Taking the Decision on

Entering a New Market

Session 6

LO W

International Trade HIGH

Patterns of
Internationalisation
Trading
Global
Industries
--aerospace
--military hardware
--diamond mining
--agriculture

Industries
--automobiles
--oil
--semiconductors
--consumer electronics

Domestic
Industries

Multidomestic
Industries

--railroads
--laundries/dry cleaning
--hairdressing
--milk

--retail banking
--hotels
--consulting

LOW

Foreign Direct Investment

HIGH

Internationalisation is the process through which a firm expands its business outside the national
(domestic) market. Eventually, international firms may develop into:
Multinational corporations (MNC): a firm that carries out its value chains in more than one country. It is
generally headquartered in one home country while it also operates in one or more host countries.
Trans-national corporations (TNC): a MNC that does not identify itself with any specific nation, but
acquires truly international (i.e., not country-dependent) features and high local responsiveness.

International Strategy
Framework
Internationalisation
drivers

Sources of
competitive advantage

International
strategy

Market
selection

Mode of entry

Drivers of
Internationalisation
Market
Drivers

Differences in cost across countries

Potential for economies of scale/scope
Potential for learning
Transportation costs

Cost
Drivers

Similarity of customer needs & tastes

Existence of global customers
Similarity of distribution channels
Transferability of marketing know-how

Forces favoring
global integration/
local responsiveness

Globalization of competitors
Industry concentration
Differences in industry
concentration across countries
Feasibility of protecting intangibles

Government
Drivers

Existence of trade barriers

Similarity of technical standards
Similarity of regulations
Differences in taxes

Competitive
Drivers
Adapted from: G. S. Yip, Global Strategy in a World of Nations? Sloan Management Review 31(1) (Fall 1989), pp. 29-41.

Levers of Value and

Adding Value
Volume

Economic
Value

Competitive
Advantage
Cost drivers
Differentiation
drivers

Margin

Industry
Attractiveness/
Bargaining Power

Uncertainty
/ Risk

SourcesofValue (ADDING)
ADDING VOLUME
DECREASING COSTS

Dynamics
(Learning)

ECONOMIES OF SCALE,
UTILIZATION

DIFFERENTIATING
I NTENSIFYING COMPETITION
NORMALIZING RISK
G
GENERATING KNOWLEDGE AND OTHER RESOURCES
Source: Pankaj Ghemawat, What are the real gains from a successful Doha Round? WTO Workshop, November 2010

Principal Motives for

International Expansion
World Market
Locations
Economies

To seek lower
production factor costs

Economies
of Scale

To expand sales and

production volume

Economies
of Scope

To exploit proprietary
assets

Motives for
Internationalization
Proactive

Reactive

Profit and growth

goals
Managerial urge
Technology
competence
Foreign market
opportunities
Economies of scale
Tax benefits

Competitive pressures
Domestic market
Overproduction
Unsolicited foreign
orders
Extend sales of
seasonal products
Proximity to
international
customers

BUSINESS STRATEGY
DIAMOND
Arenas

Where will we be active? (and

Arenas

Staging

What will be our speed

and sequence of moves?
Speed of expansion?
Sequence of initiatives

Staging

Economic logic

How will returns be obtained?

Lowest costs through scale

advantages?
Lowest costs through scope and
replication advantages
Premium prices due to unmatchable
service?
Premium prices due to proprietary
product features?

Economic
logic

with how much emphasis?)

Which product categories?
Which channels?
Which market segments?
Which geographic areas?
Which core technologies
Which value-creation
strategies?
Vehicles

Vehicles

How will we get there?

Internal development?
Joint ventures?
Licensing/franchising?
Experimentation?
Acquisitions?

Differentiators
Differentiators

How will we win?

Image?
Customization?
Price?
Styling?
Product reliability?
Speed to market?

INTERNATIONAL STRATEGY
AND THE STRATEGY
DIAMOND

Staging

Arenas

When will we go
international?

Which geographic areas will we enter?

How quickly will we expand

into international markets?

Which channels will we use in those

Arenas

areas?

In what sequence will we

Vehicles

implement our entry tactics?

Staging

Which international
Economic
logic

Vehicles

market-entry strategies
will we use? Alliances?
Acquisitions? Greenfield
investments?

Differentiators
Economic logic

Differentiators

How does our international

How does being international make our

strategy lower our costs, raise

the prices we can charge, or
create synergies between our
business?

products more attractive to our

customers?

Entry Decision Making Under

Uncertainty: Trade-off Between
Flexibility and Commitment
Timing: When is a Speed of expansion:
good time to enter? How fast to grow?
Potential gain from
waiting
Cost of delay

Scale of entry

Value of learning
Preemption of
competitors
Constraints of internal
resources

Small scale:
Establish a foothold Mode
Some modes have more
to learn
flexibility embedded
Large scale: Acquire
Some modes reduce
first mover
resource requirements
advantage

Timing of entry: First

MoverDisadvantages;
Advantages

Preempt rivals; establish

strong brand name; capture
demand
Build sales volume; ride
down experience curve
ahead of competitors; cost
advantage
Create switching costs for
that tie customers to 1st
movers products
Establish social ties ahead of
following foreign competitors
important in high-context
cultures

pioneering costs
Time spent to learn dosdonts; competitors can learn
from 1st mover
If 1st mover introducing a
new industry, it builds
infrastructure
1st mover trains customers
for followers
Break through host countrys
adjustment to foreignness
issues
Regulations may change
as a result of 1st movers
entry

Choosing the Mode of Entry

Decision Criteria for Mode of Entry:

Market Size and Growth

Risk
Government Regulations
Competitive Environment/Cultural Distance
Local Infrastructure

Classification of Markets:

Platform Countries (Singapore & Hong Kong)

Emerging Countries (Vietnam & the Philippines)
Growth Countries (China & India)
Maturing and established countries (examples: South
Korea, Taiwan & Japan)

Company Objectives
Need for Control
Internal Resources, Assets and Capabilities
Flexibility

Method for Prescreening Market

Opportunities

THE CAGE DISTANCE

FRAMEWORK

Cultural distance

Administrative distance

Geography distance

Economic distance

Different languages

Absence of colonial ties

Physical remoteness

Different ethnicities; lack

of connective ethnic or
social networks

Absence of shared
monetary or political
association

Lack of a common border

Differences in consumer
incomes

Different religions

Political hostility

Different social norms,

values, beliefs

Government policies

Weak transportation
or communication links

Institutional weakness

Hofstedes Culture Study

Differences in climates

Regulatory interactions

Products have a low value-ofweight or bulk ratio (cement)

Nature of demand varies with

income level (cars)

Products are fragile or

perishable (glass, fruit)

Economies of standardization
or scale are important
(mobile phones)

Attributes creating distance

Lack of sea or river access

Size of country

Industries or products affected by distance

Products have high
linguistic content (TV)
Products affect cultural
or national identity of
consumers (foods)
Product features vary in
terms of size (cars),
standards (electrical
appliances), or
packaging
Products carry countryspecific quality
associations (wines)

Government involvement is high

in industries that are
Producers of staple goods
(electricity)
Producers of other
entitlements (drugs)
Large employers (framing)
Large suppliers to
government (mass
transportation)
National champions
(aerospace)
Vital to national security
(telecom)
Exploiters of natural
resources (oil, mining)
Subject to high sunk costs
(infrastructure)

Communications and
connectivity are important
(financial services)
Local supervision and
operational requirements are
high (many services)

Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

Differences in costs and

quality of
Natural resources
Financial resources
Human resources
Infrastructure
Intermediate inputs
Information or knowledge

Labor and other factor cost

differences are salient
(garments)
Distribution or business
systems are different
(insurance)
Companies need to be
responsive and agile (home
appliances )

Factors affecting decision

Different Modes of Entry

Indirect export
Direct export
EXPORTING

Joint Venture
Greenfield
Brownfield (M&A)

Internet Entry
B2B
B2C
With the channels
of International
Express

INVESTMENT

INTERNATIONAL
CONTRACTING
Licensing
Franchising
Contract manufacturing
Management contract
Turnkey projects

Implications of Internationalization
for Industry Analysis

INDUSTRY STRUCTURE
Lower entry barriers around national markets
Increased industry rivalry
--- lower seller concentration
--- greater diversity of competitors
Increased buyer power: wider choice for dealers & consumers

COMPETITION
Increased intensity of competition

PROFITABILITY
Other things remaining equal, internationalization tends to reduce an
industrys margins & rate of return on capital

Barriers hindering the

process of internationalization

Comparative market risks

Competition from other firms
Differences in product usage
Language and cultural differences
Difficulties in finding the right
distributor
Differences in product
specifications
Complexity of shipping services

Commercial risks

Political risks

General market risks

Exchange rate fluctuations

Failure of export customers to pay
due to contract disputes,
bankruptcy, refusal to accept
product, or fraud
Delays and/or damage in the export
shipment and distribution process
Difficulties in obtaining export
financing

Foreign government restrictions

National export policy
Foreign exchange controls
imposed by host governments
Lack of governmental assistance in
overcoming export barriers
Lack of tax incentives
High value of domestic currency
relative to export markets
High foreign tariffs on imported
products
Confusing foreign import
regulations and procedures
Complexity of trade
documentation
Enforcement of national legal
codes regulating exports
Civil strife, revolution, and wars
disrupting foreign markets

Risk-management
strategies
Avoid exporting to high-risk markets
Diversify overseas markets
Insure risks when possible
Structure export business so that buyer bears most risk

Exit Strategies
Reasons for Exit:

Sustained losses
Volatility
Premature entry
Ethical reasons
Intense competition
Resource reallocation

Risks of Exit:
Fixed costs of exit
Disposition of assets
Signal to other
markets
Long-term
opportunities

Guidelines:
Contemplate and
assess all options to
salvage the foreign
business
Incremental exit
Migrate customers

Evaluating different
modes of Entry
Session 7

Different Modes of Entry

Entry strategies into foreign markets include:

Merely exporting a firms products into a foreign

market, possibly with the support of trade brokers

Licensing a firms production and marketing

process, or asking for royalties to be paid for the
use of firms assets and resources

Franchising a firms business

Directly undertaking production and selling in a
foreign country
a) through a multinational approach by
adapting to local markets
b) through a global approach by massmarketing the same product

Strategic alliances and joint ventures with

foreign firms

Trade-off between Risk and

Control Equity - Based
Risk

Contract Based Modes

Licensing
Franchising
Contract Manufacturing
Turnkey Operations
Management Contracts

Modes
International JVs
Wholly owned
subsidiaries
oBrownfield
oGreenfield

Export Based
Modes
Direct Exporting
Indirect Exporting

Control

Forms of FDI: Ownership

Home Country

Green Field
100% Owned

Host Country
New Entity

Full Acquisition
(i.e., 100%)

MNE

Local Firm
Partial Acquisition
(e.g., 50%)
Ownership = s%

Ownership = (1 - s)%

Joint Venture

Complementarity of
Value
Resources

Chain
Component

MNEs
Resources

Innovative
capabilities
Production Advanced
technology
and know-how
Marketing & IndustrySales
specific
marketing
Organization expertise
structure
Global Best
and systems
Practices

R&D

Local Firms
Resources

Imitating
capabilities
Older technology
and know-how
Country-specific
marketing
expertise
Country specific
organization
skills

Common Market Entry

Modes
HOME COUNTRY
Licensing

MNE

Acquisition

HOST COUNTRY

Local Firm

Export
Joint Venturing
Green Field Entry

Joint Venture
Company
New Subsidiary
Company

CHOICE OF ENTRY MODES

Choice of entry
mode
Equity (FDI)
modes

Non-equity
modes

Exports

Contractual
agreements

Alliances and
joint ventures (JVs)

Wholly owned
subsidiaries

Direct exports

Licensing/
franchising

Minority JVs

Greenfield
investments

Indirect exports

Turnkey projects

50/50 JVs

Acquisition

Others

Contracted R&D

Majority JVs

Others

Comarketing

Strategic alliances
(within dotted areas)

Source: Adapted from Pan, Y. and D. Tse, The Hierarchical Model of Market Entry Modes, Journal of International Business Studies, 31 (2000),
535-545

Going it Alone: Export

HOME COUNTRY

HOST COUNTRY
Revenues

MNE

Customers

Export of Goods

Going it Alone: Export

Advantages
Low initial investment
Reach customers
quickly
Complete control over
production
Benefit of learning for
future expansion

Disadvantages
Potential costs of
trade barriers
Transportation cost
Tariffs and quotas

Foregoes potential
location economies
Difficult to respond to
customer needs well

When Is Export Appropriate?

Low trade barriers
Home location has cost advantage
Customization not crucial

Home country or third Country

R&D

Produ
ction

Border

Export
buying
agent

B
Product
ion

Marketing

Sales and
service

Bs international
organization

sales

R&D

Product
ion

Foreign Target Market

Sales and
service

A Rider

R&D

Marketing

Piggyback

C
Sales and
service

Indirect
export

Agent,
distributor

Direct
export

A1

R&D

Producti
on
B

A2

R&D

Product
ion

A3

R&D

Product
ion

Note: A1, A2, A3, A are n=manufactures of products /services

B: is an independent intermediary/(agent)
C: is the customer

Marketing

Sales and
service

Export
marketing
group (with
a local agent
of B

Export Modes

Cooperative
export

Licensing Agreement
HOME COUNTRY
HOST COUNTRY
Licensing of Technology

MNE

Local Firm
Fees and Royalties

Licensing Agreement

Advantages
Low initial investment
Avoids trade barriers
Potential for utilizing
location economies
Access to local
knowledge
Easier to respond to
customer needs

Disadvantages
Lack of control over
operations
Difficulty in transferring
tacit knowledge
Negotiation of a transfer price
Monitoring transfer outcome

Potential for creating a

competitor

When is Licensing Appropriate?

Well codified knowledge
Strong property rights regime
Location advantage

Foreign Acquisition
HOME COUNTRY

MNE

HOST COUNTRY

Investment

Profit

Local Firm

Foreign Acquisition
Advantages
Access to targets
local knowledge
Control over foreign
operations
Control over own
technology

Disadvantages
Uncertainty about
targets value
Difficulty in absorbing
acquired assets
Infeasible if local market
for corporate control is
underdeveloped

When is Acquisition
Appropriate?

Developed market for corporate control

Acquirer has high absorptive capacity
High synergy

Going it Alone: Green

Field Entry
HOME COUNTRY

HOST COUNTRY

MNE
Profit

Investment

New Subsidiary
Company

Going it Alone: Green

Field
Entry
Advantages
Disadvantages
Normally feasible
Slower startup
Avoids risk of
Requires knowledge
overpayment
of foreign
Avoids problem of
management
integration
High risk and high
Still retains full control

commitment

When is Green Field Entry

Appropriate?
Lack of proper acquisition target
In-house local expertise
Embedded competitive advantage

Management Contract
HOME COUNTRY
HOST COUNTRY
Management Fees

MNE

Local Firm
Profit

Technological Inputs

Managerial
Service

Wholly-Owned
Subsidiary

Management Contract
Advantages
Access to local
management skills
Avoids buying
unwanted assets
Retains strategic
control

Disadvantages
Potential incentive
problem
Potential adverse
selection problem
How do you know the
competencies of the
manager?

When is a Management Contract

Appropriate?

Manager has a reputation to protect

Hotels
Consulting companies
Performance-based contract provides no perverse

Joint Venture
HOME COUNTRY

HOST COUNTRY

MNE

Local Firm
Share of
Profit
Joint Venture
Company

Inputs
Inputs
Share of Profit

Joint Venture

Advantages
Access to partners local
knowledge
Reduction of concern
about overpayment
Both parties have some
performance incentives
Significant control over
operation

Disadvantages
Potential loss of
proprietary knowledge
Potential conflicts
between partners
Neither partner has full
performance incentive
Neither partner has full
control

When is a Joint Venture

Appropriate?

Both partners contribute hard-to-measure inputs

Large expected mutual gains in the long-run
Trade secrets can be walled off

Framework for Mode of Entry

Decision

Exportin Contract
Joint
Acquisiti Greenfie
g
ual
Venture
on
ld
Agreem
Investm
ent
ent

Risk

Low

Low

Moderate

High

High

Return

Low

Low

Moderate

High

High

Control

Moderate

Low

Moderate

High

High

Integrat
ion

Negligibl
e

Negligibl
e

Low

Moderate

High

Source: V. Kumar and V. Subramaniam, A Contingency Framework for the Mode of Entry Decision, Journal of World
Business, vol. 32 (1), 1997, pp. 53-72.

Evaluating the Alternate Modes of

EntryContractu
Decision

Criteria

Risk
Return
Control
Knowledge
Investment
Ease of
Implementa

Weig
ht

al
Agreemen
t
(Licensing
or
Exporti
Franchisin
ng
g or
Manageme
nt
Contract
or
Turnkey)

Joint
Ventu
re

Greenfiel
Acquisit
d
ion
Investm
ent

Advantages and Disadvantages of

Different Modes of Entry

Managing International
Partners and Licenses
Session 9

Stages of Strategic
Alliance

Initial Euphoria
Honeymoon period
Dawning realization
Aftershock
Damage control

Conceptual model of alliance

development

Alliance
Alliance
Alliance
Alliance

conceptualization
pursuance
confirmation
implementation/continuity

Steps in SA
Implementation
Contractual negotiations

Ownership
Credit terms
Ordering decisions
Performance measures

Develop or integrate information systems

Develop effective forecasting techniques
Develop a tactical decision support tool to
assist in coordinating inventory
management and transportation policies

Assessing the International

Partnership

Right
Right
Right
Right
Right

Alliance
Partner
Partner 1
Partner 2

country?
partnering?
partner?
structure?
leadership?
Strategic
Resources &
Capabilities

Strategic
Deficiencies

Desired
Strategic
Outcome

Criteria for Assessing

Criteria

Questions

Test the
Strategic
Logic

Do you really need a partner?

Ye N
s
o

Dont
Know

Does your partner?

Will adequate returns be likely?
Is a Alliance the best option for both?

Partnership
and Fit

Do congruent performance measures exist?

Will you get access to your partners skills?
Will you be compatible/comfortable?
Can you arrange an engagement period?

Shape and
Design

Is the Partnerships scope of activity clear?

Its ownership structure?
Dispute resolution mechanisms?
Governance structure?

Doing the
Deal

Is there adequate capitalization?

Have exit arrangements been agreed to?
Is there commitment?

Making the
Partnership
Work

Will the partnership receive ongoing attention from

parents?
Can cultural differences be managed?
Is there flexibility?
Is there commitment?

Source: Paul W. Beamish, Engaging

Cross-Border
Collaboration: Managing Across Corporate Boundaries, Chapter 6 in C. Bartlett
Is thereinsound
leadership?
and P. Beamish (eds.), Transnational Management: Text, Readings, and Cases in Cross-Border Management, 6/E, Irwin McGraw Hill, Burr

Partner Choice 5 Cs or
6 Cs
Competence (rather than convenience) Two weak do
not make one strong. Does the partner have what is
needed to deliver results in this market?
Complementarity (Resources) Does the partner fill in
the gaps well? (If we are similar, then one of us is not
needed.)
Congruence (Goals) Do our goals mesh well with
those of the partner?
Compatibility Do we have similar cultures, values and
worldviews?
Chemistry Can I work with my partner? Sometimes
the most strategic fit may not be the best personal fit. If
executives dislike each other, then it is impossible to
create value through partnership.
How about C for Competitor? Can you partner with a
potential future competitor?

Requirements for Effective

Strategic Alliance
Advanced information systems
Top management commitment
Information must be shared
Power and responsibility within an organization
might change (for example, contact with customers
switches from sales and marketing to logistics)

Mutual trust
Information sharing
Management of the entire supply chain
Initial loss of revenues

Success Factors
Selection:
evaluate which upstream & downstream members should be
included in the supply chain to create a highly competitive &
efficient supply network
should be based on companys goals, objectives & values system.
partners should have competencies in collaboration & those who
already have a proven ability to work in a collaborative
environment.

Intention:
Both partners should acknowledge their mutual dependence &
their willingness to work for the survival & prosperity of the
relationship.

Trust:
Existence of trust in a relationship reduces perception of risk
associated with opportunistic behavior as this generates greater
profits & serve customers better

Communication:
allows partners to understand alliance goals, roles, responsibilities
& helps with the sharing & dissemination of individual experiences

Conflict Resolution:

Firms should be motivated to engage in joint problem solving

Success Factors

contd

Developing a focused winning strategy for the alliance:

Based on distinctive competencies and competitive advantages of the
partners in the selected target market (s).
To ensure there will not be a goal divergence or conflict between
alliance partners.
To be able to manage the company cultural challenges that may arise
between the alliance partners.
Partners should be in vulnerable strategic positions:
(i.e., in need of resources) or when they are in strong social positions
(i.e., possess valuable resources to share). seeking complementary or
similar resources for transferring or pooling.
Progressive learning & value capturing:
Learning involves significant transfer of tacit, specialized & complex
knowledge. Learning requires close collaboration of both firms to
overcome transfer challenges as knowledge, values, culture and
organizational forms.
Respect and protect the brand of each partner.
Determine and align decision rights:
To define what decisions are important to the alliance, which partner
should make them and how the decisions will be made and monitored.
Exit Strategy:
Agree upon an exit strategy for the alliance. It Is important to have
agreement in advance on how the alliance will be concluded if and
when it may fail and/or when it has fulfilled its mission and achieved
its goals and objectives

Mistakes Leading to Failure

Alliance business is viewed internally
by one partner.
One of the partners is too dependant
on the others capabilities.
Problems and dilemmas of mistrust.
Cultural & language barriers.
Collaboration in competitively
sensitive areas can be difficult.
A clash of egos might occur.

Static conceptual model of

strategic alliance failure
causes

Source: SHENG-YUE, H. and XU, R. Analyses of strategic alliance failure: a dynamic model in International Conference on
Management Science and Engineering - ISTP, 2005, Harbin Institute of Technology, Russia, 2005.

Example of Alliance
Failures
Daimler AG bought a 37 percent stake in Mitsubishi

Motors Corp. in 2000 and 2001. The holding was

unwound in 2005 after two years of sales declines at the
Japanese carmaker. Revenue plunged after Mitsubishi Motors
admitted to hiding defects, pushing it to a record 215.4
billion yen loss in the year ended March 2004.
Volkswagen and Suzuki Motor Corp agreed their tieup in December 2009, pledging to cooperate on
technology such as hybrid and electric cars and on
expanding in emerging economies such as India. Suzuki filed
for international arbitration in November 2011 after VW
repeatedly refused to sell back a 19.9 percent stake in the
Japanese carmaker that it acquired in January 2010 for 1.7
billion euros ($2.3 billion) as part of a cooperation tie-up.
In November 2008, NTT Docomo invested $2.2 billion
in Tata Teleservices, at 117 a share for a 26.5% stake
in the latter. On 25 April 2014, NTT Docomo had announced
that they would sell all of their shares in Tata DoCoMo and
exit the Indian telecom industry as they had incurred a total
loss of $1.3 billion.

Dealing with
Competition
Session 10

The Environment &

Decisions
Complex

Organic Extreme

Static

Mechanistic Extreme

Dynamic

Simple

Source: Turton, R. (1991), Behaviour in a Business Context, London,

Chapman Hall.

7-S Framework

Strategy
Ways to achieve competitive
advantage.
Examples.
Low-cost strategy through economic
production or delivery
Product differentiation through distinct
features or innovative sales.

Structure
Ways in which task and people are
specialized and divided, and authority
is distributed.
Four main structures
Functional Structure
Divisional Structure
Matrix Structure
Network Structure

Systems
Formal processes and procedures to
manage the organization.
Examples:

Performance Measurements
Reward Systems
Planning
Budgeting
Resource Allocation
Information System
Distribution System

Staffing
People, their background and
competencies.
Organizations approach to
recruitment, selection, socialization,
training and employee development.

Skills
Distinctive competencies in the
organization.
Can be of People, Management
Practices, Systems and/or
Technologies.

Style
Leadership style of top management
and overall operating style of
organization.
Impacts norms followed by people,
how they work and interact with each
other and customers.

Shared Values
Core values shared in the
organization and serve as guiding
principles of what is important.
Helps focus attention and provides a
broader sense of purpose.

Using the 7-S Model

Each S is consistent with and reinforces
the other Ss.
Recognize the full range of elements that
need to be changed and focus on the
ones that will have the greatest effects.
All seven variables are interconnected- to
make progress in one, adjustments need
to be made in others also.
No natural starting point for a change it
is decided by diagnosis of the alignment
of the organization.

Managing Human
Resources
Session 11

Dominance of the
Largest Transnational
Corporations

Three Top 10 Rankings

How Transnational is a
Corporation?
Corporations vary in range of
international dimensions
Ratio of domestic to foreign operations
The number of foreign countries entered
The size of foreign direct investment
The geographic span of operations
The extent of global integration in the
production chain
The extent of national diversity among
shareholders, employees, managers, and
directors

How Transnational is a
Corporation?
Transnationality index (TNI): The
average of three ratios: foreign
assets to total assets, foreign sales
to total sales, and foreign
employment to total employment

Calculating the Transnationality Index

(TNI) for General Electric and Philips
Electronics

The General Field of HR

Major Functions and Activities
Human resource planning
Staffing
Recruitment
Selection
Placement
Performance management
Training and development
Compensation (remuneration) and benefits
Industrial relations
Administration

Increasing Importance of Global

Human Resources Understanding
International
Mergers and
Acquisitions

Foreign
Human
Resources

Importance of
Global Human
Resources
Management

Market
Access
Opportunitie
s

Global
Competition

Key Issues in
International HRM

1. Worldwide Human
Resources Planning

Recruiting and Selection

Expatriate orientation and
training
Repatriation
Performance appraisal

2. Compensation

Dealing with inflation and

unexpected changes in
exchange rates
Providing sufficient pay to keep
individuals
Should company pay hardship
allowance?
Dissatisfaction with cost of
living allowances

3. Housing (Complex problems

at home and overseas)

4. Benefits Planning

Developing equity among

employees
Several plans necessary for
different categories of
personnel

5. Taxation (Proliferation of
new laws)
6. Communication of HR
Policies and Programs
Worldwide

Treat communication as a
continuous process
Face-to-Face contact
frequently
Make policy manuals brief and
simple
Be sensitive to needs of
receiver

What does IHRM add into the

Traditional Framework of
HRM?

Types of employees

Within and cross-cultural workforce diversity

Coordination
Communication

Human resource activities

Procurement
Allocation
Utilization of human resources

Nation/country categories where firms expand

and operate
Host country
Parent country
Third country

Differences between
Domestic HRM and IHRM
More HR activities
The need for a broader perspective
More involvement in employees
personal lives
Changes in emphasis as the workforce
mix of expatriates and locals varies
Risk exposure
Broader external influences

More HR Activities
International
taxation
relocation and orientation
expatriate administrative services
host government relations
language translation services

The Need for a Broader

Perspective
administering programs that are
equitable for more than one group.

More Involvement in Employees

Personal Lives
Ensure expatriates understand
housing arrangements
healthcare
compensation (cost-of-living
allowances, premiums, taxes)
visa requirements
schooling

Risk Exposure

expatriate failure
direct costs
indirect costs
militant activities
emergency evacuation

Broader External Influences

government
economy
labour standards and costs
taxation
health and safety
laws, compliance regulations, codes
of conduct

International Business
Strategies
Multilocal
Decentralized
Collection of independently operating
organizations

Export Market
Parent company maintains centralized control

Global approach
Hybrid combination of multilocal and export

Domestic vs.
International HR
Basic function and objective remains the same:
procurement, allocation, and utilization of
people.
Primary difference between IHR and domestic
HR lies in the complexity of operating in
different countries with different cultures and
laws.
Degree of complexity depends on:
Extent of cultural diversity
Approach taken to multinational entry
Top management attitudes (parochialism)

Questions for HR
professionals
Do we have a strategy for becoming an international
firm?
What type of managers will we need to be
successful?
How can I find out about the way that HRM is
conducted in other countries (laws, trade unions,
labor market).
What will be the impact of cultural norms on our HR
policies.
How will we choose whether to send expatriates or
use local employees.
How do we move people to different locations
How do we manage transfer of knowledge across
borders

International HR
Strategies
Ethnocentric
Centralized HR
Managed by Parent Country Nationals (PCNs)
Pay based on local market for employees; home
country for PCNs
Training aimed at KSAs to perform the job

Polycentric

Decentralized HR
Managed by Home Country Nationals (HCNs)
Pay based on local market
Training given added importance

International HR
Strategies
Geocentric
Global workforce deployed throughout the
world
Positions filled by most qualified regardless
of nationality: HCNs, PCNs, or TCNs,
Compensation based on value-added
Training and development emphasized

Regiocentric

Whirlpools Globalization
Where to go among alternative markets?

$23/hr in the U.S. including the benefits

$3/hr in Mexico
$1/hr in China
$32/hr in Germany

Mode of entry?
Acquisition of the major domestic appliances unit
of Phillips N.V. for more than $1 billion in 1991

Whirlpools total employees today:

23,000 in the U.S.
45,000 overseas

Types of international
work

Expatriates

An employee sent by his/her company in one country

to work in a different country.

Global team project

Bringing together employees from different locations
to complete a specific team project.

Short-term assignments
Sending employees on assignments, such as a threemonth assignment, to a foreign location.

Virtual assignment.
Assignments requiring employees in different locations
to use information technology to communicate on job
projects and tasks.

What is an expatriate?
An employee who is working and
temporarily residing in a foreign
country
Some firms prefer to use the term
international assignees
Expatriates are PCNs from the parent
country operations, TCNs transferred to
either HQ or another subsidiary, and HCNs
transferred into the parent country

Global flow of human resources

A Model of IHRM

Source: Adapted from P.V. Morgan, International human resource management: Fact or fiction?, Personnel Administrator, 31(9),
1986, p.44.

Types of employees in an
MNE
Parent-country nationals (PCNs)
Employees who were born and live in a
parent country.
A parent (or home) country: the country in which
a companys corporate headquarters is located.

Host-country nationals (HCNs)

Employees born and raised in a host
country.
Host country: a country in which the MNE seeks
to locate or has already located a facility.

Third-country nationals (TCNs)

Employees born in a country other than a
parent or host country.

International Assignments
Create Expatriates

Advantages of Different Sources

for Overseas Managers
Host Country
Less cost
Preference of
host country
government
Knowledge of
environment
Language
facility

Home
Country
Talent available
within company
Greater control
Company
experience
Mobility
Experience
provided to
corporate
executives

Third
Country
Broad
experience
International
outlook
Multi-lingualism

Parent-country
Nationals
Advantages
Control and co-ordination
by HQ is maintained.
Promising managers get
international experience.
PCNs may be the best
people for the job.
Assurance that the
subsidiary will comply
with company objectives
policies etc.

Disadvantages
HCNs promotion
opportunities are limited.
Adaptation to host
country may take a long
time.
PCNs may impose an
inappropriate HQ style.
Compensation
differences between
PCNs and HCNs may
cause problems.

Host-country Nationals
Advantages
No problems with language
and culture.
Reduced hiring costs.
No work permits required.
Continuity of management
improves since HCNs stay
longer in positions.
Govt. policy may force hiring
of HCNs.
Promotional opportunities
not limited - so higher morale
among HCNs.

Disadvantages
HQ may have less control
over operations.
HCNs may still have limited
career opportunities outside
the subsidiary.
Hiring HCNs limits
opportunities for PCNs to
gain overseas experience.
Hiring HCNs may encourage
a federation of disintegrated
national units rather than
one integrated global unit.

Third-country Nationals
Advantages
Salary and compensation
may be lower than for
PCNs.
May be more familiar with
host country than the
PCNs.

Disadvantages
Transfers must consider
national animosities.
Host government may
resent TCNs as much
as PCNs.
TCNs may not comply
with HQ style of
management.
TCNs may not want to
return after assignment.

Why Do International
Managers Fail?

Does it change the essence of HR?

Culture Shock
Cultural arrogance (Parochialism)
Cultural Insensitivity
The Key success factor?
Cultural adaptability

CULTURAL
ENVIRONMENT
Language
Communication styles
Nonverbal
Direct vs. Indirect
Greeting: physical and
verbal

Space
Structural & interpersonal

Time orientation
Punctuality
Monochronic vs. Polychronic

Religion
Respect/formality
Consensus seeking

Composition of the Cultural

Environment of International
Business
Language
Values and Attitudes
Religion
spoken
written language
official language
linguistic pluralism
language hierarchy
international
languages
mass media

sacred objects
philosophical
systems
beliefs & norms
prayer
taboos
holidays
rituals

Law
common law
code law
foreign law
home country law
antitrust policy
international law
regulation
Politics
nationalism
sovereignty
imperialism
power
national interests
ideologies
political risk

Technology and
Material Culture
transportation
energy systems
tools & objects
communications
urbanization
science
invention

Toward:
time
achievement
work
wealth
change
scientific method
risk-taking
Education
formal education
vocational training
primary education
secondary
education
higher education
literacy level
human resources
planning
Social Organization

kinship
social institutions
authority structures
interest groups
social mobility
social stratification
status systems

HOFSTEDES
DIMENSIONS

Individualism vs. Collectivism

Power Distance
Uncertainty Avoidance
Masculinity vs. femininity
Long-term orientation

Major Reasons for Expatriate

Failures in Foreign Environment
Inability of the managers spouse to adjust to
a different cultural environment.
The managers inability to adapt to a different
physical or cultural environment. Other
family-related problems.
The managers personality or emotional
immaturity.
The managers inability to cope with the
responsibilities posed by the overseas work.
The managers lack of technical competence.
The managers lack of motivation to work
overseas.

Traits expected from an

International Expatriate

empathy
flexibility
patience
openness
reliability
confidence
emotional stability
communication skills
tolerance for
differences
humor
resourcefulness
sensitivity
teaching skills

ability to handle alcohol

curiosity
positive regard for others
acceptability of assignment
desire to be abroad
non ethnocentrism
high motivation
courtesy
adaptability
tolerance for ambiguity
language skills
interest in host culture

International
Compensation
If compensation is high then
problems may be encountered on
return to head office.
If compensation is not adequate
then there may be no incentive to
go for the international
assignment given the hardships
that are usually involved in doing
so.

International
Compensation
Expatriation Premium
Cost of Living Allowance
Swamp Pay Allowance
Shelter Allowance
Educational Allowance
Home Leave

Repatriation
Virtually all repatriated personnel
experienced some personal difficulty
in reintegrating on return home. The
main complaints were loss of status
loss of autonomy lack of recognition
of the value of the experience and
lack of career direction.

Repatriation: Reverse
Culture-shock

JOB RELATED FACTORS

Out of sight out of
mind
International
experience devalued
Loss of status and pay
relatively peaking
Changes in the HQ

SOCIAL FACTORS
Expat assignment different type of social
interaction (going from
a very close expat
community to where
everyone is very busy
with their own lives)
Problems of spouse
returning to the
workforce
Lack of peer support for
teenagers

Flowchart of the Selection-Decision

Process
Start the Selection Process

Can the position be filled by a local national?

Select local national and subject him/her to

training basically aimed at improving technical
and managerial skills.

YE
S

NO
Identify degree of interaction required with
local community using a 7- or 9- point scale,
ranging from low to high, indicate the degree
of interaction with local community required
for successful performance on the job.

Emphasis* on tasks variables.

LOW

Second but by no means unimportant question

is to ask whether the individual is willing to
serve abroad.

HIGH
Is candidate willing?

NO
Probably not suitable for
position

VERY SIMILAR
Emphasis* on task variables

NO
YE
S Probably not suitable for
YE
S

Identify degree of similarity /

dissimilarity between cultures
using a 7- or 9-point scale,
ranging from similar to highly
diverse, indicate the magnitude
of differences between the two
cultures,

HIGHLY

DIVERSE

Emphasis* on relational
abilities factor.
Start orientation
(moderate to high rigor)

Family situation factor must

also be taken into consideration.
Start orientation (most
rigorous)

position

Start orientation
(moderate to high rigor)

Preparing for an International

Assignment

Study the following subjects:

Social and business etiquette.

History and folklore.
Current affairs, including relations between the country and
the United States.
The cultures values and priorities.
Geography, especially the cities.
Sources of pride: artists, musicians, novelists, sports, great
achievements of the culture, including things to see and do.
Religion and the role of religion in daily life.
Political structure and current players.
Practical matters such as currency, transportation, time
zones, hours of business.
The language.

Recruitment

Government Regulations
Work Permits Universally Required
Recruitment of Locals Varies
Guest Workers
Role of Church, Family, Politics

Selection

Merit Versus Best Family

Family Ties
Social Standing
Origin
Industrialized versus Less
Developed

Training Issues

Local Resources
Less Technical Capabilities
Apprenticeship Strengths in Europe
Management Development (US
Leader)
Language (English Need)

Compensation
Host Country Employees
Production Standard or Time or
Combination
Benefits (often higher than U.S.)
Profit Sharing (may be Required)

Managers
Narrowing of Salary Gap with USA

Expatriate Compensation

Base Pay
Differentials
Incentives
Company Assistance
Cost: 3-4 times USA Rate

Compensation of Expatriate
Managers
To be effective, a compensation
program must:

1. Provide an incentive to leave the united states.

2. Maintain an American standard of living.
3. Facilitate reentry into the united states.
4. Provide for the education of children.
5. Maintain relationships with family, friends, and
business associates.

Compensation Elements of an
Expatriate

Programs used by most MNCs have four elements:

Base pay equal to pay of domestic counterparts in
comparably evaluated jobs.
Differentials to offset the higher costs of overseas goods,
services, and housing.
Incentives to compensate the person for separation from
family, friends, and domestic support systems.
Company assistance programs to cover added costs such
as moving and storage costs, automobile, and education
expenses.

The Price of an Expatriate

An employers typical first-year expenses of sending a U.S.
executive abroad.

Direct Compensation Costs

Base Salary

100%

Foreign-service premium

15%

Goods and services differential

20%

Housing costs

20-40%

Transfer Costs
Relocation allowance

5%

Air fare

2%

Moving household goods

25%

Other Costs
Company Car

15%

Schooling (two children)

20%

Annual home leave (four people)

Personal income tax abroad
Total = Salary plus

5%
50%
187-207%