future.” This was translated in Polish language as, “I am interested in your lust for the future. The difference in meaning is obvious.

c) Individualism and interaction:

It is necessary to be aware of the customs in which people interact with each other. Some societies encourage individualism. Their belief is that if everybody takes care of himself, then it would not be necessary to take care of anybody else.

There are other societies which are characterized by a tight social frame work where in exchange for loyalty; people expect to be taken care of. The management of international organizations must recognize this trait.

In America, as another type of personal interaction, people shake hands with each other when they meet, while in the Middle East, they embrace each other and in Japan, they bow their heads to each other. In Latin American countries people stand much closer to each other when they talk as compared to people in the United States.

d) Concept of time:

Some societies put a very high premium on the value of time. Americans, for example, view “time is money” and set their organizational pace accordingly. Their theme is “sooner the better” and they try to find the optimum utility of time. They try to keep precise schedules and stick to deadlines.

In many countries on the other hand, the approach towards time is more relaxed. Mexicans, for example, take a long lunch break. In India, many businesses simply close for lunch, even the banks and the post offices.

People in the Middle East countries do not like to set precise appointments. Many important business meetings and events in India are scheduled on the advice of astrologers. These cultural aspects must be respected and adhered to.

e) Uncertainty avoidance:

We live in a world of uncertainty. The future is largely unknown and always will be. Even though some aspects of future can be predicted reasonably accurately by scientific methodology, based on the “cause and effect” phenomenon, we are still generally very insecure and nervous about future events. Some societies believe in destiny or “whatever will be, will be” and thus accept uncertainty with tolerance. Hofstede describes these societies as having low “uncertainty avoidance.”

A society that is high in uncertainty avoidance takes certain steps to reduce the anxiety of uncertainty. Their organizations are likely to have more formal rules. For example, in Japan, life time employment is one of the ways that offers financial security to workers.

f) Masculinity versus femininity:

An important aspect of culture faced by an international manager is the general attitudes towards male and female roles in the society. Some societies allow both men and women to take many different roles. Other societies behave according to rigid sex roles. Women are not allowed to work in Islamic societies and countries. In Japan and India, women are expected to stay at home and raise a family. In Denmark and Sweden, it is quite common to see men staying at home while their wives work. According to Hefstede again, societies that emphasize assertiveness and acquisition of money and power fall into the category of “Masculinity” and societies that emphasize relationships, concern for others and overall quality of life fall under the category of “Femininity.”

All international managers should be trained to recognize these cultural traits in vorious societies and adapt to such cultural environment to benefit the multinational corporation.

Some specific cultural differences between American managerial thinking and other nations have been discussed by Graham and Herberger as well as by Amanda Bennett. These are:

a) American management believes that, “A man is the master of his own destiny.” They believe that you can achieve success by hard work and dedication, subject to “calculated risks” and probability of certain events. In many Far East countries, destiny plays a very important role in outcomes of events. Americans must understand that certain traditional societies accept God’s will.

b) Americans are usually very informal and in most meetings they get on with first name basis irrespective of age, social standing, organizational position and authority. In other societies, there is emphasis on status and proper social behaviour.

c) Americans try to separate business from family life. A corporation in America is a separate entity and the only obligation of the employees is to achieve its objectives. In some other countries, a business enterprise is built around family relationships. In Latin American countries, the Church is involved in many business enterprises. In the remaining communist countries, the government and party are involved in the enterprise management.

d) American negotiators generally have the authority to make decisions on the spot. In other countries, the negotiators may have limited authority and may have to check with the head office continuously.

e) Americans like to get to the point early in discussions and they do not like to “beat around the bush.” In some other countries “preliminaries” are important. They want to get to know you and know about your family before discussing business. They want to do business with a friend rather than a businessman.

f) American management recruits personnel on the basis of merit. Rewards are directly proportional to performance, and pressures to the contrary are not entertained. In other countries, family connections may be a key factor in recruitment and promotions. This knowledge would help American executives when dealing with their counterparts in some other countries.

g) Americans put emphasis on facts and objective analysis. Data collection, information gathering, analytical assessment, logical conclusions and so on are all important parts of managerial training. Other people may act on intuition, superstitions, feelings and emotions without looking at alternatives or caring for optimization.

h) Americans are usually highly persistent in their persuasion and do not accept “no” for an answer easily. Others may find this attitude offensive.

Knowing, understanding and respecting these socio-cultural differences can help an American manager to become a successful international manager.

4. Technological environment:

A country’s technological environment greatly affects international business decisions in such products that are highly technologically sophisticated. Before a company can expect to sell its goods in another country, the technologies of the two countries must be compatible.

For example, if GE makes a device that depends on fiber optics, that device cannot be sold in a country that lacks fiber optic technology. It would not be successful. Robotic technology is very often used in technologically advanced countries. Transfer of such technology to underdeveloped countries would not work.

For example, Seiko watches are manufactured and assembled in Japan entirely by robots from start to finish and are untouched by human hands. Transfer of such technology in India would probably not work.

Regardless of the kind of business a company is in, it must select locations in other countries where the work force to deal with the applicable technology is available. For example, IBM in America and Toshiba in Japan, both technologically advanced companies in technologically advanced countries joined hands in manufacturing advanced flat pannel television screens. This would not have been possible with developing countries.

Some experts argue that most multinational companies have failed to adjust their production methods to suit the varying levels of technological sophistication in different countries. According to Stoner and Freeman, “introducing automated production techniques to a culture whose technology depends upon extensive manual labour may be neither appropriate nor successful.”