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Political Risk

VIEWS: 114 PAGES: 68

  • pg 1
									What is different about operating
             abroad?
        Culture and Politics
   Operating Margins for 147 of the Fortune Global 500

12 %




 8%




 4%                                              Domestic
                                                 Foreign



 0%
   1990                 1995              2001


       Source: Gestrin, OECD
What is different about operating
             abroad?
• Geographic distance
• Different economic conditions and
  currency
• Different language, culture, and
  institutions
• Different governments
       Geographic distance

• Increases transport costs
  Perishability
  Services
• Increases management costs
     Economic conditions and
           currency
• Level of economic development
  – Income inequality
• Currency
  – Foreign exchange risk if currency is not at
    Purchasing Power Parity
                     Big Mac Index of Currencies

       % Undervalued Relative to US $         % Overvalued Relative to US $



Switzerland

        UK

  Euro area

South Korea

     Japan

  Singapore

      China

                 -60 -50 -40 -30 -20 -10 0   10 20 30 40 50 60 70
                                         Source: Economist, based on July 2008 prices
   Real trade-weighted dollar exchange rate
   ppp=100
                        130


                        120


                        110


                        100


                        90


                        80


                        70


                        60


                        50
                              1975   77   79   81   83   85   87   89   91


Source: Goldman Sachs
      Why persistent deviations from PPP?


• PPP assumes arbitrage equalizes exchange
  rates
• Barriers to arbitrage prevent convergence
   – Trade barriers, transport costs, tax differences
   – Untraded inputs
• Price of untraded inputs slow to converge
  Hence exchange rates can deviate from PPP
  for long periods
• Most efficient way to hedge against persistent
  PPP deviations is local
  production/procurement
 Culture and Politics
     Home Country             Host Country


                                      Local Firms

                                              2


                                        Subsidiary   1   Subsidiary
     Headquarters                                                               Customers
                       1                manager          employees          4


                                             3                          2

                                      Government                            Press



1.   Communication of goals and directives/interpretation of behavior
2.   Communication/Negotiation
3.   Communication/negotiation
4.   Marketing mix adaptation
 Cost of foreignness: the dumb
      foreigner syndrome
• Management
• Politics
• Marketing and communication
• Business takes place within societal rules
• These rules determine how the game is
  played and who wins and loses
• Rules can be explicit (laws) or implicit
  (customs)
• Rules both affect and are affected by
  business
• This is true both at home and abroad, but
  foreigners are at a disadvantage because
  they do not know, cannot impact, and often
  cannot accept
The social group in which rules are
 enforced can vary
  – family
  – Tribe
  – Region/province
  – country
  – Multicountry grouping (EU)
  – world
The rules of the game determine..

• Employer-employee relationships
  (management costs)
• Firm-firm relationships
• Firm-government relationships
• Firm-customer relationships
         We will now look at…
• Cultural differences and their impact on
  intra and inter-organizational relationships
• Cultural and institutional differences and
  their impact on relationships with non-
  business actors (political risk)
• Cultural and environmental differences and
  their impact on relationships with
  consumers (product and service adaptation)
 Different Language and Culture
• Language
  – Spoken and silent
  – Impact on international business
• Culture
  – Dimensions of culture
  – Impact on international business
         Language
• Spoken and written language
• Silent language
Communication across
    languages
• Perceptual gaps
• Encoding/Decoding gaps
   (translation errors)
           Seller in country A                                   Buyer in country B


Seller’s field of experience                             Buyer’s field of
                                                         experience

  Sender Encoder                                                 Decoder     Receiver
                                   Message


                                   Medium
 Culture       Choice of words               Choice of words                 Culture
                                             Choice of symbols
               Choice of symbols
                                             Understanding
               Meaning
              Silent language

•   Silence
•   Color
•   Time
•   Space
•   Things
                                                       Meanings of color
                                        China                         Korea            Japan             USA



Blue                          High quality                   Powerful         Sincere **       Dependable **
                                                             High quality     Trustworthy **   High quality *
                                                             Adventurous      High quality *   Sincere
                                                             Sincere          Dependable       Trustworthy
                                                             Trustworthy                       Expensive
                                                                                               Powerful


Black                         Powerful **                    Powerful *       Powerful *       Powerful **
                              Expensive                      Expensive        Expensive        Expensive
                              High quality                                    Dependable
                              Dependable
                              Trustworthy
Red                           Happy **                       Love **          Love **          Love **
                              Love *                         Good-tasting     Good-tasting     Adventurous
                              Adventurous *                  Adventurous      Happy            Happy
                                                                              Adventurous      Good-tasting
                                                                                               Inexpensive
Yellow                        Happy                          Happy **         Happy **         Happy
                              Pure **                        Pure             Pure*            Pure
                              Progressive*                   Good-tasting     Good-tasting     Good-tasting
                                                             Dependable
Green                         Pure                           Pure 纯洁*         Pure             Good-tasting
                              Trustworthy                    Adventurous      Good-tasting     Adventurous
                              Dependable                     Sincere          Adventurous
                              Sincere                        Trustworthy
Grey                          Inexpensive *                                   Inexpensive      Expensive
                                                                                               High quality
                                                                                               Dependable
** 50% or more of respondents made this association.
* 30-49% of respondents made this association.
  All others, 20-29% of respondents made this association.
 Source: Jacobs/Keown/Worthley/Ghymn (1991), p. 24.
      Language impacts…

• management
 – Information loss
 – “Language bias”
• marketing
       What is Culture?
• Learned
• Integrated
• Shared
            Stereotypes

• Useful as a starting point
• National cultural traits are
  normally distributed
                 Stereotyping

                  Americans     French




Direct, Honest                           Indirect
Rude                                     Tactful
A Model of Culture




      - explicit
 Hofstede’s Cultural Dimensions
• Surveyed 116,000 employees from 70
  countries
• Highlighted four dimensions of culture
  –   Power distance
  –   Uncertainty avoidance
  –   Individualism
  –   Masculinity/femininity
                  Power distance
     the extent to which less powerful members of institutions and
        organizations accept that power is distributed unequally

     High power distance                      Low power distance

   Managers make decisions           Managers consult with subordinates
       autocratically
                                        Close supervision is resented by
Close supervision is appreciated                 subordinates
        by subordinates
                                      Employees disagree with their boss

Employees fear to disagree with          Managers can seek help from
         their boss                             employees

 Employees put high value on
        conformity
                    Individualism
Tendency of people to look after themselves and their immediate family
                                  only

      High Individualism                   Low Individualism

 Everybody is expected to take        Extended families and clans
    care of himself/herself          protect individuals in exchange
                                                for loyalty
  Everyone is responsible for
         his/her fate                   Belief in group decisions

 Emotional independence of the        Emotional dependence or the
individual from the organization     individual on the organization

Emphasis on individual initiative       Emphasis to belonging to
      and achievement                       organizations
          Masculinity/Feminity
A masculine society is one where the dominant values in society are
                   success, money, and things



          Masculinity                        Feminity

   Great importance put on              Importance put on
     earnings, recognition,       relationships and cooperation
  advancement, and challenge
          Uncertainty Avoidance
    Extent to which people feel threatened by ambiguous situations


  High Uncertainty Avoidance           Low Uncertainty Avoidance

  Concern with security in life          Willingness to take risks

Uncertainty is a threat that must      Uncertainty more accepted
           be fought

   Belief in experts and their      Belief in generalist and common
           knowledge                              sense

   Strong need for consensus           More acceptance of dissent
               Values of Hofstede’s Dimensions


              Power      Individualism   Masculinity   Uncertainty
              Distance                                 Avoidance
Brazil            69          38              49            76
China             58          17              45            69
Germany           35          67              66            65
Japan             54          46              95            92
Mexico            81          30              69            82
Netherlands       38          80              14            53
Norway            31          69              8             50
U.K.              35          89              66            35
U.S.              40          91              62            46
                                              Masculinity-Femininity and Uncertainty Avoidance (for 50 countries and 3 regions)
                                      4       Weak uncertainty                                                                                                               Weak uncertainty
                                      7       avoidance
                                                                                                                 SIN
                                                                                                                                                                                   avoidance
                                     10       Feminine                                                                                                                             Masculine
                                     13                                                                                                             JAM
                                     16
                                     19
                                     22                            DEN
                                     25
                                     28            SWE                                                                            HOK
                                     31
                                     34                                                                                                             IRE
                                                                                                                   MAL
                                     37
Uncertainty Avoidance Index (UAI)




                                                                                                                                         GBR
                                     40                                                                                       IND
                                     43                                                                                                       PHI
                                     46                                                              IDO         CAN        NZL         USA
                                     49                NOR                                                                              SAF
                                     52                          NET
                                                                                                     EAF
                                                                                                           WAF                    AUL
                                     55
                                     58                                        FIN                   IRA
                                                                                                                                                      SWI
                                     61
                                     64                                                  THA
                                                                                                                                                GER
                                     67                                                                              ARA                EQA
                                                                                                           TAI
                                     70                                                                            PAK                                            AUT
                                     73                                                                                                             ITA

                                     76                                                                           BRA                                       VEN
                                     79                                                                                                       COL
                                                                                                             ISR
                                     82                                                           SPA
                                                                                                                                                     MEX
                                                                                               PER
                                     85                                  COS     CHL
                                                                                         KOR          TUR                     ARG
                                     88                                                        FRA PAN
                                     91                                                                                                                                        JPN
                                     94                                                            SAL                      BEL
                                     97
                                                                                               URU
                                    100
                                                                                             GUA
                                    103       Strong uncertainty                       POR                                                                                   Strong uncertainty
                                    106       avoidance                                                                                                                              avoidance
                                    109       Feminine                                                                                                                               Masculine
                                    112                                                                                           GRE
                                    115
                                          0                        18                   36                             54                            72                 90                  108
                                                                                                   Masculinity Index (MAS)
                                              Power Distance and Uncertainty Avoidance                                      (for over 50 countries and 3 regions)
                                     4
                                              Small power distance Strong                                                                                              Large power distance
                                              uncertainty avoidance                                                                        SIN                    Week uncertainty avoidance
                                              (vintage market)
                                    12                                                                  JAM
                                                                                                                                                                                     (family)



                                    20
                                                                      DEN

                                    28                                                SWE                                            HOK
Uncertainty Avoidance Index (UAI)




                                    36                                            IRE                                                                                                MAL
                                                                                        GBR
                                                                                                                                                 IND
                                    44                                                                                                                                  PHI
                                                                      NZL               CAN    USA                                         IDO
                                                                                                         SAF
                                    52                                       NOR AUL                                           EAF
                                                                                               NET                                               WAF
                                                                                         SWI                           IRA
                                    60                                            FIN
                                                                                             GER                               THA           EQA
                                    68                                                                    PAK         TAI                       ARA
                                                             AUT

                                    76                                                                        ITA                    BRA               VEN
                                                               ISR                                                           COL
                                                                                                                     KOR   CHL                         MEX
                                    84                                                                                 PER
                                                                                             COS              ARG
                                                                                                                     SPA FRA  TUR                                      PAN
                                    92                                                                              JPN
                                                                                                                        BEL SAL

                                    100                                                                                     URU
                                                                                                                                                                       GUA
                                                                                                                              POR
                                              Small power distance
                                    108       Strong uncertainty                                                                                                     Large power distance
                                              avoidance Feminine                                                                                              Strong uncertainty avoidance
                                              (well-oiled machine)                                                          GRE                                        (pyramid of people)


                                          0      5     10     15     20     25   30     35    40   45    50     55   60      65   70   75    80        85    90     95 100 105 110
                                                                                              Power Distance Index (PDI)
                                     Power Distance and Individualism-Collectivism (for 50 countries and 3 regions)
                             4
                             6       Small power distance                                                                    EQA              GUA             Large power distance
                             8       Low individualism                                                                                                            Low individualism
                            10
                            12                                                                                         IDO   VEN              PAN
                                                                                                                COL
                            14                                                                       PAK PER
                                                                              COS
                            16                                                                    TAI
                            18                                                                           KOR SAL     SIN
                            20                                                                         THA
                            22                                                                                           WAF
                                                                                                           CHL
                            24
                                                                                                                 HOK
                            26                                                                        POR   EAF                                             MAL
                            28
                            30                                                                                                     MEX
                            32                                                                                                                 PHI
                            34                                                                            URU
                                                                                                           GRE
Individualism Index (IDV)




                            36
                            38                                                                                         BRA         ARA
                                                                                          JAM                        TUR
                            40
                                                                                                         IRA
                            42
                            44
                            46                                                        ARG          JPN
                            48                                                                                               IND
                            50
                            52                                                                      SPA
                            54              ISR
                            56           AUT
                            58
                            60
                            62
                            64
                                                                        FIN                 SAF
                            66                                          GER
                                                                  NOR
                            68
                            70                              IRE       SWI
                                                                                                               FRA
                            72                                      SWE
                            74                       DEN                                    ITA
                                                                                                          BEL
                            76
                            78                       NZL
                                                                          CAN
                            80                                                  NET
                            82
                            84
                            86
                                                                        GBR                                                                          Large power distance
                            88
                            90       Small power distance                                                                                               High individualism
                                     High individualism                 AUL         USA
                            92
                            94
                                 5                    22                      39                  56                   73                90                107
                                                                                      Power Distance Index (PDI)
High-context culture




       Japanese
         Arab
        Greek
       Spanish
        Italian
       English
        French
       American
     Scandinavian
       German
     German-Swiss




Low-context cultures
       Impacts of culture

• Cultural traits
• Differences between cultural
  traits: cultural distance
 Many people lack cultural self-
         awareness
• “We are the world”
  – Middle Kingdom
  – The World (World Series)
• Everybody is like us (or should be)!
• Just be sincere and it will show through
Cultures have the advantages of
  their disadvantages and the
     disadvantages of their
           advantages
Cultural frictions are a major, but
  underestimated, management
problem in international business
They greatly impair the implementation of
 global strategies
  – global marketing coordination
  – technology transfer
  – Joint ventures and mergers and acquisitions
• Unclear that cultures are converging
• Management practices are not
  universal
  – Accounting
  – Motivation techniques
  – Decision making
Impact of cultural differences on
          management
• Authority and delegation
• Communication
• Job scope
      Managers in Latin American affiliates of
       MNEs (as percent of total managers)

                 US MNEs   European   Japanese
                           MNEs       MNEs
Parent-Country      44         78          83
Nationals

Host-Country        47         16          17
Nationals

Third-Country        9         5
Nationals
            HRM

• Recruitment
• Socialization
• Performance appraisal
• Compensation and rewards
       Executive pay*
       1996, $000s

                      Variable compensation
                      Fixed compensation
800



600



400



200



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  Source: Towers Perrin
                                                                             *Total remuneration for chief executive officer
   Firm-to-firm relationships

• Legalistic or social
• Personal or impersonal
 Adaptation problem is harder with
    values than with customs
• Customs are explicit and easier to imitate
• Values are implicit and must be inferred
• Ignorance of local values create the most
  problems
  – Federal Express in Germany
  – Mitsubishi and Toyota in US
Coping with cultural differences
•   Try to make sense of it
•   Sleep over it
•   Question friends and colleagues
•   It’s not all about you!
•   Keep your sense of humor
  The U-curve of cross-cultural adjustment
                           Degree of Adjustment

                                 7
                               6,5
                                 6                                               Mastery

                               5,5 Honeymoon
                                 5
                               4,5
                                 4                                Adjustment

                               3,5
                                 3
                               2,5
                                 2
                               1,5
                                 1           Culture Shock

                               0,5
                                              4


                                                          9

                                                                       4


                                                                                    8
                                           3-


                                                        6-

                                                                     -2


                                                                                 -4
                                                                  13


                                                           Time in Months      46
SOURCE:
Black, J.S. & M. Mendenhall. 1991.”The U-Curve adjustment hypothesis revisited: A review and theoretical framework.”
Journal of International Business Studies, Vol. 22 second quarter, pp. 225-247.
 Culture and Politics
     Home Country             Host Country


                                      Local Firms

                                              2


                                        Subsidiary   1   Subsidiary
     Headquarters                                                               Customers
                       1                manager          employees          4


                                             3                          2

                                      Government                            Press



1.   Communication of goals and directives/interpretation of behavior
2.   Communication/Negotiation
3.   Communication/negotiation
4.   Marketing mix adaptation
          Governments…

• Buy and subsidize or penalize
• Regulate (competition,
  employment, pollution)
• Set standards (technical, health)
• Set tariff and non-tariff barriers
    Porter’s strategic framework

• Firms compete on technology,
  product differentiation, costs, not
  politics
• The rules of the game are
  exogenous and given
            Political strategies
• Tariffs and quotas: US response to Japanese
  competition
• Subsidies: ADM and gasohol; subsidies for
  foreign investment
• Government procurement: MDD in China; M-K
  and LA metro
• National Security: DP World, Lenovo and IBM
  PC, CNOOC and Unocal
• Environmental regulations: Venezuelan gasoline
           Political strategies

•   Know the rules of the game
•   Impact the rules of the game
•   obtain access
•   exert influence
      • knowledge
      • offer support (money, votes, etc.)
• Political rules of the game differ across
  countries in form and/or in content
• centralized vs. federal
• regulatory vs. incitative (pollution
  control)
• are often implicit and difficult to
  fathom
• things that “are not done”
         Foreigners

• do not know
• cannot do
• have no impact
    Foreigners do not know

• Do not speak language
• do not know local ways
• have fewer contacts
                   0
                       10
                            20
                                 30
                                      40
                                           50
                                                60
        Finland
United Kingdom
      Denmark
       Sweden
    Hong Kong
          USA
      Australia
       Canada
     Singapore
   Netherlands
      Germany
         Japan
        Taiwan
                                                     Opacity Index, 2004




         Korea
        France
         Brazil
        Poland
           Italy
        Mexico
        Russia
          India
        Nigeria
         China
    Philippines
    Venezuela
      Lebanon
     Indonesia
Table: The Opacity Index

            Country                      Category               OPA
                             COR   LEG    ENF       ACC   REG
            Finland           3    11      23       17     9    13
            United Kingdom   20     3      25       33    13    19
            Denmark           6    15      21       33    19    19
            Hong Kong        26    12      14       33    15    20
            USA              28    19      27       20    10    21
            Australia        19    16      26       33    10    21
            Canada           26    17      37       20    16    23
            Singapore        15    19      25       50    10    24
            Germany          28    14      33       17    32    25
            Japan            38    24      31       22    22    28
            Taiwan           47    33      20       40    28    34
            Korea            61    35      22       30    37    37
            Brazil           47    48      32       40    35    40
            Poland           63    35      47       40    19    41
            Italy            52    32      45       63    24    43
            Mexico           65    60      35       33    25    44
            Russia           78    44      39       40    31    46
            India            74    44      49       30    46    48
            Nigeria          80    65      48        0    50    49
            China            74    39      39       56    43    50
            Philippines      75    56      52       33    36    50
            Indonesia        82    54      90       22    49    59
        Foreigners cannot do
Constrained by home-country rules and public
 opinion
  – Corruption
  – Embargoes
  – Working conditions
       Foreigners have no impact

•   Foreigners are outsiders
•   Foreigners have fewer contacts
•   are outside the network of reciprocity
•   Foreigners carry their home flag (+ or -)
•   US firms in Arab countries
 Firms are exposed to political risk

• In all countries and by all regimes
• For all types of entry modes
• Through many forms of risk
                                       - Import restrictions?
                                       - Local content
                                       requirements?
                                       - Taxation?
                 - Nationalization?    - Price control?
                 - Intervention?       - Foreign staff
                 - Requisition?           limits?          - Restrictions on
- Revolution?    - Coerced sale?       - Labor codes         repatriation of
- Subversion?    - Coerced contract       /strikes?          dividends, royalties,
- Turmoil?         renegotiation?      - Export              interest, fees, or
- External       - Contract               requirements? capital?
  aggression?      revocation?         - Discrimination - Exchange rates?



  General                                Operations
                no     Ownership/ no                   no     Transfer      no
                                           Risk                                      GO
  Instability
                       Control         (Expropriation)         Risk
     Risk                                  Risk
  Chaotic?             Too high?       Unacceptable       Unacceptable
                yes                yes effects on     yes effects on  yes
                                       local-currency     Dollar ROI?
                                       ROI?

                STOP               STOP               STOP                STOP
      Two important points:

• Political risk is almost always
  micro
• Political risk is not exogenous
       Political risk is micro

• Limited value of political risk indices
  (Euromoney, Institutional investor)
  – Generally export receipts = solvency risk
              What to do?

•   Consider the political dimension
•   Monitor and stay informed
•   Become an insider
•   Protect investments
• Consider the political
  dimension
  –P&G and Ariel
  –Cargill and Indian salt mine
• Monitor and stay informed
  – Both internal and external sources
           Become an insider
• Take joint venture partners
• Hire local managers
• Enlist local stakeholders
  – directors
  – banks
• PR campaigns
  – Toyota in US, IBM in France
           Protect investments
•   Structure the investment
•   sequencing
•   bring in allies
•   project finance
•   set up dependence
•   Insure

								
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