IB 403 Exam 2
Brazil cost (more)
the money is of poor value so cars cost more than they should, burgers cost more than they should (Big Mac index)
Strategy
Faster economic growth and higher standards of living, redistributive policies and higher education levels; Tax reform & fiscal incentives to boost capital investments in infrastructure etc. for growth
8 note worthy Asian economies
Japan; the four tigers Hong Kong, South Korea, Singapore, and Taiwan; and newly industrialized economies - Indonesia, Malaysia and Thailand Oh, and there's China of course
Taiwan
Turn to self sufficient economy - sought to upgrade agric.; re-orient domestic production to meet local needs via import substitution industrialization
More on China
*Culturally - the use of guanxi (relationship network or connections) - deeply rooted in Chinese culture based on a Confucian philosophy, stresses the importance of relationships. *ming ying - people owned companies i.e. state owned businesses flourished and play a major role in building Chinese companies at home and abroad.
PAHC defined
- determines the direction and speed of economic development - the direction of trade and product specialization - a range of cooperative endeavors between business and government - Pooling human resources, Risk sharing, and Coordinating large numbers of economic activities, both private and public to achieve the common goal of accelerating economic growth.
The Future
- oil discoveries - investments abroad (OFDI) - Redistribution prospect - could stall; as growth accelerates in Brazil, inequality will increase
Development Model's 3 propositions
- policy augmented human capital - political stability - assertion that democracy is not necessarily a precondition for economic growth
East Asian model of economic development
- the model explains the transition from a backward economy to an industrial economy - policy augmented human capital-human capital with a development road map-led by a capable leader -validates the critical role of human capital & the role of government when gov. interventionist policies were failing elsewhere or facing opposition
Turning Point and Path to Globalization
-1991 - Economic performance failure necessitated adoption of austerity measures. 1. Two weeks foreign reserves only; 2. Turn to IMF assistance despite attached strings; -Change was necessary to cure fundamental ailments of the economy. Need a new way of thinking through reforms; -Post 1991 reforms signaled different roles for the govt. in the economy.
B. Strategy Adjustment - "Brands Conspiracy"
-Added 2 JVs in 1994 *Guangzhou Lonkey Co., Ltd which had the detergent brands of "Lonkey" and "high R&F *JV with Beijing Daily Chemical Plant into Beijing Panda P&G Co., Ltd, (65% & 35% equity. -Their individual brands froze after being incorporated into P&G -1999 - P&G began move towards whole ownership
How to achieve the 3 pillars
-Address needs of the poor and the rich - social programs and availability of capital. Bring down inflation. -Reduce poverty and income inequality e.g. Instituting a $115 per poor family to send kids to school and vaccinate them -Increased domestic demand. Domestic industries for local markets. -Appropriate policies e.g. domestic consumption for growth through business friendly policies; -regulatory oversight e.g. banking -better commodity prices
South Korea
-Adopted the Japanese model; -Highly interventionist but with the discipline of having to export; -Promoted Chaebols - holding companies controlling diversified industrial groups, with generous access to credit with govt. support. -Targeted 6 strategic industries namely: Steel, Petrochemicals, Non-ferrous metals, Shipbuilding, Electronics and Machinery;
Industrialization
-Africa has to leverage its comparative advantage in natural resources to drive industrialization -need to invest in knowledge, skills, tech. and innovation -trade should be strategically pursued
Africa - Top 500 Companies
-African companies avoided the worst of the 2008 crisis -beat walmart -demand from affluent consumers -middle class will grow -MNC w/ African foot prints -Extractive industries still dominant: oil & gas and mining -equity funds abandoning emerging markets will make it difficult to launch IPOs -country-specific problems -high interest rates
smart protectionism
-African economies exhibit high levels of Protectionism with no tangible benefits in terms of productivity. Trade support to industrialization requires a coherent policy framework. -Smart protectionism entails tariff structures that support a coordination and consistency between trade & industrial policy framework.
Negatives
-Brazil cost: the cost of inefficiencies of Brazil's economy e.g. burden of red tape & poor infrastructure -Lack skilled labor -Culture: laxity? e.g. enjoy your time, don't mind to be late
Brazil still sucks...
-Brazil is still one of the World's most unequal countries -Its murder rate rivals Mexico's -Public health care is a lottery -Fewer than half its pupils leave school fully literate
In the long term:
-Brazil needs to boost its productivity -The World Bank's annual report on doing business has a productivity to-do list for Brazil: --Make it simpler to start/wind up companies --cut and streamline taxes --increase domestic savings and investment
A. Marketing Environment
-China has grown rapidly and become a huge potential consumer market -vital component of MNC's global strategy
Note
-China is the world's largest market for indust. automation and robots -e.g. Foxconn claims that within 5 yrs the 30% of its labour force will be replaced by robots, releasing workers to do more valuable work.
Private Sector Scores
-China relied on state planning and heavy investments in infrastructure and property, a model that has run out of steam, and reforms aim to shift to growth driven by consumption and services. -State-owned enterprises (SOEs) control a large share of assets in important industries yet closer inspection reveals less impressive achievements. -The private sector, is responsible for 2/3 of all output today & almost all of the 250m-plus jobs created in cities since 1978; accounts for 9/10 of exports. Its investment grow faster than SOEs. -Resilience & dynamism of the private sector crucial for China's weathering the current storm.
So what can we conclude about China's development and challenges?
-China's economic and social agenda is far more dependent upon the impact of the friction between societal divisions; -China's domestic priorities and challenges will preclude an ambition to 'rule the world' although the rest of the world will be eyeing it as such; -The communist led Govt. has managed to transform itself and the lives of the Chinese population by embracing some democratic principles;
Singapore's success in industrialization
1. Charismatic national leader; 2. Meritocratic politicians; 3. Govt bureaucrats cum Capitalist entrepreneurs; 4. Welfare programs on sound financial basis; 5. Role of foreign mgrs.
Export environment
-China's export focused economy is giving way to a fast growing but unnoticeable consumer-driven market: bikes/motorcycles, automobiles, luxury goods, consumer electrics, jewelry, internet use, shoes, mobile phones, home appliances -In 2012 consumption contributed over 55% of China's growth, exceeding the contribution from investment. -If this pattern holds, China's growth will cease to be investment-led (let alone export-led), but more consumption-led
final thoughts on this:
-China's leaders strongly oppose outright privatization and partial privatization has done nothing to boost competition -SOEs are a drag on growth and innovation that China can't afford -the most promising approach is to end state protection for all SOEs -SOEs should also be allowedto recruit professional managers and pay market wages -If the country is to sustain growth, it must rely on fresh waves of entrepreneurialism and innovation -The gov. must push ahead w/ reforms and expose state firms to genuine market competition -Let entrepreneurial private firms compete for success!
Africa and Globalization (China)
-China's robust growth past 2 decades has been good for Africa - insatiable demand for resources & raw materials -China is now Africa's biggest trade partner -Has developed a 'Special Plan of Trade with Africa' with which it seeks to scale-up trade relations; -China has penetrated major econ sectors from infrastructure (roads, railways, telecom & energy) to agric, industry & construction -China has become a major source of development financing
Oil and Gas
-Companies are developing gas finds to boost bottom lines & cushion against oil price swings; -Rapid growth of upstream opportunities has accelerated the development of capabilities -New investment opportunities opening up in African oil and gas reflect wider investor sentiment on Africa's 'investment frontier' status -focus on downstream activities prominent
Japan
-Coordination b/w gov. and business -Firms: be strong at home to be strong abroad -support to producers, not consumers - jukyu chosei (supply-demand adjustment) -Ministry of International Trade and Industry
Indian Global Companies Unleashed
-Corporate restructuring brought confidence to Indian business. -Change-passive resisters to active promoters of Globalization; -Continuing to initiate policy change toward more open Indian market and business environment.
SIngapore
-Diverse population; -Govt. led enterprise; -Govt. responsibility for social security, housing & medical services; -Incentives to foreign ownership; -Govt. invested in business ventures & at times assigned civil servants (technocrats) to serve as mgrs; -Govt. estd central provident fund-major role as savings vehicle; -2 resources: Port and People -Success attributed to more of deliberate planning of bureaucratic managers & multinational executives than pure raw energy of individual enterprise; -RESULT - orderly & predictable industrialization & attainment of development objectives;
Opportunity Categories
-Diversified economies: calls for expansion in skills, HR, and infrastructural development -Oil and Gas: Political stability challenges; Investment challenges (mono-culture); Diversification challenges. -Transition Economies -pre-transition economies: Government stability, institutional development and sustainable agricultural development still remain crucial. These economies are characterized by lacking the basics - a) political stability, b) strong public institutions, c) sustainable agric development etc.
High economic growth rates
-Effective industrial policies e.g. Encourage FDI -Export processing zones & Industrial parks -Export-led trade policies, -Incentives e.g. numerous of tax concessions -Interventionist policies e.g. -Clear & well-defined, pre-announced performance criteria; -State-imposed below-market interest loan rates etc
Cluster 2
-Firms indicate a much higher % of foreign current customers -Aged as cluster 1 but exported within the 1st year & bulk export sales -firms internationalized much earlier than the other firms in the sample
3. Efficient Resource Allocation and Productivity
-Flexible labor markets- little or no minimal wage legislation; minimal contrast b/w formal and informal sectors -capital markets & allocation- enforcing regulations to optimize bank's project choices; creation of development banks for term lending; sector specific credit availing through targeting -openness to foreign technology- technology transfer through licensing; capital good imports; foreign training
MITI
-Focal point of Japanese economic expansion; -Worked closely with industrial sector associations; 1. Zaibatsu - industrial/ financial conglomerates; 2. Kieretsu - banks & industrial groups with less tight links; -Characteristics of Japanese economy: a. Large & educated workforce; b. Low inflation; c. Very high savings rate; -Keys: Quality improvement as a competitive weapon and investment in mass production.
Exchange rate quandry: The Renminbi/Yuan Saga
-For years china has kept the value of its currency artificially low -The yuan's appreciation will reduce the unsustainable U.S.-China trade imbalance; But... -It is feared that the measure could lead to trade war at a time when China strives to increase the yuan's value. -The unintended consequence of the tariff imposition could be increase in consumer prices China's argument... -the currency has risen -China continues to run huge trade surpluses (has declined as a % of its economy though) -China argues that this is evidence of moving toward a market exchange rate.
Mining
-Higher commodity prices have propelled mining houses but African governments are at the same time calling for direct revenue from operators in the natural resource sector; -Commodity price fluctuations have not slowed the price ascent of mining companies in Africa; -Chinese, Brazilian, Canadian & Indian firms continue to launch new multi-billion dollar operations and takeover deals all over Africa -South African firms continue to dominate the home-grown firms category; -African mining ministers signed a declaration to incorporate mining sector into the wider development priorities; -Uncertainties have affected mining production, economic storm clouds have pushed the price of gold and consequent boost in revenue.
Africa - Next Growth Market
-Home to the world's enormous opportunities -Deciding where and how to seize these opportunities is crucial to potential international players. -Many companies have been slow to enter the African market due to: *political turmoil and uncertainty; *poor infrastructure; *scarce talent; *poverty, famine, diseases etc; *being unsure of Africa's market size.
Nandani Nilekani's TED talk
-Ideas that have arrived - People; democracy; entrepreneurship; technology; the english language. -Ideas in progress - Education; infrastructure devp; Cities; internal globalization. -Ideas in Conflict - ideology; labor policies; higher education. -Ideas to Anticipate - e-governance; health system; pension & entitlements; the environment; energy
Investing in a post-recession world
-Impact of Global recession still lingers in the minds of both govts & companies; -Calls for Adopting new approaches; -Emerging economies avail opportunities to MNC & wrestling with policy measures or pro-FDIs; -MNC need to find optimal means of taping into opportunities.
CHINA
-Important economic powerhouse -by 2010, world's biggest manufacturer -meteoric economic rise, but remains politically closed -From Mao's collectivized agriculture, to cultural revolution years, walking with two legs etc to building socialism with Chinese characteristics; the Tiananmen square event of 1989, to the adoption of a the "Two system, one country" strategy, China has leaped into the world arena.
Made in China 2025 Plan
-Improve quality, productivity and digitisation, and to expand the use of numerically controlled machines. -Help companies leapfrog to the forefront of technology
In the past 25 years a better labor market and a basic social safety net have cut poverty by 2/3
-Income for the poorest Brazilians has doubled in the past decade -Brazil's Gini coefficient is at a 50 year low -The middle class is growing -More citizens now live in more solid houses
Cap-Indialism
-India's economy is one of the world's most dynamic. However, India's form of ownership has barely changed -India's own equilibrium in which profits are controlled not by institutional shareholders but mainly by the state, or by entrepreneurs and their descendants
Note about born globals
-Internationalization does not have to go through the progressive accumulation of resources and capabilities. -Born global phenomenon prevalent in knowledge intensive firms like software or information technology products. -Proposition - a small local demand might drive the firm's efforts to seek opportunities abroad. -Born global firms would abound in knowledge-based industries, and especially in small open economies.
US - China Relations
-Issues like intellectual property rights, measures that bar US companies from access to Chinese markets -worries about currency have receded -global trade tensions will continue
Early Years
-Jawaharal Nehru - First Prime Minister, oversaw the early development of the Indian state whose govt structure was modeled after the British system; -Congress party dominated India for 33 uninterrupted years; the Nehru-Ghandi dynasty dominated political leadership; -Wanted to emulate Soviet economic management system; dreamed of building India into an industrialized, socialist state -instituted bureaucratic controls & licensing system -Gov. influenced private investment decision by nationalizing and controlling capital markets; subsidized falling SOE -food shortages persisted; Green revolution turned around the fortune to exporting
The Three Pillars
-Macroeconomic stability -Trade and the Hand of God (strong export promotion) -wealth redistribution
1991 - 2001: Becoming Globally Competitive
-Major economic crisis faced India, along with the collapse of USSR (major partner) - viability of socialism in question. -Economic liberalization - a necessity. -Corporate restructuring a must.
Lessons
-Managing and dealing w/ diversity -flexibility (versatility) - central to the way India works -learning/education; learning as a social duty -the environment: deforestation, pollution, wildlife -contradictions: poverty vs. rich, static rural culture vs. efficient democracy amidst nepotism in politics, illiteracy vs. success in STEM fields, capitalism coexisting with communism
Foreign investment
-Many more Chinese firms are venturing abroad; -Today it's not just copycats...China will expand, through its own innovations and acquisitions. -Chinese firms have a burning desire to prove that it is possible to create a "Chinese brand of excellence". -Chinese investment overseas (OFDI) almost caught up with FDI in China.
Cluster 3
-More active export activities than firms in Cluster 1 -Firms' customers on average, 49% foreign -Largest firms & the majority did not export during their first year -on average, it took them 5.3 years to make their first export -main difference from cluster 1 is age and size -both groups had limited or non-existent export activity at inception -started operating in home market before expanding 1 and 3 can be described as cautious internationalizers (they are NOT born global firms)
C. "Equity Ownership Concentration"
-P&G equity ownership concentration begun in 1997, with HK$ 5.07 billion acquisition of 10.75% stake of the equity from the 30.75% held by Hutchison Whampoa Ltd. -In 1999, P&G-Hutchison Ltd expressed need for a one-time buyout of all shares in China. -In 2000, P&G-Hutchison Ltd spent 2 billion RMB on the 20% of Guangzhou P&G shares held by Guangzhou Soap Factory. -Construction Import & Export Trading Corporation sold their 4% of the Guangzhou P&G shares with the remaining completed within one year. -In 2001, Guangzhou P&G became a completely foreign investment wholly-owned company. P&G accounted for 80% of Guangzhou P&G shares and Hutchison Whampoa Ltd 20%. -On May 12, 2004, P&G announced that they would spend 1.8 billion US dollars for the acquisition of remaining 20% shares held by Hutchison Whampoa Ltd had, allowing allow 100% equity ownership by P&G. -By so doing P&G finished its last step for equity ownership concentration in Chinese market.
Behind the Measures
-P&G is not the only MNC to abandon original JV partners. -Foreign funded enterprises in China had exceeded the number of JV. Entry mode for MNCs' into the Chinese market became a significant challenge. -The multifaceted reasons of MNCs' entering the Chinese market are embodied in such aspects as: *Market environment, Govt policies, and investment structure, *Market knowledge & experiences, as well as JV constraints.
Consequently...
-Permit raj system came to a halt; -Subsidies restricted; -Tariffs simplified and lowered; -Disinvestment of govt ; -Reduction of fiscal deficit by broadening the tax base and reducing expenditure; -Monetary tightening for inflation control and devaluation of the rupee;
Building blocks for Industrialization and Development
-Political Stability; -Control of inflation - inflationary pressures reduced by stable govt; U.S. Aid; control in money supply & increased interest rate; -Family agriculture - unlike many developing countries, great emphasis was put on improving agriculture; -Moderately well developed infrastructure and human resources;
Form of ownership
-Pre 1991 - most businesses family affairs -1991-2003 - growth & more turbulent period; competition from home and abroad -2003 - possible end to oligarch capitalism altogether
China's processing trade
-Processing trade accounts for 90% of China's high-tech exports and only 30%-50% of the rest. The bulk of the high tech components are produced outside China; -Often cited example is the US$ 150 iPod that is exported from China to the U.S. but the value added originating from China is less than $5! Thus: -China's trade surplus is essentially its surplus in processing trade - significant deficits with the rest of East Asia are offset by large surplus with the rest of the world.
Opportunities
-Retailing; -Telecommunication; -Banking; -Infrastructure development; -Resource related businesses; -Agricultural value-chain. -Competition is less intense; -Relatively less foreign companies; -Pent-up consumer demand is strong.
The Case (RP)
-Reveals that definitions of born global can hide disparity b/w born regionals and born globals -questions born-global firm's existence in small open economies -tests whether the Costa Rican firms are born globals or adhered to the traditional internationalization model
Indian Business 1947 - 1991
-Shaped by constraints imposed by 3 factors: *Indian culture *British rule *Post-independence socialist policies -Resulted into an Indian business model that was predominantly domestic focused. -Rich owners, poor companies. (need to expand past domestic market)
Construction
-Strong economic growth brings more business for construction companies, but the top firms are facing capacity problems and uncertain regulatory prospects; struggling to keep up w/ demand -Attempts to reduce shortfall cement manufacturers are investing in new plants to increase capacity; -Uncertainty abound around project finance & bubbles in project pipelines, major obstacles to construction firms in Africa;
B. Government Policies
-The 1979 "JV LAw" restricted FDI entry modes -MNC JV became the most common approach into Chinese market -improved aws & regs. reduced investment risks and uncertainties -"The Foreign Enterprises Law", "Sino-Foreign Cooperative Enterprises Law" and "Sino-Foreign Joint Venture Law" -These policies influenced MNCs entry mode choice into the Chinese market
How RED is your Capitalism?
-The distinction between China's SOE and private firms is not always as clear-cut as it might seem; -You don't become successful in China as a purely private entity, you need a powerful connection, which can prove to be either an asset or a liability; -State firms that operate in sectors of little concern to the government can behave like private ones. -The Chinese Academy of Sciences still controls 1/3 of Legend Holdings, a conglomerate, which seems to make it a SOE. But thanks to shareholding reforms, its management is independent. -Just because an entrepreneur has good guanxi does not mean the party controls his firm. -SOEs have advantages, that entice private firms to get close to the party if they want to succeed; -China's entrepreneurs are more pink than red.
C. Changes in Investment Structure
-The structure of investment sources changed from smaller companies to European & US Global brand MNCs -Labor-intensive to capital-intensive & technology-intensive industries
Africa and US
-US-Africa trade arrangement - Africa Growth & Opportunity Act (AGOA) achievements have been clouded with challenges e.g. *Unequal trading environment rendering African goods inferior, logistical challenges & competition from Non-AGOA countries. -Africa offers unique investment opportunities to American investors; -Africa stands to be the biggest winner in the scramble between developed nations etc
MNC Entry into China (P&G)
-When China first established its open door policy two decades ago, the majority of foreign firms preferred JVs to wholly-owned businesses -negotiate JVs and establish local manufacturing facilities -Entry mode later shifted to whole ownership and the sole investment ownership became the main approach to enter China
Looking toward the future
-Working age popn. will continue to rise & will boost India's workforce, savings and investments. -As workers shift from agriculture (60%) to more productive jobs in industry and services, this will automatically boost GDP growth.
There is a possibility for social and economic advances
-agribusiness opportunities -expansion abroad -needed reforms: trimming pension benefits, cutting red tape, lowering and simplifying taxes, and updating labor laws -needs to become more competitive
New Capitalism
-an immense formal sector employing the majority -indian capitalism is very much concetrated in service firms and Maharashtra and Karnataka -majority of stock sits in BSE 100 -low-debt levels and strong growth -State Bank of India
This led to...
-balance sheet cleaning: Optimal debt size; asset valuation distortions; corporate governance; Strong B/S essential to attract new capital -compete through cost reduction and increased productivity; minimze fam control, enhance quality and customer focus -focus on core business: allowed companies to consolidate positions and benchmarking against global competitors -strengthen mgmt; owner mgr. replaced by professional; relationships loyalty and trust important -altered role for owners - decline in dominance of family business ownership; consolidate w/ industries emerged with liberalization
Sector ownership
-basic materials, utilities, and energy: state and family -financials: diffuse owners -consumer and healthcare: diffuse owners, foreign, family -industrials: diffuse, state, family -tech. and telecoms: family, Infosys
Case - Group B (Firm-level characteristics group)
1. Firm size - total sales and number of employees 2. firm age - no. of years that had elapsed since the firm was founded until the time of the study 3. international experience - no. of years the firm had been exporting
A. P&G First Step into Chinese Market
-began constructing research in 1985 -Founded investment company, P&G-Hutchison Ltd in Hong Kong with 69.25% P&G and 30.75% Hong Kong Hutchison Whampoa Ltd. -In 1988, PGH incorporated Guangzhou Soap Factory because of its shampoo business and working experience with U.S. JVs -JVs in designated Technological Development Zones enjoyed tax benefits. -Guangzhou P&G Co., Ltd as JV btn Guangzhou Economic Development Zone Construction Import and Export Trading Corporation and P&G-Hutchison Ltd partner in 1988; -The initial $10 million equity ratio was 65% for P&G-Hutchison Ltd, 30% for Guangzhou Soap Factory and 5% for Construction Import & Export Trading Corporation.
Overcoming the Mindset Barrier
-building Indian global brand -persistence in face of setbacks -overcoming liabilities of Indian origin
Growth prospects
-cessation of hostilities in conflict-laden countries -austerity measures -Market-friendly policies, removal of trade barriers, enhanced regulatory & legal systems and privatization of SOE
e. Constraints of JVs
-declined as major entry mode -unstable due to: differences in partners management objectives, business experiences, and future expectations -intellectual property rights protection -China's IP rights protection sucks so JVs are reluctant to transfer tech. Strain on relationship.
China and globalization
-early wave led by SOE's - corruption -future Chinese would-be investors market minded not national champions -fed up with paying licensing fees and royalties to foreigners. Looking abroad to acquire top talent and technologies -Many attempts to capture foreign markets failed -Chinese firms are getting better: increased revenues, investing in Europe -entrepreneurial companies will begin to enter new markets; competition for MNCs
The Future of China
-enhance science and technology -facing "middle income trap" - loss of competitiveness in labor intensive industries and failure to gain new sources of growth via innovation; - balance economic growth so that it's consumption-led rather than exports and investment led
Asian Tiger Economies
-enormous investment in education & human capital; -non-democratic and authoritarian political systems, -high public and private savings rates
Presently...
-growth has fallen -gov has taken steps to: liberalize India's economy by pushing for greater foreign investment, make bureaucracy more efficient, national goods-and-services tax -India's public sector banks still have massive debt -"cooperative competitive federalism" -want more power to the states to boost growth, instead of directing from the center
Causes of Brazil cost
-heavy tax burden -large payroll taxes -high tariffs = high import costs -complexity of the tax code -rigid labor laws Other: -high freight charges -high crime rates -High office rent -credit is expensive
-human capital and effective policy = innovation -human capital underlying the investment in physical capital - invention, innovation, entrepreneurship, and assimilation -the ability to formulate and execute effective development strategies is a component of human capital
Promotion of specific industries
-import protection and subsidies for capital and other imported goods -promotion of capital & knowledge intensive industries
Economic Performance
-improved macroeconomic mgmt, increased exports of natural resources, and growing middle class has helped GDP to increase -most countries have attained universal primary education, decline in HIV/AIDS, decline in infant/maternal mortality However... -poverty remains prevelant -Africa must do more to generate employment, increase incomes, and enable industrialization -Africa's pop. is getting younger -Urbanization expected to grow
D. MNCs' Cross-Border Accumulation of Knowledge and Experiences
-inexperience and lack of understanding of the market & environment in specific countries often restrict MNCs appetite to venture out -companies could overestimate risk and underestimate benefits which could lead to the wrong entry mode -w/ the accumulation of knowledge and experience MNC can better assess risks & benefits and thus be able to manage foreign operations more effectively
B. Corporate Restructuring
-liberalization of licensing; companies need to enhance domestic competitiveness -reduction of import tariffs & entry barriers removal
China's manufacturing emanated from...
-low cost, high volume -vibrant high tech - technology based, innovation based global oriented market
STILL made in China
-manufacturing is in trouble: Factories are squeezed, labour costs are rising and jobs are being reshored to America. Competitors such as Germany are said to be leaving China behind by using robotics -Some production is moving to countries nearer its consumers BUT China remains at the heart of a Factory Asia network: strong infrastructure, skilled workforce, high labor productivity -The rising middle class demands more in return and China has lost the advantage that it had -moving from "made in China" to "made by China" (innovation at home)
India and the U.S.
-not a major trading partner for the US -could be a good market for American companies -US could be good source of investment for India
More on SOEs
-number and output shrinking but remain politically powerful -crowd out private sector by gobbling up resources -responsible for may of China's excesses: poor investments, leverage, etc.
What still remains
-old roads/no new roads -poor public transport -inadequate airports -weird school -2/5 Brazilians not covered by primary health care -Infrastructure projects behind schedule or above budget -a less favorable economic climate -downturn in investments -lacks strong demographics
Why do business in Africa?
-opportunities exist -macroeconomic conditions -stable currencies -diversification
Issues with growth
-poor service sector incapable of meeting the need of a growing consumer economy. *Calcified social structures & business models not geared transacting intangibles like services; *Lags behind in the creation of a sector that for instance efficiently exploits economies of scale; *In dire need of investments in service skills, expertise, training and talent development. -Balancing international ambitions with domestic realities *The development of a more consumer based economy to supplant a large portion of its manufacturing sector; *Rebalance its economy away from trade surplus propped by the low valued yuan -Modernization of banking & finance sector *China established its stock markets in 1990 to finance its failing SOEs. It still requires transparency and oversight; *Since 2009 China signed currency-exchange agreements with Argentina, Indonesia, S. Korea, Malaysia, Belarus and Hong Kong. The smaller countries could use their yuan reserves to trade with China. *This set the stage for the yuan to become one of the top global trading currencies -Outbound investments *china's dollar trap *FDI *Top 10 Chinese M&A went to Indonesia, Malaysia, Singapore, Vietnam & Thailand; *Affinity between Asian cultures as well as the role of diaspora Chinese population will see increasing trend toward China investing in places with minimal resistance to Chinese investments than Western countries. -Population gaffe *4-2-1 breakdown - one child policy inverted demographic pyramid -Hot pot nation *modernization is taking unexpected toll on pop. *modernity is reducing the distinctiveness b/w regions *hotpot of homogeneity *homogenization = mobilization of thought and action in Chinese society
The Asian Economic Miracle
-rapid growth with equity -the high performing Asian economies differed from other developing countries in that: *had high rates of investment *high & rising human capital endowment *improved productivity HOW? -building institutional basis for growth -accumulating human & physical capital -efficient resource allocation & productivity
A. Economic Liberalization
-removal of industrial licensing -reduction in import tariffs by 25-85% -devaluation of the Rupee -removal of restrictions on Capital issues -indian firms allowed to raise funds in international capital markets -Foreign institutional investors participation in Indian capital markets allowed. -FDI inflow streamlined to allow for auto approval process in 35 industries; -Raised Max share limit of FDI by foreign capital in JV to 51% in priority sectors
the gini coefficient
-shows that India has less income inequality than China or the U.S. but has much more poverty -Some 260m people still live on less than $1 a day. -Half of all children under five are malnourished. -India needs rapid growth. But growth by itself that is not sufficient to end poverty.
Recent Events
-slow growth and high inflation fueling pessimism -many economic ups and downs -poor growth -external events affecting Brazil -Less concern for efficiency of Business -inadequate infrastructure -currency has weakened against the US dollar
SK + and -
-slowing manufacturing growth but no stronger domestic consumer market -not successful at developing its service sector -export-led model outperformed others but faced new entrants in the arena -manufacturing still grows -significant player in new growth industries, high-end manufacturing -Samsung, Hyundai & LG -only mfg exporter to have gained share in China over the last decade -strong corporate model: family owned, publicly traded, professionally managed -emphasis on entrepreneurial development: due to aging pop. and falling birth rates; economic dynamics of the neighbors; aims at creative economy drive and encouraging entrepreneurs
India Adventures in Capitalism
-the Indian economy's growth dips to 7-8%, investment slow down slowing & high inflation; -India, the land of red-hot start-ups & new entrepreneurs, is mostly led by dynastic industry heads; -Much touted "silicon valley companies" as the new sources of wealth
needed reforms
-the bloated state owned sector must be reformed so that private firms can compete on equal terms -1st view: make SOEs bigger to maintain status of state ownership dominance in China -2nd view: need an environment of free competition instead of support from the gov.
Irreversible Trends
-the impact of the internet -the rise of the middle class and consequent lifestyles -mass urbanization & the resulting rural-urban tension -environmental effect of China's industrial growth -China's insatiable demand for resources -China's foray into the international markets is unstoppable -China's population pressure
China calls for:
-understanding of competitive advantage -a strategy that allows for early localization - potential for growth -talent development and acquisition - right people at the right time in the right positions -understand the different Chinese consumer needs
The East Asian Model
-validates the critical & unique role of human capital when emphasis is on physical capital accumulation -validate the role of gov. when interventionist policies are failing -provides evidence of preference for economic development over democracy, contrary to conventional wisdom
Costa Rica +'s
-well educated workforce, liberalized economy, steadily decreased import tariffs, free trade agreements, US largest trading partner -long history of democratic stability -has one of L.A.'s highest levels of FDI
Telecom
-world's 2nd largest mobile phone market -fastest growing mobile market in the world -attractive to European telecom operators -w/ mobile market saturation, telecom operators slowing price wars and rolling out new products
Cluster 1
-young small firms -did not engage in sizeable export activities -less than 9% non-local cutomers -Practically no firm exported during its first year
Transformation of Indian companies from domestic to global players in 3 phases
1. British colonialism to post-independence socialist policies 2. Post 1991 economic reforms necessitating corporate restructuring 3. going global
Biggest obstacles to India's growth
1. India's infrastructure 2. India's labor laws - very restrictive, need more flexibility 3. India's dreadful quality of public services - lack of drinking water, toilets, poor health care, no public education -Need more investment in education and infrastructure! -Better education, labor market reforms, and less red tape -needs faster growth to create jobs for expanding population -Poor people are struggling
Export Performance based on 5 variables
1. export intensity 2. temporal proximity - inception & first export 3. % export to total sales 4. Firm size - no. of employees 5. firm age in years
Case - Group A (Export Performance Group)
1. export intensity 2. total foreign clients as a % of total customers - aims to export early 3. % total foreign sales during the first year of firm existence as % of total sales that year. 4. % of current sales that were local, regional, or global - monitor growth of export sales
Keys to Successful Entrance
1. pick the right entry strategy: M&A? Buying a stake in a large African company? Organic growth? 2. Get and Get To Customers: Investing in market intelligence to meet the needs of band-conscious consumers. Developing innovative, low-priced consumer products and services is critical 3. Fill the Skills Gap: high labor costs attributed to poor regulatory framework and infrastructural development, missing middle level cadre of managers, training programs and invest in top talents 4. manage risks: a) Diversify across geographic markets to mitigate risks; b) Build partnerships with local entities so as to navigate through the bureaucracy and foster relationships; c) Identify and work with the influencers as a smart approach to build inroads; d) Invite stakeholders into local company decision-making bodies to build a sense of belonging and ownership.
McKinsey 5 priority areas to reduce the Brazil cost
1. reduce informality 2. improving the macroeconomic environment 3. reducing red tape 4. improving efficiency of public services e.g. security, education and the judiciary 5. improving infrastructure network
SOE reform in 3 steps:
1. speeding up financial liberalization so that credit goes to the most dynamic firms 2. enforcing the rule of law so that all firms are treated equal 3. encouraging competition across the economy, including strategic sectors *competition remains ugliest aspect of reform; extreme competition and none at all
"Washington Consensus"
10 policies to market reform: -fiscal discipline, -increased public expenditure in education & health, -tax reform, -interest rate liberalization, -a competitive exchange rate' removal of trade & foreign investment barriers, -privatization, -deregulation and -secure property rights; Also... -Opening up foreign trade; -Encouraging investments into infrastructure e.g. power, ports & telecommunication; -Rise of the new private sector - role of Diaspora Indians; -Loosening of controls;
Entrepreneurial Phases
4 entrepreneurial waves that have defined the modern Chinese economy: -1st the 1980s, when the end of Maoism enabled private-sector firms to take off; -2nd wave began in 1992, when Deng Xiaoping's "southern tour" rekindled reforms; -3rd wave rolled when China joined the WTO in 2001, which opened it up to global business; -4th and highly disruptive wave has arrived - Chinese entrepreneurs are more global in outlook, more willing to accept outside investors and more innovative.
Dominant Lever
4 generic international strategies characterize Indian global companies -local optimizer -low-cost partner -global consolidator -global 1st mover Along with... -leveraged capabilities -born-global -building relationships -transformational mergers -specific india developed competencies
In the short term:
A weaker currency will help as long as tight fiscal and monetary policy prevent it from fueling inflation. A cheaper currency will be bad for Brazilians' income but good for making imports cheaper and exports pricier
Export Push
Active promotion of manufactured exports; export incentives etc Liberalization of trade regimes; Exchange rate liberalization;
Asian Tigers and Little Dragons
Comprised of Hong Kong, S. Korea, Singapore, & Taiwan; characterized with high economic growth rates & rapid industrialization in the 1960s - 1990s: -Most powerful evidence of the importance of PAHC; -Improvement of human capital; -Early import substitution did not work. Policy makers adopted an export strategy from primary to intermediate to capital goods. -Developed from poor, low income 3rd world into advanced & high-income economies; -Hong Kong & Singapore - World-class international trade and financial center; -South Korea & Taiwan -pre-eminent in electronics, manufacturing and information technology
Case Results
Data revealed that most firms sampled were not born exporters & only a few exported right at the outset -30/40 did not export at all the first year. One exported 10% and another 20% of its sales during first year of existence -4 firms reported most of their sales as exports their first year -took firms an average of 4 years to export for the first time, and not all firms exported on a regular basis
internal globalization
India is so large that there are multiple markets within and they can do business with each other, in the past they weren't interacting but now it's time to "tear down the walls"
the 3 factors defined
Indian culture: -Change is slow in ancient culture -Restrictive system -Traditional joint family system British Rule: -Infrastructure to enhance Br rule -English language -Identity Socialist Policies: -Failed to address stagnant eco stalled indust. Dev; -Agric based incapable to feed popn (high growth rate); -Central planning; licence raj; SoE;
Growth requirements
McKinsey estimates that if China is to maintain 5.5-6.5% GDP growth to 2025, 1/3 - ½ of the growth must come from improvements in total factor productivity. cannot innovate; -SOEs are inefficient and indebted, so most of that productivity growth will come from the private sector. -Inventors are now encouraged to commercialise new technologies, and -protection for intellectual-property rights is being strengthened.
Encouraging Entrepreneurs
Measures to boost incentives for start-ups, small business and venture investors
Independence Struggle
Mohandis Ghandi -non-violent struggle -Swadeshi - self-reliance -Central planning and state control -against split of india: Hindu and Muslim, East and West Pakistan
Impact of MNCs Entry into Chinese Market
Positive 1. ease employment pressure, cultivate top talents 2. Optimize Market Competition, Enhance Enterprises' Competitiveness 3. Enhance Export Competitiveness, Optimize Export Structure Negative 1. Reduce Technology Diffusion, Slow Technological Progress 2. Occupy Domestic Market, Crowd out Domestic Firms 3. The Complex Internal Trade and Difficult Supervision 4. Not Conducive to Rational Distribution and Adjustment of China's Industrial Structure
Light and Heavy Industry
Pre-World War II capital-intensive industry was primarily military hardware while post-World War II development of heavy industry was based on economic rationale. -Small and medium enterprises led to the development of light industry -Heavy industry post WWII - dependent on heavy industrialization
Other Factors
Technocrats who believed in -Social engineering; -Role of govt. in technology transfer, project funding & guiding economic development of; -Building up state enterprises as the key to progress; -Development of key sectors and export promotion; -Govt-Business Relations; -Embracement of Democratic principles;
Recommendations
To Chinese gov. 1. optimize policies 2. strengthen supervision To Entrepreneurs 1. Increase Innovation and Cultivate the Core Competitive Power 2. Cultivate Talents, Promote Enterprise Development 3. Brands Protection
Brazil was characterized by:
massive borrowing high tax burden overhauled exchange rate high interest rates grand corruption 2000% inflation the largest IMF rescue ever
2. Accumulating Human & Physical Capital
a. building human capital - rapid human and physical resources accumulation was attained via fundamental & interventionist policies, including *adequate infrastructure, education and secure financial institutions *education policies & their role in equitable income distribution *emphasis on acquisition of technical skills for the creation of a human capital base suited to rapid economic development b. increasing savings & investments -savings promotion: avoiding inflation, ensure secure banks, private savings -encouraging investments: infrastructure complimentary to private sector, investment friendly environment, below market deposit & lending rates
1. Building institutional basis for growth
a. shared growth principle - all groups to benefit from growth policy measures; necessitating adoption of: *land reform programs (Korea, Taiwan) *rice & fertilizer price policies aimed at raising rural incomes (Indonesia) *wealth sharing programs (Malaysia) *public housing programs (SIngapore, Hong Kong) *programs for the promotion of SME (small and medium enterprises) b. creation of business friendly environment *recruitment of competent & honest technocrats (work in both civil service and private sector) *private investments hospitable legal and regulatory structure *enhanced business-gov coordination
Born-Global firms
companies that, from or near their founding, obtain a substantial portion of total revenue from sales in international markets
