MODULE IN INTERNATIONAL BUSINESS MANAGEMENT

Objectives:

The International Business Management education focuses on managing

and leading international businesses. The topics are combined from different

fields of managing a business, which makes IBM a truly multidisciplinary

program. The education includes four core learning themes: theories and

concepts of international business management, organizational applications,

leadership execution, and own insights to international business management.

A close connection between theory and practice is maintained in research,

teaching and company projects. During the studies, the students are involved in

and actively participating in assignments for both small and large companies.

The education aims to give students the tools needed in managing, creating, and

developing various kinds of international organizations, including new ventures.

Chapter 1
 Globalizing Business

What is Globalization Perspectives?

 From a cultural perspective, it is the growth of cross-cultural

understanding made possible by the increasing two-way flow of

entertainment and news, and the development of human values that

transcend those of any one culture. At the same time, it is also the erosion

of local traditions and standards and their replacement by foreign ones.

 From a business/economic perspective, globalization is perceived as the

creation of high-tech jobs in wealthy nations and the lifting from poverty

of some three billion people or half the world’s population. At the same

time, it is also perceived as the loss of jobs in wealthy nations and the

exploitation of workers in poor nations.

From a technological perspective, globalization is the spread of knowledge

and the dramatic leaps in world communications and travel that has

resulted in eradication of deadly diseases, saving of endangered species,

the reduction of famine and the increase in world productivity to the

benefit of all humankind. At the same time, it has also unleashed

destructive forces leading to loss of species, spread of disease,

environmental degradation, war, and terrorism.

Arguments Against Globalization

  Triumph of giant companies who have the

political and financial power to drive small rivals

out of business.

 Destroys the environment by promoting environmentally unsustainable

technologies.

 Often leads to a “race to the bottom” inlabor and environmental standards

as poor countries compete with each other in an attempt to attract MNCs

by relaxing laws and lowering standards in order to get jobs for their

citizens.

 Destroys jobs in wealthy and advanced economies as MNCs close plants

in such countries and open them in developing countries where wages are

lower.

 Widens the gap between rich and poor both within and between nations

 May lead to political, economic, and cultural Americanization of the world.

 Shifts power from national governments towards undemocratic

supranational institutions (e.g., the World Trade Organization (WTO), the

World Bank, the International Monetary Fund (IMF), the European Union

(EU), etc.

Globalization is the shift towards a more integrated and independent world

economy. The globalization components are:

1. The globalization of markets

2. The globalization of production

3. The globalization of financial markets

4. The globalization of technology

5. The globalization of HR skills

Chapter 2
 Understanding Politics, Laws, and Economics

Chapter Objectives:

After studying this chapter, you should be able to:

1. Identify two types of institutions.
2. Explain how institutions reduce uncertainty.
3. Identify the two core propositions underpinning an institution-based view of
global business.
4. List the differences between democracy and totalitarianism.
5. List the differences among civil law, common law, and theocratic law.
6. Articulate the importance of property rights and intellectual property rights.
7. List the differences among market economy, command economy, and mixed
economy.
8. Explain why it is important to understand the different institutions when doing
business abroad.

OPENING CASE: Adam Smith Versus Deng Xiaoping

Adam Smith would probably turn in his grave if he heard that in

2008,thefundamental principle of histheory first published in 1776 in The

Wealth of Nations, laissez faire(the idea that governments should be hands-off

whenmanaging the economy), would be severely challenged. Most strikingly,

these challenges came from the United States and Great Britain—the two

countries so deeply in love with Adam Smith that they had often preached “free

market principles” around the world

until recently.To be sure, the times were tough: Financial markets were melting

down, banks were failing left and right, and consumer and investor confidence

were reaching all-time lows since the Great Depression. However, the solutions

turned the unthinkable into a new orthodoxy. Labeled “radical intervention” or

even “financi
al socialism,” the solutions centered on nationalization of failing banks and

financial services firms. Yet, for over three decades (since the 1980s),

privatization—the complete opposite of nationalization—had been largely in the

air.On October 3, 2008, the Emergency Economic Stabilization Act, commonly

known as the $700 billion bank bail-out plan or the Paulson plan (named after

then-US Treasury Secretary Henry Paulson in the George W. Bush

Administration), was passed. The congressional debate prior to its passage was

ferocious, because critics argued that this would clearly violate the enshrined

free market principle of non-intervention. On October 15, Paulson announced

the first step of implementation, by injecting $125 billion into eight banks: Bank

of America, JPMorgan Chase, Citigroup, and Wells Fargo obtained $25 billion

each, Goldman Sachs and Morgan Stanley $10billioneach, and Bank of New York

and State Street between $2 billion and $3 billion each. In return, the US

government, having turned these banks into (partially) state-owned enterprises

(SOEs), would take non-voting preference shares paying 5% interest. This action

was so at odds with the free market tradition in the United States that its

principal architect, Paulson, admitted that it was “objectionable.” In Paulson's

own words at a press conference:

Government owning a stake in any private US company is objectionable to

most Americans, me included. Yet the alternative of leaving businesses and

consumers without access to financing is totally unacceptable. Similarly,

onOctober8, 2008, the UK government announced a £400 billion ($692 billion)

rescue package to inject cash into UK banks. The justification was that if the

government had not acted, UK banks faced the real risk of collapse. So used to

being lectured by the British about “free markets,” other EU governments were

reluctant to believe this initially. But they quickly followed UK actions by bailing

out their own troubled banks. By the end of 2008, governments in most

developed economies became the largest shareholders in their financial

industries, reversing three decades of deregulation and privatization. No doubt,

these actions will be recorded as an important turning point in economic history,

triggering a fundamental re-think regarding the merits of private ownership and

state ownership. The once-cherished assumptions about the superiority of the

US economic model, centered on more market forces and less

government intervention, are now in doubt. Recently, French President Nicolas

Sarkozy announced that such “laissez faire capitalism is over.” The irony was

that he had been elected in 2007 on a campaign platform promising to practice

more “Anglo-Saxon capitalism” in France. “Forget Adam Smith. Whatever

Works.” This is the title of a BusinessWeek article in October 2008. On October

11, Federal Reserve Bank of Dallas President Richard Fisher gave a speech at

the Group of Seven (G-7) finance ministers meeting in Washington, and borrowed

a line from the late Chinese leader Deng Xiaoping: “Regardless of whether it is a

white cat or a black cat, as long as it can catch mice, it is a good cat. ”Of course,

Deng in the early 1980s popularized his pragmatic “cat theory” in an effort to
transform China from a command economy to a market economy. Interestingly,

nearly three decades later, the “cat theory” was being

invoked in a totally opposite direction. The upshot is that to the same extent that

a pure command economy does not exist, a pure free market economy does not

exist either. No doubt the post-bailout United States and Great Britain can still

be labeled “market economies,” but it is prudent to drop the “F” word. In other

words, let's drop the “free” from the term “free market economies.”

Questions:

1. What are the benefits and costs of private ownership?

2. What are the pros and cons of state ownership?

3. What are the political ideologies behind such ownership arrangements?

4. Why are the stakes so high?

As the Opening Case illustrates, these decisions are affected by

institutions, popularly known as the “rules of the game”. As economic players,

firms play by these rules. However, institutions are not static and they may

change, as evidenced by the 2008 bailouts. Such institutional transitions are

“fundamental and comprehensive changes introduced to the formal and informal

rules of the game that affect firms as players.” Overall, the success and failure

of firms around the globe are to a large extent determined by firms'

ability to understand and take advantage of the different rules of the game. This

calls for firms to constantly monitor, decode, and adapt to the changing rules of

the game in order to survive and prosper. As a result, such an institution-based

view has emerged as a leading perspective on global business.

Institutions, Firms, and Firm Behaviors

Two Core Propositions of the Institution-Based View Managers and firms

Rationally pursue their interests and make choices within the formal and

informal constraints in a given institutional framework. While formal and

informal institutions combine to govern firm behavior, in situations where formal

constraints are unclear or fail, informal constraints will play a larger

role in reducing uncertainty and providing constancy to managers and firms.

Two Core Propositions of the Institution-Based View Second, while formal and

informal institutions combine to govern firm behavior, informal constraints play

a larger role in reducing uncertainty and providing constancy for managers and

firms in situations where formal constraints are unclear or fail. For example,

when the former Soviet Union collapsed and with it the formal

regime, the growth of many entrepreneurial firms was facilitated by informal

constraints based on personal relationships and connections (called blat in

Russian) among managers and officials. Many observers have the impression

that relying on informal connections is relevant only to firms in emerging

economies and that firms in developed economies pursue only market-based

strategies. This is far from the truth. Even in developed economies, formal rules

make up only a small (though important) part of institutional constraints, and

informal constraints are pervasive. Just as firms compete in product markets,

firms also fiercely compete in the political marketplace characterized by informal

relationships. Basically, if a firm cannot be a market leader, it may still beat the

competition on other grounds—namely, the nonmarket, political environment.

IN FOCUS - The Russia Puzzle

Russia is not the Soviet Union. But what is it? Since the collapse of the

former Soviet Union in 1991,Russia has undergone a series of extraordinary

institutional transitions. It changed from a communist totalitarian state into a

democracy with regular elections. Its centrally planned economy was

transformed into a capitalist economy of mostly private firms. Yet, Russia has

remained a huge puzzle to policy makers, scholars, and managers both in

Russia and abroad, thus provoking a constant debate. Politically, does Russia

really have a democracy? In 2004, Russia was downgraded from “Partly Free” to

“Not Free”—on a 1–3 scale of “Free,” “Partly Free,” and “Not Free”—by Freedom

House, a leading nongovernmental organization (NGO) promoting political

freedom. This was driven by Russia's recent steady drift toward

moreauthoritarian rule under then-president Vladimir Putin. Yet, Russia

underPutin between 2000 and 2008 grew 7% annually, whereas Russia under

Boris Yeltsin during the 1990s, when it was “Partly Free,” experienced a

catastrophic economic decline. Most Russians, who were economically better off

in the 2000s, do not seem to mind living in a “less democratic” country (relative

to what Russia was in the 1990s). Legally, establishing the rule of law that

respects private property is one of the main goals of Russia's institutional

transitions. In a society whereby nobody had any significant private property

until recently, how a small number of individuals became super-rich oligarchs

(tycoons) almost overnight is intriguing. By 2003, the top ten families or groups

owned 60% of Russia's total market capitalization. Should the government

protect private property if it is acquired through illegitimate or “gray” means?

Most oligarchs obtained their wealth during the chaotic 1990s. The government

thus faces a dilemma: Redistributing wealth by confiscating assets from the

oligarchs creates more uncertainty, whereas respecting and protecting the

property rights of the oligarchs results in more resentment among the

population. Thus far, except when a few oligarchs, notably Mikhail

Khodorkovsky, threatened to politically challenge the government, the

government sided with the oligarchs. Not surprisingly, oligarchs have emerged

as a strong force in favor of property rights protection. Where exactly is Russia

heading? The key to solving this puzzle is to understand Putin (who became

prime minister in 2008) and his chosen successor, President Dmitry Medvedev.

While Russia becomes economically richer and stronger (thanks to high oil

prices), the government is bolder and more assertive in foreign affairs. At home,
the government is also sliding back to more authoritarian ways. But, one

argument goes, if the government delivers economic growth or at least survives

the recent downturn, so what? In addition, other experts note that despite its

former super-power status, Russia has become a “normal,” middle-income

country. With GDP per capita around $8,000, Russia in 2012 is at a level similar

to that of Argentina in 1991 and Mexico in 1999. Democracies in this income

range are rough around the edges. They tend to have corrupt governments, high

income inequality, concentrated corporate ownership, and turbulent economic

performance. In all these aspects, Russia may be quite “normal.” However, these

flaws are not necessarily incompatible with further progress down the road. For

example, consumers in normal, middle-income countries naturally demand

bank loans, credit cards, and mortgages, which have only appeared recently in

Russia and created lucrative opportunities for Russian and foreign firms.

Because Russia is so large and complex, news from Russia is often

simultaneously both good and bad. For example, IKEA, aleading Swedish

furniture retailer, aggressively entered Russia in 2000, investing $4

billion in a decade during which Russia's yuppies became known as the “IKEA

Generation.” However, even as one of the largest foreign investors, IKEA has been

frustrated by corruption, especially at the local level. In 2009, IKEA put

on hold all new investment in Russia. At the same time, despite such bad news,

overall, big political risks seem reasonably remote. With the Middle East up in

flames, Russia's stability as an oil producer shines. More foreign firms are now

rushing in. As the R in BRIC, Russia is simply too big and too rich to ignore.
Disposable household income in Russia is one third higher than Brazil's, four

times China's, and ten times India's. However, the Russian economy seems

overly de

pendent

on raw materials exports (such as oil, gas, and minerals). The global collapse of

demand, due to the 2008–2009 crisis, is hurting Russia. Yet, the new

government, under President Medvedev, has the ambition to transform Russia

into a more innovation-driven economy. Overall, solving the Russia puzzle has a

direct bearing on firms' assessment of the risks of operating in Russia relative to

the risks of operating in other countries such as BIC in BRIC.Sources: “Dreams

of an iPad economy for Russia,”

List the differences between democracy and totalitarianism.

Political Systems

A political system refers to the rules of the game on how a country is

governed politically. At the broadest level, there are two primary political

systems: democracy and totalitarianism. This section first outlines these two

systems and then discusses their ramifications for political risk.

Democracy
 Democracy is a political system in which citizens elect representatives to

govern the country on their behalf. Usually, the political party with the majority

of votes wins and forms a government. Democracy was pioneered by the

Athenians in ancient Greece. In today's world, Great Britain has the longest

experience of running a democracy, and India has the largest democracy (by

population). A fundamental aspect of democracy that is relevant to global

business is an individual's right to freedom of expression and organization. For

example, starting up a firm is an act of economic expression, essentially telling

the rest of the world: “I want to be my own boss! And I want to make some

money!” In most modern democracies, the right to organize economically has

been extended not only to domestic individuals and firms but also to foreign

individuals and firms that come to do business. While those of us fortunate

enough to have been brought up in a democracy take the right to establish a

firm for granted, we should be reminded that this may not necessarily be the

case under other political systems. Before the 1980s, if someone dared to

formally establish a private firm in the former Soviet Union, he or she would have

been arrested and shot by the authorities.