International Business

1. International Business Wendy Jeffus Harvard Summer School

2. Introduction • Team Evaluations Due! • Chapter 18: Global Human Resources Management • Vineet Garg: "HR services Outsourcing by P&G to IBM" • Chapter 19: Accounting in the International Business • Chapter 20: Financial Management in the International Business

3. Wendy Jeffus Harvard Summer School Chapter 18: Global Human Resources Management

4. IBM Thinkpad Moved global headquarters to New York Acquired 4,000 employees (2,400 in the U.S.) Appointed Stephen Ward the former head of IBM’s PC division as the CEO of Lenovo $2004 Lenovo purchased IBM’s PC division for $1.75B. http://www.lenovo.com/planetwide/select/selector.html

5. Human Resource Management • Four major tasks of HRM • Staffing policy • Who do you hire? • Management training and development • How do you train them? • Performance appraisal • How do you critique their performance? • Compensation policy • What should you pay them?

6. HRM • Strategic role: HRM policies should be congruent with the firm’s strategy and its formal and informal structure and controls Summer 2006 Intern trip to Sea World San Antonio Source: Company websites

7. International HRM • Task complicated by profound differences between countries: • Labor Markets • Skilled labor, average workday, influence of unions, • Culture • Role of women, role of religion, distance between the boss and the employee, emphasis on time! • Legal • Handshake, legal support, labor laws • Economic Systems • Fixed vs. floating currencies

8. International Human Resource Mgmt. HR plays a large role in an organization’s architecture

9. Staffing Policy • Staffing policy • Selecting individuals with skills to do a particular job • But also a tool for developing and promoting corporate culture • 3 types of Staffing Policy Source: Company website

10. 1. Ethnocentric Policy • Key management positions filled by parent-country nationals (belief: Home country skills are superior) • Advantages: • Overcomes lack of qualified managers in host nation • Unified culture • Helps transfer core competencies • Disadvantages: • Produces resentment in host country • Can lead to cultural shortsightedness

11. 2. Polycentric Policy • Host-country nationals manage subsidiaries • Parent company nationals hold key headquarter positions (belief: each host country is unique) • Advantages: • Alleviates cultural shortsightedness • Inexpensive to implement • Helps transfer core competencies • Disadvantages: • Limits opportunity to gain experience of host country nationals outside their own country • Can create gap between home and host country operations

12. 3. Geocentric Policy • Seek best people, regardless of nationality (belief: there are both similarities and differences) • Advantages: • Enables the firm to make best use of its human resources • Equips executives to work in a number of cultures • Helps build strong unifying culture and informal management network • Disadvantages: • National immigration policies may limit implementation • Expensive to implement due to training and relocation • Compensation structure can be a problem

13. Nestlé: Global HRM • Headquarters: Vevey, Switzerland • ~250,000 employees, (100 different nationalities) • Emphasis on language skills (You must be fluent in English and in two other languages) • All entry level graduate positions featured are international careers. • Engineering • Nestlé Audit Group • Nestlé Productivity Team • Marketing & Sales • Expatriates at Nestlé make a long-term commitment to carry out a series of two to three year assignments abroad, moving from one country to another. • International expatriates have the opportunity to work in many locations – mainly in Asia, Africa, Eastern Europe and Latin America. http://www.nestle.com/Careers/Introduction/Careers.htm

14. The Expatriate Problem • Expatriate: citizens of one country working in another • Expatriate failure: premature return of the expatriate manager to his/her home country • Cost of failure is high: estimate = 3X the expatriate’s annual salary plus the cost of relocation.

15. US multinationals Inability of spouse to adjust Manager’s inability to adjust Other family problems Manager’s personal or emotional immaturity Inability to cope with larger overseas responsibilities European multinationals Inability of spouse to adjust Japanese Firms Inability to cope with larger overseas responsibilities Difficulties with the new environment Personal or emotional problems Lack of technical competence Inability of spouse to adjust Reasons for Expatriate Failure

16. Expatriate Failure Rate < < <

17. Expatriate Selection • Reduce expatriate failure rates by improving selection procedures • An executive’s domestic performance does not (necessarily) equate to his/her overseas performance potential • Employees need to be selected not solely on technical expertise, but also on cross-cultural fluency

18. Four Attributes that Predict Success • Self-Orientation • Possessing high self-esteem, self-confidence and mental well-being • Others-Orientation • Ability to develop relationships with host country nationals • Willingness to communicate • Perceptual Ability • The ability to understand why people of other countries behave the way they do • Being nonjudgmental and flexible in management style • Cultural Toughness • Relationship between country of assignment and the expatriate’s adjustment to it

19. Training • Cultural training: • Seeks to foster an appreciation of the host country’s culture • Language training: • Can improve expatriate’s effectiveness, aids in relating more easily to foreign culture, and fosters a better firm image • Practical training: • Ease into the day-to-day life of the host country

20. Management Development • Development: • Broader concept involving developing manager’s skills over his or her career with the firm • Several foreign postings over a number of years • Attend management education programs at regular intervals

21. Didn’t know what position they hold upon return. Firm vague about return, role and career progression. Took lower level job. Leave firm within one year. Leave firm within three years 10 20 30 40 50 60 70 percent Repatriation of Expatriates

22. Management Development & Strategy • Development programs designed to increase the overall skill levels of managers through: • Ongoing management education • Rotation of managers through a number of jobs within the firm to give broad range of experiences • Used as a strategic tool to build a strong unifying culture and informal management network

23. Performance Appraisal • Problems: • Unintentional bias • Host nation biased by cultural frame of reference • Home country biased by distance and lack of experience working abroad • Expatriate managers believe that headquarters unfairly evaluate and under-appreciate them • In a survey of personnel managers in U.S. multinationals, 56% stated foreign assignment either detrimental or immaterial to one’s career

24. Compensation • Two issues: • Pay • Should you pay executives in different countries according to the standards in each country OR equalize pay on a global basis? • Method of payment

25. Compensation in Various Countries Additional source: US Bureau of Labor Statistics http://www.bls.gov/fls/

26. Compensation in Various Countries

27. Expatriate Pay • Typically use balance sheet approach • Equalizes purchasing power to maintain same standard of living across countries • Provides financial incentives to offset qualitative differences between assignment locations

28. Components of Expatriate Pay • Base Salary • Same range as a similar position in the home country • Foreign service premium • Extra pay for work outside country of origin • Allowances • Hardship, housing, cost-of-living, and education allowances • Taxation • Firm pays expatriate’s income tax in the host country • Benefits • Level of medical and pension benefits identical overseas

29. The Balance Sheet Approach

30. International Labor Relations • Key Issue • Degree to which organized labor can limit the choices of an international business • Aims to foster harmony and minimize conflicts between firms and organized labor

31. Concerns of Organized Labor • Multinational can counter union bargaining power with threats to move production to another country • Multinational will keep highly skilled tasks in its home country and farm out only low-skilled tasks to foreign plants • Easy to switch locations if economic conditions warrant • Bargaining power of organized labor is reduced

32. Strategy of Organized Labor • Lobby for national legislation to restrict multinationals • Attempts to achieve international regulations.

33. Wendy Jeffus Harvard Summer School Chapter 19: Accounting in the International Business

34. Accounting Information & Capital Flows

35. Relationship Between Business and Providers of Capital Importance of each varies from country to country • Three external sources of capital: • Individual investors • Buying shares and bonds • Banks • Loan capital • Government • Make loans or investment

36. International Standards • Efforts to harmonize accounting standards across countries • Formation of International Accounting Standards Board • Members represent 79 countries • Responsible for formulating international accounting standards (IAS) • Has issued over 30 IAS • Voluntary compliance • Recognition is growing

37. Currency Translation *Used in Germany, Japan & the U.S. If inflation is high the historic cost principle underestimates a firm’s assets, so the depreciation charges based on these underestimates can be inadequate for replacing assets when they wear out or become obsolete. • The current rate method: • Exchange rate at the date on the balance sheet is used to translate foreign subsidiary financial statements into home country currency • Incompatible with ‘historic cost principle’ where the assumption is that the currency is not losing value due to inflation.* • The temporal method: • The foreign subsidiary assets are translated into home-country currency at the time of purchase of the asset • Changing exchange rates may mean the balance sheet may not balance!

38. Current Rate Method: Example • At time = 0 a U.S. firm invests $100,000 in a Malaysian subsidiary. • Exchange Rate at time 0 = 5MYR/1USD • Subsidiary purchases land with 500,000 ringgit. • Exchange rate at time 1 = 4MYR/1USD • If this new exchange rate is used to convert the value of the land back into dollars, it will seem that the land has appreciated by 25%! • The new value of 500,000 ringgit in dollars is $125,000! • (500,000MYR ÷ 4MYR/USD)

39. Temporal Method: Example • At time = 0 a U.S. firm invests $100,000 in a Malaysian subsidiary. • Exchange Rate at time 0 = 5MYR/1USD • Subsidiary purchases land with 500,000 ringgit. • Exchange rate at time 1 = 4MYR/1USD .

40. Current US Practice Firms using multidomestic or international strategies. Firms using global or transnational strategies. • Statement 52 “Foreign Currency Translation” • Self-sustaining autonomous subsidiary: • Functional currency is local currency • Balance sheet uses exchange rate at end of financial year • Income statement is financial year average • Integral subsidiary: • Functional currency is US currency • Financial statements use the temporal method • Dangling credit or debit increases or • Decreases consolidated earnings for the period

41. Transfer Pricing and Control Systems Transfer prices introduce significant distortions into the control process Transfer price must be taken into account when setting budgets and evaluating a subsidiary’s performance

42. Wendy Jeffus Harvard Summer School Chapter 20: Financial Management in International Business

43. Financial Management • Investment Decisions • What activities should the company finance? • Financing Decisions • How should the company finance selected activities? • Money Management Decisions • How can the firm manage its financial resources most efficiently?

44. FMC 59% of ‘06 Revenue was outside the U.S. • Produces chemicals and farm equipment with significant overseas business. • 5,000 employees throughout the world (2,600 in the US). • Segments: 1) Agricultural Products, 2) Specialty Chemicals and 3) Industrial Chemicals. Source: 2006 Annual Report, available at www.fmc.com

45. 2007 (Update) 63% of ‘07 Revenue was outside the U.S.

46. FMC’s Competitive Advantage • Offers 3-year pricing contracts available in multiple currencies. • An in-house bank handles ~$1B in currency transactions annually to support these prices. • 2006 Annual Report: “The primary currencies for which we have exchange rate exposure are the U.S. dollar versus the euro, the euro versus the Norwegian krone, the U.S. dollar versus the Japanese yen and the U.S. dollar versus the Brazilian real.”

47. The Finance Function • Competitive Advantage: through reduced costs of value creation and/or adding value by improving customer service. • Reduce the costs of creating value by: • Lowering the firm’s cost of capital • Managing foreign exchange risk • Minimizing the firm’s tax burden • Reducing exposure to unnecessary risk • Managing the cash flows and reserves efficiently

48. Investment Decisions • Capital budgeting: • Quantifies the benefits, costs and risks of an investment • Managers can reasonably compare different investment alternatives within and across countries • Three issues complicate the process: 1. Project and Parent Cash Flows 2. Adjusting for Political & Economic Risk 3. Risk & Capital Budgeting

49. 1. Project and Parent Cash Flows • Project cash flows may not reach the parent: • Host country may block cash-flow repatriation • Cash flows may be taxed at an unfavorable rate • Host government may require a percentage of cash flows to be reinvested in the host country

50. Blocked Funds • Blocked Funds – When the host country’s government prohibits or limits the remittance of revenues abroad that are earned by foreign corporate investors or by local subsidiaries. • Revenue can be in the form of overdue bills, royalties and dividends, local earnings, or unpaid trade credits. • Other forms of revenue: Interest payments in local currencies servicing hard currency loans, licensing fees, advanced payments of import duties, and proceeds from the sale of property. • Why do governments block funds? • To regulate the transfer of FX because of hard currency shortages. • Methods of blocking funds: • Restrictions on the percentage of revenues that can be repatriated, or making the currency inconvertible. • Dealing with Blocked Funds - Examples: • Xerox used its blocked funds to purchase one of the largest buildings in Bogota, Colombia • Volkswagen invested its earnings to acquire ranches in Brazil Source: Haar Jerry, “Managing the problem of blocked funds in Latin America,” International Executive, volume 33, issue 3 p. 7-11.