NTB 280: International Business Environment
Q1. Please read the article, “Switzerland Luxury Timepieces.” After reading it, answer the following question:
How does Michael Porter’s Competitive Advantage of Nations (also called Porter’s Diamond) explain how Switzerland has become a powerhouse in the manufacturer of luxury timepieces? Please use specific items in the mini-case to demonstrate a complete understanding of Porter’s Diamond and national competitiveness. As part of your answer, explain why Porter’s Diamond provides a “better” understanding of trade than do absolute or comparative advantage.
Q2. Read the case, “Pierre LaPlace in China.” After reading it, answer the following questions:
2a. From a cross-cultural perspective where did Pierre go wrong? What are the sources of his cultural conflict? Please be specific in your answer. The strongest answers will make connections to cross-cultural theory and not just repeat statements from the case.
2b. Now make some recommendations to Pierre as to how he can better manage cross- cultural differences in the future. The strongest answers will include insights from Chapter 8: Managing Cross-Cultural Differences.
Q3. Please watch this video on child labor in Bolivia from the New York Times. Note: You will need to click the speaker icon on the New York Times website.
After watching the video answer these two questions:
3a. Explain how this video illustrates both the essence of an ethical/moral dilemma and the limitations of cultural relativism.
3b. Now, explain how the Sustainable Development Goals can be solution to the ethical issues raised in this video. As part of your answer, explain what the Sustainable Development Goals are and why the eradication of poverty is goal #1.
Q4. This question is about the liability of foreignness.
Please explain why liability of foreignness is such an important concept for every manager in an international business (including the CEO) to understand. Include in your answer a discussion of how the liability of foreignness relates to the value chain as illustrated in our textbook Figure 13. 1. At this point in the assignment, you know I am not interested in just having you give me a definition of either the liability of foreignness or the value chain. You need to do more.
Once a company decides it wants to begin international operations, it must choose the foreign markets it will enter and how it will do so. An external analysis is an important first step in determining the attractiveness of foreign markets, and any such analysis likely includes a full PEST (political, economic, sociocultural, and technological) analysis. However, not all decisions are based solely on an opportunity. Sometimes other forces and resources at the company level may keep firms out of or pull firms into specific countries. These forces include the liability of foreignness, first-mover advantages, and the need to follow customers into specific markets.
The Liability of Foreignness
The liability of foreignness describes the challenges multinational companies face when entering and competing in foreign markets. This liability increases as the geographic, economic, cultural, or administrative differences between the foreign market and the domestic market increase.1 Companies doing business in countries that are geographically proximate, are economically similar, share a common cultural base, and have few administrative differences—such as Thailand and Laos, or the United States and Canada—face a small liability of foreignness. Those doing business in the presence of large differences—such as Brazil and Saudi Arabia, or Mexico and Turkey—are likely to face a large liability of foreignness.
As these differences grow, and particularly when working across very different languages and cultures, global companies are more likely to face novel challenges in the foreign market, may make poorer decisions, and face increased costs to coordinate activities with the foreign division.2 Some common ways to measure different kinds of distance are found in Table 13.1.
The liability of foreignness is not just a challenge a company faces as it learns how to act and react to the market. Customers, the media, and government officials in the new environment are also more likely to be biased against firms perceived as foreign. For instance, recent research founds that when firms such as BP engage in activities like reducing emissions in foreign markets, locals are more likely to focus on the harm the foreign firm causes rather than on actions the firm takes to reduce that harm.3 Moreover, customers often exhibit an ethnocentrism bias, meaning they prefer and are willing to pay more for local brands even when the quality is inferior,4 particularly when buying high-priced, infrequently purchased items like cars and electronics.5
In addition to customer bias, foreign firms often face a bias in the media. Local media outlets often are more negative in their coverage of foreign firms. A recent study in Germany demonstrated that foreign firms receive twice the press of domestic firms when downsizing staff, and the press coverage of foreign firms has a more negative tone than the coverage of local firms.6 This media slant against foreign firms is another part of the liability of foreignness.
Finally, government officials are also likely to discriminate against foreign firms. A study of corporate mergers in the European Union found that governments prefer that companies remain domestically owned rather than foreign-owned, and officials can take actions that deter foreign firms from attempting to acquire local firms, such as increasing regulations and proactively looking for suitable domestic acquirers.7
Research suggests that minimizing the geographic, economic, cultural, or administrative distances between a firm and a foreign market can help foreign firms succeed in new markets. In other words, companies that pick foreign markets similar to their home markets are more likely to succeed.8 Hence companies may enter countries that aren’t ideal according to a traditional PEST analysis but are similar to their own domestic environment, reducing the number of adaptations they must make.
As an example, AJE Group is a multinational company based in Peru that sells alcoholic and nonalcoholic beverages. Its flagship product is Kola Real, a cola beverage. The company was founded in the late 1980s, when military and terrorist conflicts in Peru made it impossible for established beverage companies like Coca-Cola and PepsiCo to distribute their products. For instance, their delivery trucks and drivers were often seized and held for ransom. In the absence of other cola products, the Añaños family began producing cola in their kitchen and distributing it with an old pickup truck. The terrorists ignored them because of their small size and lack of resources, which enabled them to maintain low costs and low prices. Their company quickly grew and expanded into nearby countries such as Venezuela and Ecuador, where similar distribution challenges and similarly price-sensitive customers existed. AJE then expanded to distant markets but continued to seek those with similar infrastructure and customer challenges, like Thailand, Nigeria, Indonesia, and Vietnam9 (see Figure 13.1).
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