Basics of International ManagementOTTO-VON-GUERICKE-UNIVERSITY MAGDEBURGBEIJING NORMAL UNIVERSITYProf. Dr. Birgitta Wolff, Marjaana Rehu, M.A.Otto-von-Guericke-University, Germany2International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Outlook1. Globalization of Economic Activities2. Institutional Environment of International Business3. Business Risks from a New Institutional Economics Perspective4. Multinational Corporations5. Entering Foreign Markets: Choosing the Organizational Form6. External Growth Strategies7. International HR Management8. Cross-Cultural Business Negotiations9. Project: The Ruritanian Electronics Negotiation3International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.The Theory of Absolute AdvantageAdam Smith 1776The Theory of Comparative AdvantageDavid Ricardo 1819The Theory of Factor ProportionsEli Heckscher and Bertil OhlinThe Competitive Advantage of NationsMichael Porter1. Globalization of Economic Activities(Czinkota/Ronkainen/Moffett (2000), International Business. Update 2000, Fort Worth et al., p. 156.)4International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.1. Globalization of Economic Activities1.1 Motives for Firms to go International(according to Czinkota et al. 2000, p. 368)5International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.1. Globalization of Economic Activities1.2 Drivers of GlobalizationWhat drives Globalization?A Technological TriggersB Institutional Triggers6International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.1. Globalization of Economic Activities1.2.2 Drivers of Globalization: Institutional ChangeHill, C. W. L. (2000): International Business, 3thd ed., Boston et al. ad A. Technological Triggers Transport goods raw material humans Information and Communication Technology information know-how monitoring control7International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.1. Globalization of Economic Activities1.2.2 Drivers of Globalization: Institutional ChangeHill, C. W. L. (2000): International Business, 3thd ed., Boston et al. ad B. Institutional Triggers Legal changes e. g. declining trade and investment barriers - less protectionism (tariffs, subsidies, regulations or quotas), because of WTO, ETC - less capital restrictions Political changes revolutions, new governments, wars . Consumer tastes changing preferences and tastes; growing acceptance of standardized - consumer electronic goods, - automobiles, - computers, - calculators growing individualization“8International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.2. Institutional Environment of International BusinessThree layers of analysisCf. Williamson (1996), The institutions and governance of economic development and reform, in: Williamson, O. E. (1996), The mechanisms of governance, New York, p. 326.Institutional FrameworkContractual GovernanceIndividualBehavioralAttributesShiftParametersStrategicEndogenousPreferences Framework effects“ The same“ management tools might induce different effects in different environments. Behavioral expectations can vary much more when crossing framework borders.9International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.2. Institutional Environment of International Businesscf. Klein, P. G. (2000), The New Institutional Economics, p. 3, , pp. 458 ff.;cf. Wolff, B. (1999): Anreizkompatible Reorganisation von Unternehmen, Stuttgart, p. 197 ff. refers to the background constraints, or rules of the game“InstitutionalEnvironmentformal, explicitrulesinformal, oftenimplicit rulese.g.constitutions,lawse.g.social conventions,normsThe institutional environment forms the framework in which human actiontakes place. It defines property rights and how they can be transferred.2.1 Explicit Institutional Environment10International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.2. Institutional Environment of International BusinessImpact of different frameworks on expectations about another players behavior2.2 Implicit Institutional Environment1. Realize:g1 f1Expectations about Partners BehaviorAsymmetric Information on Partners Environment Preferences/CapabilitiesKnown Differences(Ignorance)Unknown Differences(Ignorant Ignorance)Create Awareness(Learning)Exact Definition of Problem2. Identify:D = ?1. Realize:g1 f1Expectations about Partners BehaviorAsymmetric Information on Partners Environment Preferences/CapabilitiesKnown Differences(Ignorance)Unknown Differences(Ignorant Ignorance)Create Awareness(Learning)Exact Definition of Problem2. Identify:D = ?1. Realize:Expectations about Partners BehaviorAsymmetric Information on Partners Environment Preferences/CapabilitiesKnown Differences(Ignorance)Unknown Differences(Ignorant Ignorance)Create Awareness(Learning)Exact Definition of ProblemExpectations about Partners BehaviorAsymmetric Information on Partners Environment Preferences/CapabilitiesKnown Differences(Ignorance)Unknown Differences(Ignorant Ignorance)Create Awareness(Learning)Exact Definition of Problem2. Identify:D = ?gx=your decision in xfx=your decision in xg1(g0)f1(g0)11International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.2. Institutional Environment of International BusinessReducing risks resulting from diverging expectations2.2 Implicit Institutional Environment12International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.2. Institutional Environment of International BusinessInstitutionalEnvironmentformal, explicitrulesinformal, oftenimplicit rulessolves problems ofcoordination and motivation by altering the payoff structure in eachgamesolves problems of coordination and motivation by repeating the game (social rewards and sanctions)Formal rules and informal rules are not necessarily substitutes, but complements.They influence each other.dominant principle2.2 Implicit Institutional Environment13International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.2. Institutional Environment of International Business2.3 Institutional Frameworks in a Globalized WorldEUASEANWTO, World Bank, IMF, UNCTAD, OECD, DAC,BIS, EFTA, EBRD, G10, G7, Paris Club, Group 77, .A common roof“ for world trade?cf. e.g. Tayeb, M. (2000), International Business. Theories, Policies and Practices, Harlow et al. p. 69 ff.14International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.3. Business Risks from a New Institutional Economics PerspectiveTerminology: Difference between uncertainty and risk* cf. Tayeb, M. (2000), International Business. Theories, Policies and Practices, Harlow et al. p. 344 f.; * Eitemann et al. (2001), Multinational Business Finance, 5th ed., p. 470.Uncertainty:*- caused by many factors, with unpredictable outcomes,- immeasurable,- no possibility to assign proba- bilitiesRisk:*- measurable (often financial) effect of uncertainty,- high levels of uncertainty in- crease risk,- possibility to calculate probabilitiesthe possibility of suffering harmor loss, or a course involving un-certain danger or hazard“*15International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.3. Business Risks from a New Institutional Economics Perspective3.1 Endogenous RisksPossible sources of risks by levelsInstitutional FrameworkContractual GovernanceIndividualBehavioralAttributesShiftParametersStrategicEndogenousPreferencesSource ofendogenous risksSource ofexogenous risksSource ofexogenous risks16International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.3. Business Risks from a New Institutional Economics PerspectiveRoots of risks: Asymmetric information and specific investmentcf. e.g. Wolff (1995), Contractual Problems in Market Relations, in: Bernitz/Hallstrm (eds.), Principles ., Stockholm.3.1 Endogenous Risks17International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.3. Business Risks from a New Institutional Economics PerspectiveRecap: Possible sources of risks by levelsInstitutional FrameworkContractual GovernanceIndividualBehavioralAttributesShiftParametersStrategicEndogenousPreferencesSource ofendogenous risksSource ofexogenous risksSource ofexogenous risks3.2 Exogenous Risks18International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.3. Business Risks from a New Institutional Economics Perspective3.2 Exogenous RisksTypes ofexogenous risks ininternational BusinessPoliticalRiskCulturalRiskEconomicRiskImplicitExplicit19International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.4. Multinational CorporationsWhat shapes an multinational corporation? corporationas a nexus ofcontractsFirmPolitical GroupsGovern-mentsSuppliersCompetitorsTrade Associ-ationsEmployersUnionsCustomer Advocate GroupsOwnersFinancial CommunityActivist GroupsCustomers20International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.4. Multinational CorporationsMultinational corporation4.1. What exactly is a Multinational Corporation? enterprises that own or control production or service facilities outside the country in which they are based“ (United Nations in Czinkota et al.: 395)quantitative criteria - must have operations in at least two countries (sometimes subsidiaries in even 6 or more countries are required)- proportion of overall revenue generated abroad: 25-30 percent is most often cited- involvement in foreign markets should be substantial enough to make a difference in decision making or- the owners of the corporation must be of several nationalitiesqualitative criteria - management must consider the firm as multinational and must act accordingly (view their domestic operations as part of worldwide operations)- .21International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.4. Multinational CorporationsProperty rights allocation as a determinant of governance structurecf. Picot, A./Wolff, B. (1994), Institutional economics of public firms and administrations, in: JITE, Vol. 150, No. 1 (March), p. 218. 4.1. What exactly is a Multinational Corporation?22International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.4. Multinational Corporations4.2 Creating Competitive AdvantageWhat is a competitive advantage? something that is extremely important to the customer refers to the fact that some companies perform better than other ones even though they act in the same environment Creation of competitive advantages?Orientationtowards markets creation and securing of sustainable success of an company/corporationOrientationtowards resources- evaluation of environmental opportunities and threats: PORTERs five competitive forces- evaluation of the countrys competitiveness- resource-based view- core competencies23International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.4. Multinational Corporations4.2.1Porters Five-Forces-ModelMultinationalCorporationSuppliersBuyersSubstitutesPotentialEntrantsBargaining powerof buyersThreat of substituteproducts or servicesBargaining powerof suppliersThreat of newentrantsexplicit and implicitinstitutional frameworkendogenous andexogenous riskscf. Porter, Michael E. (1998a): The Competitive Advantage of Nations, Hampshire, London. p. 4Porter, M. E. (1998b): Competitive Strategy. Techniques for Analysing Industries and Competitors, New York. p,. 4ff24International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.4. Multinational Corporations4.2.2 Role of Home Countries for Competitive Advantage: Porters Diamond firms gain competitiveadvantage where their home base allows and supports the most rapid accumulation of specialized assets and skillsHomecountryFirm Strategy,Structure andRivalryRelated andSupportingIndustriesDemandConditionsFactorConditionsChanceGovern-ment25International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational FormMarket entryLocation?Mode of control? involves twointerdependent decisionsWhere:Choosing the right locationHow:Choosing the right form26International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Where: Choosing the right location location as a variable affecting global competitiveness of firms because of location bound assetsChoice of LocationFirm specific variablesFramework variablesResource SeekingMarket SeekingEfficiency SeekingStrategic Asset SeekingCountry risk analysis Exogenous risks5. Entering Foreign Markets: Choosing the Organizational Form27International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.ABCDECountryCustomersManufacturingCustomer ServiceR&DSalesPurchasingManufacturingCustomer ServiceR&DSalesPurchasingSuppliersSupport LevelSupport Level1. 2.2. 1. 2. 1.Legend: Weak Medium Strong Disintegration of the Value ChainCf. Wiegand, R./Picot, A./Reichwald, R. (1997): Information, Organization and Management, Chichester et al, p. 363.5. Entering Foreign Markets: Choosing the Organizational Form28International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational Form5.2 Alternative Modes of Foreign EntryAlternative Modes of Foreign Market EntryInternal strategies: Using your own assets1. Exporting2. Licensing3. Franchising4. Joint Ventures5. Sales Office6. Production Plant7. Full Scale Subsidiaries8. Turnkey contractsExternal strategies: Combining your and your partners assetsCorporate NetworksStrategic Alliances ( International Management II“)Reference: Hill (2000)29International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational Form1. Export:Domestic production and administrative control,Example: Selling Miele washing machines in Russia A: Miele Corp; B: local appliance storeT0T1T2T3A+B strike a deal(contract) A pro-ducesB sells abroadB collects the profit and pays A (fixed amount)Moral HazardAdverseSelectionTime5.2 Alternative Modes of Foreign Entry30International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational Form2. Licensing:A licensor grants the rights to intangible property to another entity (the licensee) for a specified period; the licensor receives a fee.Example: Selling cell phone technoloy to a Chinese Mobil Phone Company A: Motorola Corp.; B: Chinese partnerTime T0T1T2T3A +B strike a deal A delivers product conceptB pro-duces and sellsB collects the profit and pays A (fixed amount for the license)Moral HazardAdverseSelection5.2 Alternative Modes of Foreign Entry31International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational Form3. Franchising:Involves longer-term commitments than licensing; is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchiser agree to abide by strict rules as to how it does business.Example: Selling McDonalds Franchise to a German entrepreneur A: McDonalds Corp.; B: German partnerT0T1T2T3A +B strike a deal A delivers business conceptB pro-duces and sellsB collects the profit and pays A (fixed amount for the franchise)Moral HazardAdverseSelectionTime5.2 Alternative Modes of Foreign Entry32International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational Form4. Joint VentureEntails establishing a firm that is jointly owned by two or more otherwise independent firms (most typical is 50/50 venture“)Example: Starting brick factory in China A: Austrian Corp.; B: German partnerT0T1T2T3A+B strike a dealA+B investA+B pro-duce and sellA+B share the profitMoral HazardHold-Up (A: risk; esp. if B is player and arbitrator/rule maker at the same time) Adverse Selection5.2 Alternative Modes of Foreign Entry33International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational FormT0T1T2A invests abroadA produces at home, transports to foreign sales office, and sellsA collects profits and transfers them homeCountry hold-up (A maybe not allowed to export profits)5. Sales OfficeExample: DaimlerChysler opens a car shop in Egypt A: DC5.2 Alternative Modes of Foreign EntryCountry Hold-Up(may not be allowed to retrieve inv.)34International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational Form6. Production PlantExample: DaimlerChysler opens a car factory in South Africa A: DCT0T1T2A invests abroad A produces and sellsA collects profits and transfers them homeCountry Hold-Up(may not be allowed to retrieve inv.)Country hold-up (maybe not allowed to export profits)5.2 Alternative Modes of Foreign Entry35International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational Form7. Full-Scale Subsidiary:The firm owns 100 percent of the stock; two possible ways: setting up a new operation or acquiring an established firm.T0T1T2A creates AA producesand sellsA collects profits and transfers them to A (not internal)Country Hold-Up (maybe not allowed to export profits)5.2 Alternative Modes of Foreign EntryCountry Hold-Up(may not be allowed to retrieve inv.)36International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational Form8. Turnkey Contract:The contractor agrees to handle every detail of the project for a foreign client including the training of operating personnel.Example: Selling a power plant to Chinese Energy Corporation A: Siemens Corp.; B: Chinese partner T0T1T2T3A +B strike a deal A delivers completetechnologyB learnsB collects the profit and pays A (fixed amount for the project)Adverse SelectionMoral HazardHold Up5.2 Alternative Modes of Foreign EntryT4End of project, B produces and sells37International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational FormExportingAbility to realize location and experience curve economiesHigh transport costs Trade barriersProblems with local marketing agentsFranchisingLow development costs and risksLack of control over qualityInability to engage in global strategic coordinationLicensingLow development costs and risksLack of control over qualityInability to realize location and experience curve economiesInability to engage in global strategic coordinationTurnkey contractsAbility to earn returns from process technology skills in countries where FDI is restrictedCreating efficient competitorsLack of long-term market presenceEntry ModeAdvantageDisadvantageHill (2000), p. 443.5.2 Alternative Modes of Foreign Entry38International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.5. Entering Foreign Markets: Choosing the Organizational Form5.2 Alternative Modes of Foreign Entry: Opportunities and RisksProperty rights allocation in expansion strategies100Domestic %Foreign %01001. Export2. Licensing3. Franchising4. Joint Venture & Strategic Alliances5. Sales Office6. Production Plant7. Full Scale Subsidiary8. Turnkey Contract39International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Number of PartnersManyNoneSales OfficeProd. PlantSubsidiaryConsortiumJoint VentureLicensingFranchisingStrategic AllianceExportOWNERSHIP CONTINUUMModified from: Daniels, J. D./Radebaugh, L. H. (2000): International Business: Environments and Operations, 9th ed., p. 497.Equity(more ownership)SharingNonequity(less ownership)Tight controlMedium controlLittle control6. External Growth Strategies40International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Corporate AllianceExample: Subway System in SingaporeT0T1T2T3A+B make a deal to cooperate in projectA+B negotiate PA and PBA+B collect and and divide PA and PBA+B deliver their contri-butions at cost CA and CBTimeT0T1T2T3A+B make a deal to cooperate in project (e.g. 50:50)A+B negotiate PPrice P due: A+B collect and share ( each)A+B deliver their contributions ( C each) Joint VentureTime6. External Growth Strategies41International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Benefits of Corporate CollaborationsShared RisksShared Knowledgeand ExpertiseSynergy & Competitive AdvantageEasier Market Entrymodified from: Griffin, R. W./Pustay, M. W. (1999): International Business. A Managerial Perspective, 2nd ed., p. 453.6.1 Potential Benefits of Collaborative Ventures6. External Growth Strategies42International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.TypeAdvantagesDisadvantagesWholly Owned Sub-sidiary(WOS)n Protection of technology/ know-hown Right to decide about all further steps in global strategyn Ability to realize location and experience curve economiesn No moral hazard problem with partnern High costs and risks of setting up over- seas operationsn Country-specific hold-up problem (Restrictions on money transfer e.g. profits/investment by the host country)n Adverse selection problemJoint Venture(shared owner-ship)n Access to local partners know-hown In some countries: only politically feasible solution to enter a marketn Less capital required (shared between partners) n Shared business riskn Less country-specific hold-up risk than in WOSn Lack of control over technology/know- hown Potential imcompatibility of partnersn Diluted incentives to investn Adverse selection, moral hazard, and hold-up problemStrategic Alliancen Shared costs/risks of R&D (products/processes)n Joint complementary skills and assets that neither partner could (at lower cost) develop on her ownn Greater chance to establish technological industry standardsn Undiluted incentives to investn Less country-specific hold-up risk than in WOSn Less moral hazard risk than in JVn Loss of autonomy n Potential incompatibility of partnersn Adverse selection, and hold-up problem6.2 Advantages and Disadvantages of Corporate Collaborations6. External Growth Strategies43International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.6.3 Potential Pitfalls of Corporate CollaborationsChallengesIncompati-bility of PartnersAccess toInformationDistribu-tion ofEarningsLoss ofAutonomy*Incompati-bility of PartnersAdverseSelectionMoralHazardMoralHazardHold-UpNormalUncertaintySignaling,ScreeningPropertyRightsAllocationPropertyRightsAllocationHostages,IntegrationBetterForecasting,SufficientFlexibility(modified from: Griffin, R. W./Pustay, M. W. (1999): International Business. A Managerial Perspective, 2nd ed., p. 469.)* Further Ref.: Textbook Problem“:Economic Problem:6. External Growth Strategies44International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Institutional FrameworkCorporate GovernanceIndividual CharacteristicsA Business Economists Field of InterestStrategicEndogenousPreferencesBehavioral AttributesShiftParametersSource: Williamson (1994), p. 3267. International HR ManagementHow do institutional frameworks influence work relations and, thus, HRM-practices?explicitimplicit45International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Industrial relations factors Relationships between worker, union, and employer (e.g. codetermination and participation in Germany or USA)7.1 How Intercountry Differences Affect HRMCultural factorsDiffering cultures require different HR practices among a firms subsidiaries, e.g. implementation of different incentive plans. ( Hofstede)Economic factorsE.g.: Productivity and efficiency in SOEs in contrast to firms competing in a market (e.g. full employment at the expense of efficiency)Labor cost factorsWorldwide diffe-rences in hourly compensation costs, hours worked per week, severance pays, vacation time, etc.Intercountry Differences Affect HRMSource: Dessler, G. (2000), Human Resource Management, 8th ed., Upper Saddle River (Prentice-Hall), pp. 614 ff.Culture(implicit framework)Law(explicitframework)7. International HR Management46International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Ethnocentric-orientedfirmsKey management positions are filled by parent-country nationalsReasons: Lack of qualified local senior managers Maintain unified corpo- rate culture and tighter control Transfer of firms core competenciesExample:Dutch national financial controllers at Royal Dutch Shell worldwidePolycentric-orientedfirmsHost-country nationals in foreign subsidiaries headquarter with parent-country nationals. Reasons: Reduction of cultural mis- understandings locally in comparison to expatriates Usually less expensiveExample:Volkswagen AGGeocentric-orientedfirmsBest suited person, regard-less of nationality, is transferred to any appropriate open positionReasons: Most efficient use of HR resources of the firm Building stronger and consistent culture Building of team spirit and bonds between team membersExample:General Electric Corp.7.2 International Staffing PolicyInternational staffing policiesSource: Dessler, G. (2000), pp. 623 f.7. International HR Management47International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.I. ? / ?(Compromise) II. ? / ?(A gives in to B) IV. ? / ?(B gives in to A) III. ? / ?(None gives in)Player APlayer BAgreementAgreementNon-AgreementNon-Agreement Negotiation will be beneficial, if both players can win by reaching field I.8. Cross-Cultural Business Negotiations8.1 The Structure of Bargaining Two players: Player A, Player B Options in the negotiation process: “Agreement” or “Non-Agreement” No PD!48International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.The Negotiation Process What should be considered? Defined by next best option (outside option“): What is at stake? Most likely different for each partner Can be manipulatedReasons for Non-AgreementBargaining PowerCoordination: Ambiguity and/or uncertainty of payoffs (one-sided or bilateral information deficits, irrationality“)Remedies: Adequate communication Better predictions Prognostic toolsMotivation: Non-agreement payoff is best for meRemedies: Transfers“ within bargaining space (i.e. space defined by players outside options)8. Cross-Cultural Business Negotiations8.1 The Structure of Bargaining49International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A. Should the players enter negotiations? What are the players outside options? (Bargaining Power) Which transfer is required to reach an agreement? (What is the transfer space?)The Bargaining Process What should be considered?I. 10 / 10II. 6 / 12IV. 13 / 5III. 2 / 12Player APlayer BAgreementAgreementNon-AgreementNon-Agreement8. Cross-Cultural Business Negotiations8.1 The Structure of Bargaining50International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A. Should the players enter negotiations?I.10 / 10II.6 / 12IV.13 / 5III.2 / 12Player APlayer BAgreementAgreementNon-AgreementNon-AgreementAnswer: Yes, they should enter negotiations, because the agreement is socially desirable. 20 18 18 148. Cross-Cultural Business Negotiations8.1 The Structure of Bargaining51International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A. What are the players outside options? (Bargaining Power)I. 10 / 10II.6 / 12IV.13 / 5III.2 / 12Player APlayer BAgreementAgreementNon-AgreementNon-Agreement Bargaining Power: Defined by next best option (outside option“): What is at stake?As Perspective: Result: B chooses Non-Agreement (12) Player A gets (2)Options for player B: Agreement (10) or Non-Agreement (12) Result: B chooses Non-Agreement (12) Player A gets (6)a) As choice: Agreementb) As choice: Non-AgreementOptions for player B: Agreement (5) or Non-Agreement (12)8. Cross-Cultural Business Negotiations8.1 The Structure of Bargaining52International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A. What are the players outside options? (Bargaining Power)I. 10 / 10II.6 / 12IV.13 / 5III.2 / 12Player APlayer BAgreementAgreementNon-AgreementNon-AgreementBs Perspective:a) Bs choice: Agreement b) Bs choice: Non-AgreementBs choice of Agreement is dominated by Non-Agreement 12 10 or 5 Result: Player As choice of Non-Agreement (13) is not feasible.Options for player A: Agreement (6) or Non-Agreement (2) Result: Player A chooses Agreement (6) Player B gets (12)8. Cross-Cultural Business Negotiations8.1 The Structure of Bargaining53International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A. What are the players outside options? (Bargaining Power)I. 10 / 10II.6 / 12IV.13 / 5III.2 / 12Player APlayer BAgreementAgreementNon-AgreementNon-AgreementConclusion Player B will never agree, because he/she gains 12 whatever the other partner will do. Field III is dominated by field II A should agree (6 2) The payoff 13 for A will never be reached not binding/no feasible outside option for A best feasible outside option for A: 2 Feasible outside option for B in this game: Payoff 128. Cross-Cultural Business Negotiations8.1 The Structure of Bargaining54International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A. What could be done to motivate both partners to agree? Which transfer is required to reach an agreement? What is the transfer space?Player APlayer B A is better off: gains 7 instead of 6Results: Choice of Agreement At least 2 should be transferred!( 20)( 18)( 14)( 18) B is better off: gains 13 instead of 12 Agreement is socially desirable ()I. 10 / 10II.6 / 12IV.13 / 5III.2 / 12Player APlayer BAgreementAgreementNon-AgreementNon-Agreementt = 3 20: 20 18 = 2 B: 10 6 = 4 A: 10 12 = -28. Cross-Cultural Business Negotiations8.1 The Structure of Bargaining55International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.1) Pre-BargainingSource: Lebow, R. N. (1996): The Art of Bargaining, Baltimore & London (J. Hopkins Univ. Press), pp. 4/5. What is the problem? What is the nature of the problem? Can I resolve it in isolation, or does it require (or allow) me to address other problems as well? What are my interests? What do I have at stake on and off the table in this negotiation? Which interests are essential? What are my bargaining goals? What do I want out of the negotiations? What am I prepared to settle for? Is bargaining feasible? What are the interests and goals of the other side? Is there likely to be enough overlap with mine to warrant bargaining?8. Cross-Cultural Business Negotiations8.2 Three Phases of the Bargaining Process56International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.2) Bargaining Select a Bargaining Strategy Given the nature of the bargaining situation, which strategy is most appropriate? Should I use it alone or in tandem with another strategy? Increase your Leverage What resources and advantages do I have? What can I do to increase my advantages, diminish the other sides advantages, or convince the other side of my advantages? Frame a Proposal What kind of offer or counteroffer do I want to make? How is it conditioned by my bargaining strategy? Explain and Justify your Demands Why are my demands legitimate and reasonable? Do I want an agreement in principle or an agreement in detail? Have I reached a written agreement on all details that are important to me? Pin Down Important Details8. Cross-Cultural Business Negotiations8.2 Three Phases of the Bargaining Process57International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A. Is my agreement self-executing? If not, what requirements does it have? Have I secured those requirements in my agreement, in so far as it is possible to do so?3) Postbargaining Ratify the Agreement Does my agreement need ratification? What kind of terms will I need to gain ratification? Is there anything else I can do to increase the chances of ratification? Implement the Agreement8. Cross-Cultural Business Negotiations8.2 Three Phases of the Bargaining Process58International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Source: Fisher, R./Ury, W. (1991): Getting to Yes. Negotiating Agreement Without Giving In, 2nd edition, New York etc. (Penguin Books).1. The Problem: Do not bargain over positions.2. The Method: Separate the peoplepeople from the problem Focus on interestsinterests, not positions Invent optionsoptions for mutual gain Insist on using objective criteriacriteria3. What if they are more powerful? Develop your BATNA (Best Alternative To a Negotiated Agreement)8. Cross-Cultural Business Negotiations8.3 The “Harvard”-Concept of Negotiating59International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Source: Ury, W. (1991): Getting past No. Negotiating Your Way From Confrontation to Cooperation, New York etc. (Bantam Books).1) Preparation:1.Interests: yours and theirs2.Options: yours and theirs3.Standards: identify fair“ procedure (e.g. referring to market price)4.Alternatives: BATNA (Best Alternative to a Negotiated Agreement)5.Proposals: should be better than other sides BATNA6.Rehearse: talk it over with someone else8. Cross-Cultural Business Negotiations8.3 The “Harvard”-Concept of Negotiating60International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.2) NegotiatingBarriers to Cooperation1.Your reaction2.Their reaction3.Their position4.Their dissatisfaction5.Their powerCorresponding Strategy1.Dont react: Go to the balcony2.Dont argue: Step to their side3.Dont reject: Reframe4.Dont push: Build them a golden bridge5.Dont escalate: Use power to educate8. Cross-Cultural Business Negotiations8.3 The “Harvard”-Concept of Negotiating61International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A. Specifics of Cross-Cultural Business NegotiationsSource: Hendon/Hendon/Herbig (1996), pp. 15-76, 231-242. of the nature and characteristics of the role of government in (more or less) centrally planned economies of the relatively low status assigned to business-persons in many countries and attention to training executives in the art of negotiationsInsufficient recognition of the role of the negotiator in accommodating the conflicting interests of his group with those of opposing groups of the loci of decision-making authority of the strength of competitors of the difference between approval at one level and implementation of such approval at other levels of the government of the role of host government in the negotiation process of the economic and political criteria in the decision-making process8. Cross-Cultural Business Negotiations8.3 The “Harvard”-Concept of Negotiating62International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Hofstede (1980) defines four dimensions of culture:Individualism vs. collectivismMasculinity vs. femininityHigh uncertainty avoidance vs. low uncertainty avoidanceHigh power distance vs. low power distanceExamples: Germans: high uncertainty avoidance, small power distance, high individualism, masculineAmericans: weak uncertainty avoidance, small power distance, high individualism, masculine8. Cross-Cultural Business Negotiations8.3 Dimensions of Cultures63International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Specifics of Cross-Cultural Business Negotiations (cont.)Source: Hendon/Hendon/Herbig (1996), pp. 15-76, 231-242. Common mistakes made when negotiating overseasFailure to place yourself in the other persons shoesInsufficient allocation/attention of time for negotiationsInsufficient understanding of the role of personal relations and personalities in the decision-making processInsufficient knowledge of the host country including history, culture, government, status of business, image of foreignersInsufficient attention to saving face of the opponentInsufficientattention to planning for changing negotiation strengthsInterference by headquartersInsufficient planning for internal commu-nication and decisionsInsufficient understanding of different waysof thinking8. Cross-Cultural Business Negotiations64International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.9. Project: The Ruritanian Electronics NegotiationYou as representatives of your culture will negotiate an annual labor contract with the firms management (Personnel Managers)BackgroundRuritanian Electronics (A multicultural Computer manufacturer in the Republic of Ruritania)Management RuritanianWorkforce50 % Feefifofians50 % Abadabenise Management has to negotiate a new annual labor contract with (the two parts of) the workforce Personnel managers, Feefifofians, and Abadabenise have different aims and culture profiles Each party has something to win or loose (See instructions in the reading pack!) The NegotiationProblem:65International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Schedule team meetings:1.Define your own bargaining position by setting your goals according to your communitys culture2.Plan how you want to conduct the negotiation process. You will not be able to define your own strategy without anticipating your opponents goals and strategies.3.Remember: If your negotiations do not end in an agreement top management is likely to sell the business and you all might get dismissed.Team meeting: Preparation of the negotiation Prepare the readings (Instructions) carefully! Handout: Abadabinese; Feefifofians, or Personnel managers score sheet9. Project: The Ruritanian Electronics Negotiation66International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A. The Negotiation: You - as representatives of your culture - will negotiate an annual labor contract with the firms management. “Postbargaining”: Discussion of Results Have some slides ready to present and explain your strategy!9. Project: The Ruritanian Electronics Negotiation67International Management Beijing 2002Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.Thanks for your attention and good luck in your future careers!