Chapter 2: Business in the Global Context

International Trade

The theory of international trade suggests that increasing number of countries participating in international trade serves to socio-economic expansion of these countries. A firm that is involved in international trade must cope with several factors:

• Role of state as a regulatory institution and level of state intervention in a target country have to be analyzed carefully.
• Managing interactions among geographically dispersed firms is another aspect of involving global business.4
• Marketing goods and services in different countries and working with local employees require examining values, norms, beliefs and expectations of foreign cultures.
• Working in a business ecosystem consists of big and small players may also require development of unique strategies for organizational survival.
• Entrepreneurs as well as managers who have an intention to carry out firm’s operations abroad have to understand and examine the concept of globalization carefully.

Globalization differs than the internationalization process which is basically operating across national borders. Globalization begun with the tendency of first industrial firms to market their goods to other countries during the late 19 th century. The story of globalization in Turkey is quite different from industrialized Western countries. The state financed the industrialization processes through public banks and import substitution policies that shaped the economic activities until 1980s. Import substitution is an economic policy which defends replacing foreign imports with domestic products. Turkey has converted its economic strategy from a protectionist model to a market oriented and an open perspective during the recent decades. Turkish state has signed several agreements concerning free trade between European Union and Turkey after mid 90’s.

Balance of trade (BOT) is the difference between a country’s imports and its exports for a given time period. A country that exports more than it imports has a trade surplus . On the contrary, if a country imports more than it exports has a trade deficit . Turkey is among the countries which have major trade deficits. Turkey needs raw materials, energy sources, and technical know-how from other countries to sustain its economic growth.

A multinational corporation (MNC) is an organizational form, which has operations in more than two countries, and it consists of a central firm – usually in the home country- and branches or subsidiaries in foreign countries. The initial steps towards internationalization of MNCs usually start with entering markets that are most familiar to the home markets. The critical success factors for MNCs emphasized in the literature are:

• Entering into complex markets to gain new knowledge.
• Recognition and reputation.
• Key strategic partnerships.

It is not so meaningful to think about a strict distinction between national and international competition in today’s global economy. A local entrepreneur who owns a small market may anytime face with competitive pressures of international retail chains. MNCs generally have an advantage to achieve economies of scale. Economies of scale is the cost advantage that arises with increased output of a product. Firms have to find partners, collaborate, and cooperate with each other to compete with big players, which have dominated international markets. So, international competition refers to a complex network of multiple types of relations and interactions.

Emerging markets are the transition economies such as Brazil, Russia, India, Mexico, Nigeria and Turkey that are characterized by high levels of growth despite insufficient infrastructure.19 Emerging markets are quite different from western countries in terms of their cultural context, regulations and institutional arrangements.

Power Tactics and Organizational Survival in Foreign Markets

In multinational competition, there are four issues that need to be considered:

1. Whether to customize products or services in each local market or offer standardized products/ services.
2. Whether to employ the same generic competitive strategy everywhere or modify the strategy for each country.
3. Whether to locate a company’s facilities, distribution centers, and customer services operations for location advantages.
4. How to transfer a company’s resource strengths and capabilities among countries to secure competitive advantage.

There is a close link between competitiveness and intentions of these firms to globalize their operations. The basic contributions of global business operations to a firm’s competitiveness are; cost reduction, spread of risk across wider environments, capitalization of core competencies, gaining access to new customers, and valuable natural resources. When companies buy and sell goods and services in the global market place, they complete the transaction by exchanging currencies. Exchange rate is the number of units of one currency that must be exchanged for a unit of the second currency. Fluctuating exchange rates affect exporters depending upon manufacturing country’s currency power in positive or negative ways. Taxes, surcharges, or duties arranged against imported goods are known as tariffs.

Companies decide for going international as well as which strategies to follow based on the resources they can allocate for international operations. Following strategy options are frequently used to compete in foreign markets:

• Exporting
• Licensing
• Franchising
• Global Strategy

Export strategies use domestic facilities as a base for exporting to foreign markets. Licensing is an appropariate choice when a firm has valuable technical know-how or a patented product but lacking international capabilities positioning in foreign markets. Franchising has a better fit into global expansion efforts of service and retailing companies. The strategic choice for a global strategy is to employ essentially the same strategy in all countries. There would be three options for dealing with these specific conditions and buyer preferences. They are “think local – act local”, “think global – act global”, “think global – act local” options. Competitive advantage is the superiority or an edge that a company gains over its rivals. There would be three ways to gain competitive advantage:

• Locating activities among countries to decrease costs on high product differentiation.
• Efficient and effective transfer of competencies and capabilities from one country to another for companies.
• Coordinating dispersed activities.

Global competition can be achieved via cooperation and cooperative agreements with foreign companies. Purposes of strategic alliances are; joint research efforts, sharing technology, joint use of production on distribution facilities, and marketing one another’s products and services.

In international business environment there are many appeals and advantages of strategic alliances. These are listed below:

• Better access to feasible countries from host country to import and market products/services.
• Capture economies of scale.
• Fill missing information in technical expertise of local markets.
• Share distribution facilities and dealer network.
• Take advantage of partner’s local market knowledge and networks.
• Combine competitive energies toward defeating mutual rivals.
• Under some circumstances, there would be pitfalls of strategic alliances such as:
• To overcome language and cultural barriers.
• To deal with diverse or conflicting operating practices of partners.
• To consume time for managers in terms of communication, trust building and coordination costs.
• To create mistrust when collaborating in competitively sensitive areas.
• To clash in egos and company cultures.
• To deal with conflicting objectives, strategies, corporate values, ethical standards.
• To become too dependent on another firm for essential expertise in the long term.

The characteristics of emerging international markets may be different and as a result, competition in these markets should be arranged accordingly. Companies have to attract buyers with bargain prices and have to achieve a better fit to local requirements . Specially designed or packaged products may be needed to accommodate local market circumstances. Management teams for these firms must be consist of a mix of expatriate and local managers. For emerging markets, competition should be based on low price. The companies aiming at emerging markets may need to develop new business models to accommodate local conditions.

Business in a Multi-Cultural Environment

The cultural, economic, social, and political systems differ between countries. As culture is a blend of values in a society, it shapes the way of doing business in organizations. Culture can affect how managers lead, hire, and compete in various countries. Ethical values are individuals’ moral judgments about what is right or wrong. Universalism is widespread and objective sets of ethical guidelines exist across countries. Cultural relativism refers to the approach that a country’s own unique culture, laws, and business practices determine ethical behavior in a country.

The implications for international management could be explained through evaluating cultural dimensions and categorizing by country clusters. How countries are clustered based on cultural values and to what extent cultural values affect employee attitudes need to be considered primarily in internationalization decisions. International managers should consider the culture together with the basic managerial decision areas such as employee motivation, human resource practices, organizational structure, strategy formation and implementation, conflict management, negotiation tactics, and leadership styles. The key point in managing multicultural and international business environment is to understand culture and turn it into an advantage. Most of the research results show that companies are more successful when investors and managers consider local methods. However, managing culture is not easy because it is complex, dynamic and there are common exceptions.

For successfully managing the impact of culture on international business, managers:

• Approach other cultures by changing your stereotypes and with caution.
• Find cultural informants and review practices from unfamiliar cultures.
• Learn mental maps that will increase effectiveness in different cultures.

Likewise, suggestions for international corporations:

• Appoint employees who have cognitive complexity in international positions such as expatriates with cross-cultural experience.
• Emphasize in-country training and schedule an orientation program for international assignments.
• Become a learning organization in relation to cultural understanding.