Licensing
International licensing is an arrangement by which a licensee in another country buys the rights to manufacture a company’s product in its own country for a negotiated fee (typically royalty payments on the number of units sold). The licensee then puts
Bottom Line
Exporting offers scale economies.
Can services be exported? Why or why not?
Exporting Licensing Franchising Joint Venture
Wholly Owned Subsidiary
Advantages
Scale economies Lower development costs
Lower development costs
Local knowledge Maintains control over technology Consistent with
pure global strategy
Lower political risk Lower political risk Shared costs and risk May be the only option
Maintains control over operations
Disadvantages
No low-cost sites High transportation costs
Tariff barriers
Loss of control over technology
Loss of control over quality
Loss of control over technology
Conflict between partners
High cost High risk
TABLE 6.2 Comparison of Entry Modes
up most of the capital necessary to get the overseas operation going. The advantage of licensing is that the company need not bear the costs and risks of opening up an overseas market.
However, a problem arises when a company licenses its technological expertise to overseas companies. Technological know-how is the basis of the competitive advan- tage of many multinational companies. But RCA Corporation lost control over its color TV technology by licensing it to a number of Japanese companies. The Japanese companies quickly assimilated RCA’s technology and then used it to enter the U.S.
market, eventually gaining a bigger share of the U.S. market than RCA held.
Franchising
In many respects, franchising is similar to licensing. However, whereas licensing is a strategy pursued primarily by manufacturing companies, franchising is used primarily by service companies. McDonald’s, Hilton International, and many other companies have expanded overseas by franchising. Pretzel maker Auntie Anne’s has expanded through fran- chising in the Asia-Pacific region, where its sales are growing at 30 per- cent a year, far more quickly than in the United States. 54
In franchising, the company sells limited rights to use its brand name to franchisees in return for a lump-sum payment and a share of the franchi- see’s profits. However, unlike most licensing agreements, the franchisee has to agree to abide by strict rules regarding how it does business. Thus, when McDonald’s enters into a franchising agreement with an overseas company, it expects the franchisee to run its restaurants in a manner identical to that used under the McDonald’s name elsewhere in the world.
The advantages of franchising as an entry mode are similar to those of licensing.
The franchisees put up capital and assume most of the business risk. However, local laws can limit this advantage. Until recently, China required franchisors to operate at least two company-owned outlets in that country profitably for at least a year before they would be allowed to offer franchises to Chinese entrepreneurs. Relaxation of that requirement made franchising in China’s high-growth market far more attractive to businesses such as Ruby Tuesday, all of whose restaurants are operated by franchisees with knowledge of their local markets. 55
The most significant disadvantage of franchising concerns quality control. The company’s brand name guarantees consistency in the company’s product. Thus a busi- ness traveler booking into a Hilton International hotel in Hong Kong can reasonably expect the same quality of room, food, and service that he or she would receive in New York. But if overseas franchisees are less concerned about quality than they should be, the impact can go beyond lost sales in the local market to a decline in the company’s reputation worldwide. If a business traveler has an unpleasant experience at the Hilton in Hong Kong, she or he may decide never to go to another Hilton hotel—and urge colleagues to do likewise. To make matters worse, the geographic distance between the franchisor and its overseas franchisees makes poor quality difficult to detect.
Joint Ventures
Establishing a joint venture (a formal business agreement discussed in more detail in Chapter 17) with a company in another country has long been a popular means of entering a new market. Joint ventures benefit a company through (1) the local
Bottom Line
Franchising is one way to maintain standards globally. Why does quality control pose a risk in franchising?
In six years, Cold Stone Creamery has expanded its franchises into 17 countries outside of the United States, including South Korea, shown here.
partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems and (2) the sharing of development costs and/
or risks with the local partner. Hershey recently announced a joint venture with India’s Godrej Beverages and Foods as a way to achieve growth in an industry that has matured in the United States. Hershey will own a 51 percent share of the joint business, which combines Hershey’s brands and recipes with Godrej’s manufacturing facilities and distribution network. The venture will start by selling Hershey’s Syrup in India and later add other products. 56 In addition, many countries’ political consid- erations make joint ventures the only feasible entry mode. Before China opened its borders to trade, many U.S. companies, including Eastman Kodak, AT&T, Ford, and GM, did business in the country via joint ventures.
But as attractive as they sound, joint ventures have their problems. First, as in the case of licensing, a company runs the risk of losing control over its technology to its ven- ture partner. For example, Japan’s Kawasaki Heavy Industries and Germany’s Siemens entered into joint ventures with Chinese partners to build China’s high-speed rail net- work, but now those Chinese companies are using some of the technology they learned from the venture to compete with Kawasaki and Siemens for contracts elsewhere. 57 Sec- ond, companies may find themselves at odds with one another. For example, one joint venture partner may want to move production to a country where demand is growing, but the other would prefer to keep its factories at home running at full capacity. Conflict over who controls what within a joint venture is a primary reason many fail. 58 In fact, many of the early joint ventures American and European companies entered into with companies in China lost money or failed precisely because of conflicts over control. To offset these disadvantages, experienced managers strive to iron out technology, control, and other potential conflicts up front, when they first negotiate the joint venture agreement.
Wholly Owned Subsidiaries
Establishing a wholly owned subsidiary—that is, an independent company owned by the parent corporation—is the most costly method of serving an overseas market.
Companies that use this approach must bear the full costs and risks associated with setting up overseas operations (as opposed to joint ventures, in which the costs and risks are shared, or licensing, in which the licensee bears most of the costs and risks).
Nevertheless, setting up a wholly owned sub- sidiary offers two clear advantages. First, when a company’s competitive advantage is based on technology, a wholly owned subsidiary normally is the preferred entry mode because it reduces the risk of losing control over the technology.
Wholly owned subsidiaries are thus the preferred mode of entry in the semiconduc- tor, electronics, and pharmaceutical industries. However, this advantage is limited by the extent to which the government of the country where the subsidiary is located will protect intellectual property such as patents and trademarks. Seven years after SI Group, a U.S. chemical company, began making rubber-bonding resins in China for the local tire industry, a competitor hired away SI Group’s plant manager and began making a product that was virtually identical. After aggressive efforts to find relief in the Chinese legal system failed, SI Group took its complaint to the U.S. International Trade Commission (ITC). The ITC could restrict the sale of the Chinese competi- tor’s products in the United States if it finds the company stole trade secrets. 59
Second, a wholly owned subsidiary gives a company tight control over operations in other countries, which is necessary if the company chooses to pursue a global strat- egy. Establishing a global manufacturing system requires world headquarters to have a high degree of control over the operations of national affiliates. Unlike licensees or joint venture partners, wholly owned subsidiaries usually accept centrally determined decisions about how to produce, how much to produce, and how to price output for transfer among operations.
Setting up a wholly owned subsidiary offers two clear advantages.
W hen establishing operations overseas, headquarters executives have a choice among sending expatriates (individuals from the parent country), using host-country nationals (natives of the host country), and deploying third-country nationals (natives of a country other than the home country or the host country). Although most corporations use some combination of all three types of employees, there are advantages and disadvantages for each. Colgate-Palmolive and Procter & Gamble, for example, use expatriates to get their products to market abroad more quickly. AT&T and Toyota have used expatriates to transfer their corporate cultures and best prac- tices to other countries—in Toyota’s case, to its U.S. plants.
Because sending employees abroad can cost three to four times as much as employ- ing host-country nationals, other companies, including Texas Instruments, have made more limited use of expatriates. Moreover, in many countries—particularly develop- ing countries in which firms are trying to get an economic foothold—the personal security of expatriates is an issue. As a result, more firms may send their expatriates on shorter assignments and engage in telecommuting, teleconferencing, and other electronic means to facilitate communications between their international divisions.
In fact, working internationally can be very stressful, even for experienced globalites.
Table 6.3 shows some of the primary stressors for expatriates at different stages of their assignments. It also shows ways for executives to cope with the stress as well as some of the things companies can do to help with the adjustment.
A lthough developing a valuable pool of expatriates is important, local employees are more available, tend to be familiar with the culture and language, and usually cost less because they do not have to be relocated. In addition, local governments often provide incentives to companies that create good jobs for their citizens, or they may place restrictions on the use of expatriates. Such advantages, coupled with the often-inadequate educational systems of developing nations, combine to create stiff competition for local management talent. The result is that China, India, and Latin America do not have enough qualified talent to fill the demand for local executives.
For example, in China, recruiting firm Russell Reynolds finds that local managers offer technical skills but often lack conceptual skills and a strategic perspective. Motorola Mobil- ity meets the challenge in mainland China with a mix of executives—about one-third from mainland China, one-third from other Asian countries, and one-third from the West. 60
Skills of the Global Manager
I t is estimated that nearly 15 percent of all employee transfers are to an international location. However, the failure rate among expatriates (defined as those who come home early) ranges from an estimated 20 percent to 70 percent, depending on the country of assignment. The cost of each of these failed assignments ranges from tens of thousands to hundreds of thousands of dollars. 61 Typically, the causes for failure overseas extend beyond technical capability and include personal and social issues.
In a recent survey of human resource managers around the globe, two-thirds said the main reason for the failures is family issues, especially dissatisfaction of the employee’s spouse or partner. 62 The problem may be compounded in this era of dual-career cou- ples, in which one spouse may have to give up his or her job to accompany the expa- triate manager to the new location. To ensure that an overseas posting will succeed, managers can encourage an employee to talk to her or his spouse about what he or she will do in the foreign country. For both the expatriate and the spouse, adjustment requires flexibility, emotional stability, empathy for the culture, communication skills,
LO 5
expatriates
Parent-company nationals who are sent to work at a foreign subsidiary.
host-country nationals Natives of the country where an overseas subsidiary is located.
third-country nationals Natives of a country other than the home country or the host country of an overseas subsidiary.
Bottom Line
Expatriate hiring increases cost;
training raises quality. How might training an expatriate manager differ from training a local manager?
LO 6
failure rate
The number of expatriate managers of an overseas operation who come home early.
It is estimated that nearly 15 percent of all employee transfers are to an international location.
Managing across Borders
Stage Primary Stressors Executive Coping Response Employer Coping Response Expatriate
selection
Cross-cultural unreadiness. Engage in self-evaluation. Encourage expatriate’s self- and family evaluation. Perform an assessment of potential and interests.
Assignment acceptance
Unrealistic evaluation of stressors to come. Hurried time frame.
Think of assignment as a growth opportunity rather than an instrument to vertical promotion.
Do not make hard-to-keep promises. Clarify expectations.
Pre- and postarrival
Ignorance of cultural differences.
Do not make unwarranted assumptions of cultural competence and cultural rules.
Provide pre-, during-, and postassignment training.
Encourage support-seeking behavior.
Arrival Cultural shock. Stressor reevaluation. Feelings of lack of fit and differential treatment.
Do not construe identification with the host and parent cultures as mutually exclusive. Seek social support.
Provide postarrival training.
Facilitate integration in expatriate network.
Novice Cultural blunders or inadequacy of coping responses. Ambiguity owing to inability to decipher meaning of situations.
Observe and study functional value of coping responses among locals. Do not simply replicate responses that worked at home.
Provide follow-up training.
Seek advice from locals and expatriate network.
Transitional Rejection of host or parent culture.
Form and maintain attachments with both cultures.
Promote culturally sensitive policies in host country. Provide Internet access to family and friends at home. Maintain constant communication and periodic visits to parent organization.
Mastery Frustration with inability to perform boundary-spanning role. Bothered by living with a cultural paradox.
Internalize and enjoy
identification with both cultures and walking between two cultures.
Reinforce rather than punish dual identification by defining common goals.
Repatriation Disappointment with unfulfilled expectations.
Sense of isolation. Loss of autonomy.
Realistically reevaluate assignment as a personal and professional growth opportunity.
Arrange prerepatriation briefings and interviews. Schedule postrepatriation support meetings.
TABLE 6.3 Stressors and Coping Responses in the Developmental Stages of Expatriate Executives
SOURCE: From Academy of Management Executive, J. Sanchez, P. Spector, and C. Cooper, May 2000, pp. 96–106. Copyright © 2000. Reproduced with permission of Academy of Management via Copyright Clearance Center.
resourcefulness, initiative, and diplomatic skills. 63 When Kent Millington took the position of vice president of Asia operations for an Internet hosting company, his wife Linda quit her job to move with him to Japan. Especially for Linda Millington, the first three months were difficult because she didn’t speak Japanese, found the transit system confusing, and even struggled to buy food because she couldn’t translate the labels. But she persevered and participated in classes and volunteer activities. Eventu- ally, she and her husband learned to enjoy the experience and appreciated the chance to see just how well they could tackle a challenge. 64
Companies such as Levi Strauss, Bechtel, Monsanto, Whirlpool, and Dow Chemical have worked to identify the characteristics of individuals that will predict their success abroad. Table 6.4 shows skills that can be used to identify candidates who are likely to succeed in a global environment. Interestingly, in addition to such characteristics as cultural sensitivity, technical expertise, and business knowledge, an individual’s success abroad may depend greatly on his or her ability to learn from experience. 65
Companies such as BPAmoco, Global Hyatt, and others with large international staffs have extensive training programs to prepare employees for international assign- ments. Table 6.5 suggests ways to improve their likelihood of success. Other organiza- tions, such as Coca-Cola, Motorola, Chevron, and Mattel, have extended this training to include employees who may be located in the United States but who also deal in international markets. These programs focus on areas such as language, culture, and career development.
Managers who are sent on an overseas assignment usually wonder about the effect such an assignment will have on their careers. Certainly their selection for a post over- seas is usually an indication that they are being groomed to become more effective managers in an era of globalization. In addition, they will often have more responsi- bility, challenge, and operating leeway than they might have at home. Yet they may
• Structure assignments clearly: Develop clear reporting relationships and job responsibilities.
• Create clear job objectives.
• Develop performance measurements based on objectives.
• Use effective, validated selection and screening criteria (both personal and technical attributes).
• Prepare expatriates and families for assignments (briefings, training, support).
• Create a vehicle for ongoing communication with expatriates.
• Anticipate repatriation to facilitate reentry when they come back home.
• Consider developing a mentor program that will help monitor and intervene in case of trouble.
TABLE 6.5 How to Prevent Failed Global Assignments End-State Dimensions Sample Items 1. Sensitivity to cultural differences
2. Business knowledge.
3. Courage to take a stand.
4. Brings out the best in people.
5. Acts with integrity.
6. Is insightful.
7. Is committed to success.
8. Takes risks.
When working with people from other cultures, works hard to understand their perspective.
Has a solid understanding of the company’s products and services.
Is willing to take a stand on issues.
Has a special talent for dealing with people.
Can be depended on to tell the truth regardless of circumstances.
Is good at identifying the most important part of a complex problem.
Clearly demonstrates commitment to seeing the organization succeed.
Takes personal as well as business risks.
Learning-Oriented Dimensions Sample Items 1. Uses feedback.
2. Is culturally adventurous.
3. Seeks opportunities to learn.
4. Is open to criticism.
5. Seeks feedback.
6. Is flexible.
Has changed as a result of feedback.
Enjoys the challenge of working in countries other than his or her own.
Takes advantage of opportunities to do new things.
Does not appear brittle—as if criticism might cause him or her to break.
Pursues feedback even when others are reluctant to give it.
Doesn’t get so invested in things that he or she cannot change when something doesn’t work.
TABLE 6.4 Identifying International Executives
SOURCE: Copyright © 1997 by the American Psychological Association. G. M. Spreitzer, M. W. McCall, and J. D. Mahoney, “Early Identification of International Executive Potential,” Journal of Applied Psychology 82, no. 1 (1997), pp. 6–29.
be concerned that they will soon be out of the loop on key developments back home.
Good companies and managers address that issue with effective communication between subsidiaries and headquarters and by a program of visitations to and from the home office. Communication technology now makes it easy for expatriates to keep in touch with colleagues in their home country on a daily or even more frequent basis, through e-mail and phone calls. Alan Paul, an American journalist working in China, says Internet phone service, a webcam, and podcasts of favorite radio programs also enable him to stay in touch with family and friends back home, even to the extent that he has to work hard to have “a fully engaged existence in China.” 66
Understanding Cultural Issues
In many ways, cultural issues represent the most elusive aspect of international busi- ness . In an era when modern transportation and communication technologies have created a global village, it is easy to forget how deep and enduring the differences among nations can be. The fact that people everywhere drink Coke, wear blue jeans, and drive Toyotas doesn’t mean we are all becoming alike. Each country is unique for reasons rooted in history, culture, language, geography, social conditions, race, and religion. These differences complicate any inter-
national activity and represent the fundamental issues that inform and guide how a company should conduct business across borders. For example, while working in Hong Kong, Geoffrey Fowler discovered that his coworkers there choose topics for small talk—people’s weight, salary, and the size of their apartment—that would horrify Americans. At the same time, Chinese workers are put off by the American custom of com- bining lunch with a business meeting, meaning junior employees are chewing away while a superior in the company is talking. 67
Ironically, although most of us would guess that the trick to working abroad is learning about a foreign cul- ture, in reality our problems often stem from our being oblivious to our own cultural conditioning. Most of us pay no attention to how culture influences our everyday behavior, and because of this, we tend to adapt poorly
to situations that are unique or foreign to us. Without realizing it, some managers may even act out of ethnocentrism —a tendency to judge foreign people or groups by the standards of one’s own culture or group and to see one’s own standards as superior.
Such tendencies may be totally unconscious—for example, the assumption that “in England, they drive on the wrong side of the road” rather than merely on the left.
Or they may reflect a lack of awareness of the values underlying a local culture—for example, an assumption that the culture is backward because it does not air American or European television programming, when it is actually focused on maintaining its traditional values and norms.
Assumptions such as these are one reason people traveling abroad frequently expe- rience culture shock —the disorientation and stress associated with being in a foreign environment. Managers are better able to navigate this transition if they are sensitive to their surroundings, including social norms and customs, and readily able to adjust their behavior to such circumstances. 68 Employers can help by identifying some of the cultural norms to expect and by establishing performance measures for behaviors that contribute to success in the host country (for example, the types of communication and direction employees will expect from their manager).
A wealth of cross-cultural research has been conducted on the differences and similarities among various countries. Geert Hofstede, for example, has identified
LO 7
ethnocentrism
The tendency to judge others by the standards of one’s group or culture, which are seen as superior.
culture shock
The disorientation and stress associated with being in a foreign environment.
In this era, when people from all over the globe are collaborating on business issues, it is important to continue learning about and respecting different cultures in order to succeed.