Cultural differences and FDI

1. WK2 Agenda Hot topic: News? Facebook Companion websites No class last week of July MIB Student survey India vs. China Reading Discovery Nonverbal Communication FDI Mini FDI Decision Homework 1 MIB, BBA 2010

2. India vs. China BBC video clips, Fed Article What is the focus of each country? Why China and India walk different path? What kind of business that you will prefer India over China? Apply the concepts you’ve learned to compare China and India for the overall attractiveness of the country. What other information would be helpful for your reasoning? Where can you get it? BBA, MIB 2010 2

3. Reading Discovery Read the following articles. What’s the main theme of those stories? Why is it important? How do we learn other cultures? What are the determinants of culture? Fill up this table. 3 MIB, BBA 2010

4. Nonverbal Communication Need two volunteers. Act from the following list of body language. Ask your classmates: What does it mean? MIB, BBA 2010 4

5. Foreign Direct Investment Watch the video clips from PBS Hanes brand relocates to Vietnam, Thailand, and China FDI in Ethiopia What makes Vietnam and Ethiopia attractive for FDI? What are the issues in these stories? What can the companies do to help improve the situation? What are the advantages and disadvantages of FDI? MIB, BBA 2010 5

6. Homework for Friday In a group of 4-5, select a particular business. Your goal is to decide on the best country for your business. Create a list of criteria (4-6). Weight each criteria against each other. Create the country options(3-4) and compare all options according to each criteria. Compare each option based on all criteria combined. Compare the option score. Detail instruction example is in the sheet provided. Where can you get the data for this exercise? MIB, BBA 2010 6

7. WK2.2 Agenda Hot topics: World Cup? This time for? Review: Monday discovery Exchange students FDI interviewing exercise Lecture Mind map Homework MIB, BBA 2010 7

8. Exchange students interview(FDI analogy) In a group of 4-5, interview your friends from abroad(anywhere outside Ubon) Reasons for coming here. How long have they studied here? Did they start from high-school? What are the advantages and disadvantages of both sides(local students and exchange students)? What did you gain? What did you loose? Any investment? Expense? How can we encourage more exchange students to come here? How can we decrease the number of exchange students to come here? MIB, BBA 2010 8

9. Review What’s the meaning of this diagram? Two types of model you can choose. Adaptive Changing agent How to choose? Depend on your resources (time & money), sustainable growth. MIB, BBA 2010 9

10. Culture Culture: the collection of values, belief, behaviors, customs, and attitudesthat distinguish one society from another A society’s culture determines the rules that govern how firms operate in the society. A societyis a group of people who share common set of values and norms Values: abstract ideas of about what the group believes to be good, right and desirable i.e. Asian value? Norms: social rules and guidelines that prescribe appropriate behavior in a particular situation i.e. dress code MIB, BBA 2010 10

11. Values and Norms Values form the basis of a culture: abstract concept & emotional significance. Abstract concepts: freedom, democracy, truth, justice, honesty, loyalty, responsibility, Emotional significance: people fight over freedom, fight for democracy Norms: folkways & mores Folkways: the routine conventions of everyday life such as dress code, social manner and neighborly behavior Mores: norms that are seen as central to the functioning of a society and to its social life such as theft and incest. Which one is more serious, folkways or mores? MIB, BBA 2010 11 Thailand?

12. Social Structure Social structure refers to its basic social organization There are two dimensions: Degree of individualandgroup Degree of class or caste Country in each quadrant? MIB, BBA 2010 12 Individual Class Caste Group

13. Individuals and Groups MIB, BBA 2010 13

14. Social Stratification All societies are stratified on hierarchical basis into social categories or social stratai.e. birth, occupation, and education All societies are differ by The degree of mobility between social strata The significanceattached to social strata in business contact Social Mobilityis the ability from which an individual can move out from which they are born…How? The social stratification of a society is significant if it affects the operation of business organizations. What would be the concerns for MNEs operating in highly stratify countries? Front end: your market segment Back end: hiring and promotion procedures MIB, BBA 2010 14

15. Religious and Ethical System Religion: a shared belief and rituals Ethical systems: a set of moral principles, or values that are used to guide and shape behavior Four major religions: Christianity, Islam, Hinduism, and Buddhism Confucianism Economic research suggests that strong religious beliefs stimulate economic growth, because they help to sustain aspects of individual behavior that lead to higher productivity. MIB, BBA 2010 15

16. Religions MIB, BBA 2010 16

17. Religions MIB, BBA 2010 17

18. Language Means of communication: spoken and unspoken language(facial expression, personal space, and hand gesture). Express how people see the world. More languages, more cultures: Swiss, Belgium, India Language is a competitive advantage for doing international business. Example: Chevy No Va, Toyota Camry in Thai MIB, BBA 2010 18

19. Education Formal education is the medium through which individuals learn many of the language, conceptual, and math skills that are crucial for the society. Education is important for the nation’s competitive advantage. The US, UK, Germany, and Japan have their distinctive systems. General education level can be a good index of what kinds of product to sell or invest in a particular country. Example: Illiterate country is unlikely to sell popular books. MIB, BBA 2010 19

20. Culture and the workplaceHofsteds’sFive Dimensions of National Culture MIB, BBA 2010 20

21. Research and our result Collectivism: relationship over task, learn how to do things not learn how to learn Transition state: lecture vs. activities, Power tolerance: need resourceful democrat teacher, but also Power respect: Parental teacher: tell you what to do in every situation Uncertainty avoidance: like structure and objective, teacher must know all, dislike rules(uncertainty acceptance because you’re still young) Passive goal: use intuition, emphasize on life quality Long term: but no goal??? MIB, BBA 2010 21

22. Implication for Manager Culture changes over time. Beware of ethnocentric behavior. Manager need cross cultural literacy for success. MIB, BBA 2010 22

23. Foreign Direct Investment FDI: occurs when a firminvest directly in new facilities to produce and/or market in a foreign country (an ownership share of at least 10-25%)=>MNE FDI can be: Greenfieldinvestment: wholly own company Merger and Acquisition (M&A, Brownfield) with firms in the foreign country Does it require capital movement? The flow of FDI: amount of FDI undertaken over a given time period The stock of FDI: total accumulatedvalue of foreign-owned assets at a given time Out flows of FDI: the flows of FDI out of the country In flows of FDI: the flows of FDI into a country Gross fixed capital formation: the total amount of capital invested in factories, stores, and office buildings. FDI: source of capital investment and economic growth MNE MIB, BBA 2010 23 Out flow In flow

24. Trends in FDI FDI has increased tremendously for the past 30 years, except for these past two years due to world economic collapse. Reasons: Fear of protectionism The shift toward democratic and free market economies, FDI↑ Globalization, ensure presence in the regional market MIB, BBA 2010 24

25. The Direction of FDI Historically, most FDI have been directed to the developed nations, with the US as the favorite target. While the US still maintain its rank as the largest for host and home country of FDI, some EU countries have lost their ranks and got the negative inflow of FDI. The emerging direction includes: South, East, and South East Asia—particularly China. Latin America is also an emerging market for FDI, especially for oil and energy sector. Notice the increasing trend of FDI to Africa. MIB, BBA 2010 25

26. The Forms of FDI Acquisition vs. Greenfield Investments Most cross border investment are in the form of M&Arather than Greenfieldinvestment Firms prefer to acquire existing asset because: M&A are quicker to execute than Greenfield investments M&A are easier and less risky than to build from the ground up Firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology or management skills MIB, BBA 2010 26

27. The Shift to Services FDI is shifting away from extractive industries and manufacturing, and towards services. The shift to service is driven by: General move in developed nations toward services The fact that many services need to be produced where they are consumedi.e. Starbucks, cement A liberalization of policies governing FDI in services i.e. banking, insurance The rise of Internet-based global telecommunication networks MIB, BBA 2010 27

28. Why FDI? MIB, BBA 2010 28

29. Theories of FDI Internalization: Market Imperfection FDI advantage when: cost↑, trade barrier↑, know how protection↑, want control↑, firms capabilities ↑ What didn’t he explain? MIB, BBA 2010 29 Firms of the same industry do FDI at the same time at roughly the same location because: - Strategic rivalry or imitative behavior in the oligopolistic industries: Honda, Toyota, Nissan, Airline industry -Multipoint competition: Kodak vs. Fuji, Coke vs. Pepsi, Nike vs. Adidas, Mc Donald vs. Burger King Licensing drawbacks: -Give away know how to potential competitor: RCA=>Sony in 1960 -No tight control over manufacturer, marketing, or strategy to max profit -Know how or corporate culture is not amendable: Toyota lean manufacturing, Philip managing skills, P&G marketing skills.

30. Theories of FDI MIB, BBA 2010 30 In addition to the various factors discuss earlier, Eclectic Paradigm suggest that we consider: -Location specific advantages: that arise from using resource endowments or assets that are tied to a particular location and that firms find valuable to combine with its own unique assets i.e. oil and mineral, low cost highly skilled Bangalore -Externalities: knowledge spillovers that occur when companies in the same industry locate in the same area i.e. rubber town, silicon valley Firms undertake FDI at particular stages in a life cycle of a product. Firms invest in: -Developed countries when demand in those countries are high. -Developing countries when standardize product or market susurration to save production cost. Vernon fails to explain why it is profitable for firms to undertake FDI rather than continuing to export from home base or licensing a foreign firm. John Dunning Raymond Vernon

31. Political Ideology and FDI Ideology towards FDI range from Radical View: hostile to all FDI, MNEs are the instrument of imperialist (only until 80s) Pragmatic View: pragmatic nationalism, only if the benefit outweigh the cost Free Market View: non-inverterventionist, disperse products and increase overall efficiency MIB, BBA 2010 31 Radical Pragmatic Free Market

32. Benefits and Costs of FDI for Host Country Benefit Resource transfer effect: capital, technology, management resource Employment effect: bring jobs Balance of payment effect: receive from other countries, FDI can help achieve a current account surplus Effect on competition and economic growth: more green field investment~moresuppliers~competition~price consumer welfare ↑ Increase competition: productivity↑,innovation↑, economy↑ Cost Possible adverse effect on competition (MNE might do better due to larger support) Adverse effect on the BOPs:repatriate earnings to the parent country, MNE still import parts from abroad Loss of national sovereignty and autonomy: no commitment from MNE, host country government has no real control MIB, BBA 2010 32

33. Benefits and Costs of FDI for Home Country Benefit Positive effect on BOP: from the repatriate money Employment effect: Toyota supplier in Japan, Thai companies still order the machines for operating from abroad Gain from learning new skills that can transfer back to the home country Cost Initial capital outflow to finance FDI Job loss: Serve home market from the low cost labor, FDI is a substitute for direct export MIB, BBA 2010 33

34. International Trade Theory and FDI International trade theory suggested that the home country concern about the negative economic effects of offshore production may not be valid because of the following reasons: Free up resource in the home country to concentrate on comparative advantage Consumers benefit if the price of the products falls as a result of offshore production Not worth losing market share to international competitor Therefore, the long run economic effect of FDI, outweigh the minor BOP and employment effects. MIB, BBA 2010 34

35. Government Policy on FDI for Home Country Encouraging Outward FDI Government backed insurance to cover major types of foreign investment risk, special loan, tax incentive, eliminate double tax, encourage host country to open market: US, Japan RestrictingOutward FDI Most countries limit capital outflows, manipulate tax rules, or outright prohibitFDI (Cuba, Iran) MIB, BBA 2010 35

36. Government Policy on FDI for Host Country Encouraging Inward FDI Offer incentive to foreign firms such as tax concessions, low interest loan, grants or subsidies, improve infrastructure and education Why should we encourage inward FDI? Restricting Inward FDI Government can use ownership restraint and performance requirement To protect national security and competition:Sweden excludes foreign ownership in tobacco and mining industry, US government rejected DP United Arab Emirates, Malaysia protects its infant auto business Max the benefit of resource transfer and employment: Japan during the 80s allowed JV with valuable technology only MIB, BBA 2010 36

37. Implications for Manager Decision factors to undertake FDI Supply factors=>Cost Production costs: better location, tax rate, labor Logistics: transportation cost Resource availability: oil, gas, tuna etc. Access to key technology: faster than developing by itself i.e. Swiss Pharmaceutical Demand factors=>Benefit Sales expansion: market size, market growth Customer access: require presence i.e. fast food chain Marketing advantage Exploiting competitive advantage: brand, trade mark, technology Customer mobility: to continue to supply the customer i.e. Japanese auto supplier Political Factors=>Risk Avoidance of trade barriers i.e. Fuji Economic development incentive, BOI, Chinese government Share the risk: not depend only on home country market MIB, BBA 2010 37

38. Implications for Managers What type of firm that should not be licensing? High technology (need to protect firms expertise) Global oligopolies (need tight control) Industries with costpressures (need tight control) MIB, BBA 2010 38

39. Mind Map & Homework Summarize this lecture through your mind map. Any question for Friday homework? MIB, BBA 2010 39

40. Different Diagrams of the Same Topics MIB, BBA 2010 40

41. WK2.3 Agenda Discussion: news? CCTV? China Mind map all elements? How can we have all elements? Do we need all elements? Facebook, PPT, notebook The good, the bad, and the ugly mind maps. FDI Decision Homework Business? Criteria? Options? Result of option score? BOI target countries: Africa: Nigeria, Morocco Middle East: Iran, Qatar, Dubai, Oman, Jordan South Asia: India, Pakistan Latin America: Brazil, Chile, Caribbean Neighboring countries: Lao, Cambodia, Myanmar, Vietnam, China Business: Construction, Energy, Petrochemical, Food, Automotive parts, Textile, Shoes, Tourism and services MIB, BBA 2010 41

42. FDI Decision Homework The order of creating criteria vs. options, will lead you to different result or different path of doing business. It doesn’t mean that you won’t be success. You’ll have to use different strategy. Creating the criteria first will lead you to try to find all of your options. Creating options first, will make you think of how to compare them. If you have more than 6 criteria, you should not use this method because you might end up having very little importance(weight) to all those criteria. MIB, BBA 2010 42