Anda di halaman 1dari 10

Introduction The globalisation of business and commerce has become an increasingly significant reality worldwide: in 2000, the global

trade in goods and services reached 25% of world GDP (Govidarajan & Gupta 2000), while in terms of manufactured goods, international trade has multiplied by more than 100 times since 1955 (Schifferes 2007). The rise of globalisation posits a number of important challenges to a business seeking international presence. Numerous strategic aspects must be taken into account prior to commitment at an international level, and afterwards. Constant flexibility is required to adapt to changing patterns at local, regional and international levels. This research paper seeks to identify the main issues affecting international businesses, including accounting practices, cultural issues, strategic choices and political risk. 1. Globalisation in the International Business Environment Definitions of globalisation refer to it as growing economic interdependence among countries as reflected in increasing cross-border flows of three types of commodities: goods and services, capital, and knowhow (Govidarajan & Gupta 2000, p.275), or as the closer integration of the countries and peoples of the world ...brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and people across borders" (Stiglitz 2002, p. 9). Globalisation is usually divided into globalisation of markets and globalisation of production (Hill 2005). According to Levitt (1983), market globalisation implies a standardisation of products across the world as national barriers become less and less relevant. Nevertheless, this type of globalisation appears less of a reality as national markets still present significant differences, marketing strategies continue to have country-specific traits and customer needs differ across countries (Douglas & Wind 1987). Instead, production globalisation appears more of a reality. Globalisation of production refers to the sourcing of goods and services to take advantage of a difference in the factors of production (land, labour, capital). Globalisation of production continues to suffer from trade barriers, costs of transportation, economic, social and political risks and others (Hill 2005). While trade barriers have been significantly lowered since World War II, formal and informal barriers continue to survive. Globalisation has significantly impacted on the business environment, prompting the development of the multi-national enterprise (MNE). The governance of the MNE is recognised as being different than that of a national company. For instance, Bartlett and Ghoshal (1998) have introduced the influential concept of the transnational model, which allows the transfer of knowledge developed and jointly shared on a worldwide basis. In order to create a successful global business, Bengley and Boyd (2003) have underlined the importance of a global mindset, defined as the ability to develop and interpret criteria for business performance that are not dependent on the

assumptions of a single country, culture or context. Corporate management must not automatically assume that the culture of the home office is equally applicable elsewhere (Bradley 2005). An important new development in the international business arena has been the rise of mini-multinationals small and medium size enterprises that do business on a global basis (Hill 2005). 2. Strategic Choices for International Business Beginning with the pioneering work of Perlmutter (1969), numerous scholars have emphasised the importance of adopting a global strategic approach to business (i.e. Hamel and Prahalad 1985, Yip 1989). However, the optimal strategy for tackling global markets has been a matter of dispute. Often scholars propose an evolutionary view of strategy, which goes from a simple international strategy to sophisticated transnational solutions (Hill 2005). Under the international strategy framework, international business is not a core interest of the firm. The company simply decides to go international and often sets up an international division that deals with the non-domestic business of the company. As the international business develops, the company may decide to source some components from overseas, and to standardise some of its products. As Briscoe and Schuler (2004) point out, when a certain critical mass develops, the company must choose other, more complex strategies of tackling the international market. As a companys international presence increases, often a multi-domestic or localisation strategy develops. Under this strategy, the company sets up subsidiaries in several countries, which tend to operate independently from each other and often relatively independently from the headquarters (Briscoe & Schuler 2004). This type of strategy emphasises local responsiveness, but this is often achieved at the expense of costs and possibly quality. When MNEs grow in size, they could reach a level where global standardisation strategy may be a strategic choice. The global strategy was promoted by Levitt (1983), who considered that globalisation naturally results in uniformity of consumer taste. In this framework, a company could achieve significant economies of scale by producing the same standard product at a global level. In addition to the global strategy solution, many large MNEs with significant international presence may choose the transnational strategy approach. This was first introduced by Bartlett and Ghoshal (1998) and differs from the global strategy in that transnational companies tend to produce localised products that employ global expertise, technology and resources. In addition to overall strategic choices, a company seeking international business must consider the method of accessing international markets. At a very simple level, a company may choose to invest in foreign firms (Briscoe & Schuler 2004). A company could restrict itself to exportation of goods or to franchising, which is type of quality or brand export. In more involved strategies, a MNE may choose to establish

an equity joint venture with a local or global company, or to create a whole-owned subsidiary. 3. Culture and the Costs of Doing Business Culture is an elusive term that has received hundreds of definitions. Hofstedes (1984, p. 21) influential definition is that culture is the collective programming of the mind which distinguishes the members of one human group from another Hofstede (1984) identified the main dimensions of culture that affect work practices in different countries: Power distance, uncertainty avoidance, individualism vs. collectivism, masculinity vs. femininity, long vs. short-term orientation. In a national culture framework, large power distance can translate into potential corruptive practices. Takyi-Asiedu (1993) associated power distance to corruption in sub-Saharan Africa. Cohen, Pant and Sharp (1996) also found that high powerdistance culture people tend to view unethical practices as acceptable. On the other hand, Gray (1988) correlated high power distance with uniformity of financial and accounting practices, which may be more or less costly to a company depending on its manner of doing business. Uncertainty avoiding countries tend to have solid legal frameworks and strict rules of doing business (Pagell & Halperin 2001). In such countries, thorough auditing tends to be carried out to ascertain compliance with rules (Hill 2004). These countries tend to have uniform accounting procedures and low disclosure levels (Gray 1988). Coming from a different cultural perspective, an international business may find it costly to adapt to the national standards and rules of the country it wishes to do business in. Paradoxically, uncertainty avoidance can also translate into unethical practices as persons seek to secure a more certain result through corruption (Husted 1999). In terms of entry modes into the country, businesses may find that uncertainty avoidant countries favour solid frameworks such as established subsidiaries or local ownership, which are more costly and risky. Individualism vs. collectivism is an important aspect that influences the costs of business. For instance, Husted (1999) has found an important correlation between software piracy and individualism criterion. Collectivism has been associated with unethical behaviour and corruption (Hooper 1995). Masculinity vs. femininity also tends to influence business costs. For instance, high masculine cultures have been associated with unethical practices (Vitell et al 1993). Feminine cultures could result in higher secrecy and conservatism in accounting and finance (Salter & Niswander 1995). Apart from Hofstedes aspects, religion has an important impact on doing business. For instance, Hill (2005) noted that Islamic culture encourages private enterprise and the right to private property. This implies that doing business in Islamic culture may have reduced political risks, whose prevention can become costly.

4. The Impact of Political Risk Political risk was defined by Wells (1998) as the challenges faced by investors that result from some sort of government action, and sometimes inaction. Political risk implies negative business consequences due to the behaviour of governments and public sector organisations (Suder 2004). The most important political risk has been the threat of nationalisation (Brooks et al 2004). The extreme threat of nationalisation sometimes takes milder forms as when, in times of crisis, some governments resort to exchange rate controls. Another source of political risk are wars or civil strife. However, Jones (2001) observes that dramatic events such as wars, assassinations and sequestrations are rare in the international business arena. Another important political risk is represented by corruption practices (Hill 2005). For instance, a company may lose a contract because of a governments unethical dealings (Madura 2006). To mitigate this risk, Transparency International has created a corruption index that can be available to all interested (Jones 2001). Political risk can also translate in the change in tariff barriers, which make a company more or less competitive globally. Other political risks are more mundane and include, as Jones (2001) points out, government procurement policies, health and safety, environmental regulations, new standards, consumer protection policies or technology transfer. Hill (2005) also adds intellectual property rights as a political risk, since the legal framework varies from country to country. Customarily, the management of political risks has been divided into integrative and protective techniques (Brink 2004). Integrative techniques seek to integrate the company within the host society. Such measures include local sourcing and employment, ownership sharing with government or local firms; training of managers to ensure cultural sensitivity; cultivation of close ties to the government. The downside of integrative techniques is the risk of a MNE embedding itself too much into local culture and losing its worldwide optimisation (Gregory 1988) Protective techniques attempt to discourage government interference or to minimise the losses in case interference happens. A typical protective measure is political risk insurance (Brink 2004). Too many protective techniques can adversely affect companies as the government may identify it as a hostile entity (Gregory 1988). Generally, to minimise political risk, companies can respond through political behaviour such as lobbying the central government (Suder 2004). Another solution is to negotiate a better deal with the government; for instance, an investor can seek a reduction of tax levels in exchange for accommodating the government (Brink 2004). 5. International Trade Theory International Trade Theory dates back to Adam Smiths famous Wealth of Nations and David Ricardos comparative advantage model. In the early 20th century, trade

theory has achieved its classical form through the Heckscher-Ohlin (H-O) theory (Leamer 1995). According to the H-O model, relative factor endowments determine a countrys comparative advantage. Leontief (1956) found that empirically the H-O theory did not work in the case of the US, which imported capital-intensive products, even though it was a capital-rich country. This generated a long line of controversy as further researchers found arguments for and against the Leontief paradox. Empirical trade analysis has concluded that the traditional trade models must be adjusted to fit the trade data (Rivera-Batiz & Oliva 2003). Such modifications should include technology differentials, home biases in consumption, trade costs and distance and intermediate outputs. Trefler (1993) created a modified H-O model that accounted for a difference in technologies and home bias. Rivera-Batiz and Oliva (2003) maintain that, once such model modifications are introduced, the H-O model appears to hold fairly well. Davis and Weinstein (2001) and Trefler and Zhu (2000) have achieved up to 74% correlation between predictions and measurements under the modified H-O model. Despite this, the H-O model continues to fail to account for intra-industry trade and increasing returns to scale in major industries (Rivera-Batiz & Oliva 2003, Dunning 2009). The Product Cycle model introduced by Vernon (1966) creates a theory of product development, exports and imports. Poh (1987) considered the model valid, although some refinement was needed. Later on, Feenstra et al (2001) showed empirically that, as Vernon predicted, more advanced countries do tend to grow faster and display higher levels of economic activity than the less advanced ones. Another assumption of international trade, the gravity theory, fares quite well in terms of empirical testing. According to gravity model, the volume of trade between two countries is related to the size of each country and the distance between the trading partners (Anderson 1979, Deardorff 1998). Evidence confirms that the larger and richer countries trade more with each other than with smaller countries. However, the theory fails to explain the imbalanced trade flows between US and Japan or China, or the large home bias observed in empirical analyses by McCallum (1995), Eaton and Kortum (2002). Generally, it must be noted that the empirical analysis of international trade is currently experiencing a revival. The adjusted H-O and the gravity theory are now fitting the real world trade much better than earlier models. 6. National and International Accounting Business accounting has historically developed on a national basis (Walton & al 2003). As Walton et al point out, the national differences are a reflection of the culture of the country where businesses operated. Moreover, the national accounting principles seek to capture the respective economic circumstances of the country. The contingent model of accounting evolution considers that accounting principles or

laws are built in response to a major national crisis, or pressure (i.e. Anderson & lanen 1997). In addition to culture, another variable of national accounting principles is represented by influences from ones neighbours, major trading partners or culturally tied countries (Walton et al 2003). Recently, the cross-border ties have been a driver of accounting harmonisation, as countries become regionally integrated (i.e. European Union, NAFTA). Similarly, accounting practices differ in accordance with the relationship between the business and its shareholders. There are three established sources of capital: individual investors, banks and government (Hill 2005). For instance, the tradition of family-owned companies in Germany has created an environment of professional secrecy which does not require high transparency (Walton et al 2003). By comparison, the US has a tradition of transparency due to the relatively large amount of shareholders. Inflation accounting also differs amongst different countries. For instance, current cost accounting was used in the UK until the inflation rate decreased (Hill 2005). By comparison, the pervasive inflation has motivated several South American countries to use general price-level adjustment (Tweedle and Whittington 1984). As the world is becoming more and more globalised, there have been increasing efforts toward harmonisation of accounting. Currently, the idea of convergence rather than standardisation of accounting has become the most popular (Walton et al 2003). The drive toward harmonisation is given by the need for efficient cross-border transactions, as well as reduction of burden for multinational companies. Harmonisation has been led by two main organisations: the International Accounting Standards Board (IASB) and the European Union. The European Unions accounting principles are being developed regionally and are enforced through Directives. By comparison, the IASB attempts to set global accounting principles through voluntary compliance. The IASB has issued the IAS (international accounting standards), which are now embraced by many multi-nationals. IAS has encountered several difficulties, including the disagreements between the different participants, and particularly because of the opposition of the US GAAP (Walton et al 2003). However, the IAS is now emerging as a de-facto international standard. 7. Conclusions As this paper has endeavoured to show, doing business internationally presents far greater challenges to local activity. The complexity of playing at the global level presents companies with different conundrums and choices, many of which are not straightforward. However, the way forward implies a careful strategic analysis and a strong cultural sensitivity in order to take advantage of global opportunities.

Contract manufacturing: Contract manufacturing avoids the need for heavy investments and facilitates a quick entry with a lot of flexibility. On the other hand, there can be supply bottlenecks in such arrangements and production may not keep pace with demand. It may also be difficult to maintain the desired quality levels. 2. Franchising: Franchising, like contract manufacturing involves limited financial investment, but needs fairly intensive training to orient the franchisees. Quality control is again an area of concern in franchising. 3. Licensing: Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor". Coca Cola is an excellent example of licensing 4. Joint Venture Joint ventures can be defined as "an enterprise in which two or more investors share ownership and control over property rights and operation". A joint venture helps in spreading risk, minimizes capital requirements and provides quick access to expertise and contacts in local markets. 5. Acquisition: An acquisition gives quick access to distribution channels, management talent and established brand names. However, the acquired company should have a strategic fit with the acquiring company and the integration of the two companies, especially when there are major cultural differences, needs to be carefully managed. 6. Greenfield projects: Greenfield projects are time consuming and delay market access. They also involve big investments. On the other hand, the delay may be worth its while as green field projects usually incorporate state of the art technology and features which maximize efficiency and flexibility. Market Research Consider another important marketing activity, market research. For a transnational corporation, this activity is far more complicated than for a domestic company. Global coordination is necessary to facilitate sharing and transfer of knowledge. The global head of market research has the important job of ensuring that each country is aware of not only the research activities it is carrying out but also of the activities being carried out by other subsidiaries. The research design is more complicated due to cultural

differences across regions. Some elements such as the sample to population ratio and the information to be collected for each product category can be standardized. Product Development Product development is a critical activity for all MNCs. A globally standardized product can be made efficiently and priced low but pleasing few customers. On the other hand, excessive customization for different markets across the world may be too expensive. Thus, a standard core can be developed, around which customized features can be built to suit the requirements of different segments. In the case of industrial products, standardization may become unavoidable if customers coordinate globally their purchases. In industries characterized by high product development costs (as in the pharmaceuticals industry) and great risk of obsolescence (as in the case of fashion goods), there is a great motivation for developing globally standardized products and services. By serving large markets, costs can be quickly recovered. Even in the food industry, where tastes are largely local, companies are looking for opportunities to standardize as developing different products for individual markets can be prohibitively expensive. Though identical offerings cannot be made in different markets, companies are developing a core product with minor customization, (like a different blend of coffee), to appeal to local tastes. In their enthusiasm to reduce costs by offering standard products, MNCs need to avoid some pitfalls. Customer preferences vary across countries. A product developed on the basis of some 'average' preference may well end up pleasing no one. Some products tend to be more global than the others. These include cameras, watches, pocket calculators, premium fashion goods and luxury automobiles. In the case of many industrial products, since purchase decisions are normally taken on the basis of performance characteristics, considerable scope exists for global standardization. However, even here, local customization may be required in engineering, installation, sales, service and financing schemes. In the same industry, different segments may have different characteristics. Product positioning International positioning is far more complicated than positioning in the domestic market. The degree and nature of segmentation can vary across countries. Brands may not be perceived the same way in different regions. The importance of product attributes may vary from market to market. In general, a global positioning is recommended when different usage patterns, buying motives and competitive pressures across countries result in the need for positioning products uniquely to suit the needs of individual markets. Global positioning ensures that money is spent efficiently on building the same set of attributes and features into products. Global positioning can also reduce advertising costs. However, uniform positioning without taking into account the sensitivities of local markets can result in product failures.

Brand Name: The choice of brand name is an important issue in global marketing. Companies such as Coca-Cola have used the same brand name around the world for their flagship products. Others have used different names to convey the same meaning in different languages across the world. Advertising In general, advertising is more difficult to standardize, than product development. Due to language differences, chances of being misunderstood are great, especially in the case of idiomatic expressions. Besides, cultural differences can result in different interpretations of the same advertisement in different countries. Differences in media infrastructure also play an important role. Differences in government regulations also stand in the way of developing a standardized approach to advertising. Consider the choice of advertising agency. A totally decentralized approach would mean selection of different agencies for different countries. While local agencies are often in the best position to understand the needs of the local markets, no global company can afford a totally uncoordinated approach towards advertising. Pricing When it comes to pricing, both global and local approaches can be used, depending on the specific situation. Sometimes, global pricing becomes difficult because of different levels of competition in different markets. A point which MNCs should appreciate is that multiplying the home country price by exchange rate to arrive at the price in the overseas market may not always be appropriate. Very often, there is a significant difference between the market exchange rate and the exchange rate calculated on the basis of the relative purchasing power of the two currencies. The Indian rupee trades at about Rs. 46 to the dollar but based on relative purchasing power, the rate is closer to Rs. 10. Sales & Distribution Approaches to personal selling can vary from country to country. In some markets, door to door selling is very popular while in others, people prefer to shop at retail stores. Telemarketing is quite popular in the US but not so in many Third World countries. Yet opportunities to standardize should not be ignored. International distribution has to take into account local factors. Strategies can vary from country to country owing to different buying habits. In some societies, 'mom and pop' stores proliferate, while in others large departmental stores carrying several items under one roof are popular. In some countries, intermediaries handle credit sales, while in others, cash transactions are the norm. Even within developed countries, significant differences exist in the channels of distribution. The rapid emergence of the Internet is however changing the old paradigm. Many companies are seriously looking at the potential of the Net as a global distribution vehicle, an excellent example being Amazon.com.

Conclusion Global marketing strategies have to respond to the twin needs of global standardization and local customization. In their quest to maximize local responsiveness, companies should not overlook opportunities to standardize and cut costs. On the other hand, an excessive emphasis on generating efficiencies through a standard marketing mix may result in the loss of flexibility. The challenge for global marketers is to identify the features which can be standardized and build a core product. Then customized offerings can be designed around the core product for different markets. In real life, striking the right balance between standardization and customization can be extremely challenging.