The global environment of business: New paradigms for international management

Note: This article is based on a book by David W. Conklin entitled The Global Environment of Business: New Paradigms for International Management (Sage Publications, Thousand Oaks California, 2011) The article consists of excerpts from an article with that title in Effective Executive, IUP Publications, Hyderabad, India, June 2011, pp.32-43.

Forces outside the firm’s traditional boundaries are increasingly important in determining the firm’s success. These forces in “the environment of business” differ among nations and over time, continually confronting the firm with new issues that require modifications in strategies and management practices. Managing in the context of turbulence has become an ongoing reality.  Readers will learn how to modify their strategies and management practices and adapt to this new reality.

Social Forces

The subject of ethical codes and CSR crystallizes many social challenges.  At the one extreme are those who, like Milton Friedman (1970/2001), advocate the guiding principle of shareholder value maximization as the sole determinant of managerial decisions. At the other extreme are those who expound an altruistic philanthropy based on philosophical beliefs concerning universal ethics, such as those related to human rights. Within this range of perspectives, many authors offer distinct typologies for analyzing social forces and for developing appropriate firm responses to each set of social forces. Meanwhile, the rise of activist groups who threaten public criticism and boycotts means that even Friedman’s dictum of maximizing shareholder value now requires a wide range of CSR strategies.

Some analysts, such as Porter and Kramer (2006), believe that each firm should create a competitive advantage through appropriate CSR strategies. From this perspective, CSR morphs into political strategies through which a firm’s reactions can be designed in order to achieve desirable government decisions. For multinational enterprises (MNEs), it is clear that CSR has become a subject of major importance, but the complexity of dealing with social forces that differ among nations has created uncertainties about the optimal strategies. The pursuit of least-cost alternatives in each country conflicts with the objective of creating globally consistent strategies. Meanwhile, international NGOs and national governments are negotiating CSR agreements to create global standards. For the MNE, corporate governance with division of responsibilities between the parent and its subsidiaries adds confusion to the implementation of global strategies and adds difficulties to the creation of appropriate procedures for global reporting and enforcement. CSR has become a central management issue in a world where public expectations, legal requirements, and social needs all differ significantly among nations and where the MNE must continually reconcile its universal ethical positions with nation-specific realities.

A major force underlying the CSR challenges in international business is the difference in culture among countries. The impacts of cultural differences extend beyond CSR to include the business behaviour of local management and employees, as well as the preferences of consumers. For the MNE, there are advantages in creating a globally consistent set of organizational structures and incentives and a unified marketing program. Yet there may be many instances where exceptions geared to the local culture may be most effective. Countless articles have utilized the typology created by Hofstede and Bond (1988) in order to analyze the implications of cross-country cultural differences for management decisions. On the basis of extensive surveys, Hofstede and Bond conclude that each country’s culture can be best examined in accordance with five dimensions: individualism/collectivism, uncertainty avoidance, power distance, masculinity/femininity, and long-term versus short-term orientation. Not only do cultural differences impact CSR, they also impact consumer preferences and marketing, as well as structures within firms and industries. For example, cultures differ in regard to the weight they place on attributes such as quality, privacy, service reliability, the introduction of breakthrough services, and the means of consumer communication with the firm. The retail MNE in particular must create an international expansion strategy on a country-by-country basis, focusing on differences in consumer preferences and the need for market segmentation.

For many cultures, personal relationships are built on an ongoing exchange of favours. Personal relationships and trust form a central determinant of success, both within the firm and in its external interactions.  In China, the pervasive importance of guanxi demonstrates the benefits that MNEs derive from developing ongoing and long-term exchanges of favours that link individuals, as well as the organizations in which they work. Government approvals can be expedited, and informal preferences can place an MNE ahead of its competitors. Furthermore, without a tradition of business jurisprudence, rapid contract enforcement may become impossible with the result that one must rely on personal relationships to cope with misinterpretations and misunderstandings.  Continual changes in the environment of business may require ongoing renegotiation of contracts—a process that may be most effective in the context of longstanding personal relationships and trust. The literature on joint ventures and strategic alliances repeatedly emphasizes the need to create procedures for decision making that are conducive to the building of trust among firms. These behavioural characteristics may be more significant in predicting the degree of success than any structural or organizational features among firms. Yet the exchange of personal favours may raise questions related to ethics.

Personal relationships that involve an ongoing exchange of favours may be criticized as petty corruption that can pervade all types of business transactions, both between firms and also with government employees.  While some of this bribery can simply expedite decisions and actions, other situations may involve a distortion of business outcomes.  Meanwhile, government officials in positions to alter the firm’s overall profitability may receive substantial payments. Funds that rightfully belong to the public may be diverted into private hands. Firms that would have paid fees to the government may be able to reduce their financial obligations. Corruption distorts free market outcomes, resulting in business and government decisions that reduce efficiency and so reduce a nation’s aggregate production. Some investors may reject potential business dealings in certain cultures because of the presence of corruption.  Recent years have witnessed global attempts to reduce corruption, and many nations now treat corruption as a crime. In this context, management encounters issues that challenge ethical positions and that involve risks of legal prosecution, as well as impacting potential profits.

Managers today must be continually concerned about preventing fraud. New governmental reporting requirements seek to enhance transparency and accountability. New legal provisions increasingly add to the responsibility of boards of directors in providing accurate information to investors. At the core of these concerns is the need to develop a corporate culture that provides ethical guidelines to all the firm’s employees so that decisions throughout the firm are socially acceptable.

For the MNE, these issues are linked in a host of multidimensional decisions that require ongoing responses, hopefully within a consistent set of strategies that create a competitive advantage while maintaining an ethical code of conduct. Social forces are changing as the MNE confronts these issues. People throughout the world are now watching the same television and movies, reading the same books, purchasing globally branded products, and communicating via the Internet. For many, there is now an ongoing adaptation to global norms and values. Migration is creating new international relationships that may alter cultures in both the old home country and the new. Much of the academic literature has ignored youth’s rapid degree of adaptation to the realities of cultural differences, as opposed to the intransigence of older groups in this regard. As the years go by and the youth age, each national culture will likely be modified.  Changes in each nation’s demographic profile over time can also impact certain cultural characteristics. Meanwhile, there is an ongoing interplay between social forces and other forces—with an ongoing modification of many other elements in the environment of business.

Technological Forces

Among cultural differences, the role of personal relationships and trust is a key determinant of the nature and extent of social capital, linking these cultural differences to their implications for entrepreneurship. While physical capital obviously differs among countries, the more ephemeral social capital also differs among cultures. Social capital has important implications for managerial decision making, particularly in relation to innovation and entrepreneurship. Networks based on personal relationships and ethnic trust can facilitate business transactions and risk taking.  Social capital impacts the degree of cooperative behaviour that the firm can expect from its employees, as well as its customers, government agencies, and other stakeholders. Hence, it influences the firm’s ability to develop new forms of value creation. Social capital can play a key role in market entry decisions and in the creation of new products, services, or procedures.  Firms differ in their ability to utilize social capital within each culture, so the enhancement of a firm’s ability in this regard may lead to a competitive advantage for the firm.

Many authors use the social capital perspective to analyze differences among countries in regard to economic growth and the productivity improvements that drive growth. For the World Bank, this subject has been the focus of considerable research—much of it linking social capital with human capital. Cultures differ in regard to the degree to which they encourage and reward risk taking and innovation. These differences impact a country’s legal, financial, fiscal, and education systems. For the MNE, an understanding of these cultural differences is essential in reaching optimal investment decisions and business practices.

Until recent decades, innovations were generally created as responses to specific challenges within particular circumstances. The printing press, for example, resulted from a desire to improve on the time-consuming process of writing by hand. The steam engine resulted from a desire to increase efficiency in the removal of water from mines and to achieve a more rapid pace than that of horses. Often, the innovation process then involved the diffusion of such technological breakthroughs to additional uses. Many business opportunities grew out of the array of potential applications related to a single basic concept.

While this process is still prevalent in today’s business environment, what is new is the creation of innovation procedures that aim to achieve continual cost reductions and improvements in products and services.  What is new is the conscious pursuit of knowledge that can lead to ongoing competitive advantages for the firm. What is new is the development of a learning organization whose culture and practices are designed to stimulate and facilitate the innovation process on a continual basis. This vision of the firm often includes the involvement of all of the firm’s employees, as well as the involvement of customers and suppliers throughout the value chain. For many firms, this vision also includes new partnerships, particularly with universities and government research institutes. This pervasive impact of technological forces has created new paradigms for strategies and management. New success indicators relate to the firm’s capability in acquiring and managing knowledge. A “balanced scorecard” includes more than just financial results, and intellectual capital focuses on the firm’s strategy for building and managing its knowledge activities.

Each nation, and each region within each nation, has its own unique innovation system that forms a key component of the environment of business. These innovation systems differ significantly, with some offering distinct advantages for the firms located there. This reality rests to a large degree on culture, social capital, education, and entrepreneurship. For  each nation or region, a set of crucial characteristics includes the nature  and strength of attitudes toward risks and rewards, the entrepreneurial  quality of university relations with businesses, the willingness of all members  of a value chain to become partners in the pursuit of knowledge, and  the extent to which innovations within the financial system support this  process. Current success creates conditions that support future success in repeated cycles of new technological advances, each of which may move from the research phase to widespread diffusion throughout the economy.

The United States has attained a position of global leadership in the new knowledge economy. Some Western European countries have also attained outstanding success. For much of the rest of the world, a central question relates to their capacity to adopt the technological advances of the United States and Western Europe. The motivations and procedures for technology transfer have become an essential element in the growth prospects of less developed nations. The linkages between international investments and the advanced technologies that are embodied in these investments place the MNEs at the center of this subject. MNEs may regularly transfer the manufacture of new products from the developed nations to the less developed nations in order to reduce costs through payment of lower wage rates. Many governments of developing nations wish to break out of this product cycle by creating their own innovation systems through investments in universities and research institutes. However, much must first be transformed within a nation’s social, economic, and political forces in order to create an innovation system.

Advances in information technology have combined with innovations in microelectronics to create a host of new opportunities for e-business activities in every business sector. The Internet has become the new infrastructure that can reduce costs, improve communication, and enhance management practices. Porter (2001) has emphasized that,

“the greatest threat to an established company lies in either failing to deploy  the Internet or failing to deploy it strategically. Every company needs an aggressive program to deploy the Internet throughout the value chain, using technology to reinforce traditional competitive advantages and complement existing ways of competing.” (Porter, M. Strategy and the Internet. Harvard Business Review, 79(3) p. 77)

For many nations, a digital divide may exist between regions, age groups, and income and educational levels. Advanced local loop technologies and broadband service may not be available at a reasonable cost everywhere. The nature of the digital divide underlies the need for e-market segmentation with distinct strategies and practices for different market segments. For many firms, e-business is changing the relative bargaining power in the employer/employee relationship and is changing the nature of human resource activities. In the knowledge economy, ongoing employee education and retraining programs have a greater importance and a central role in supporting the firm’s competitive advantage. E-business is changing the competitive positions of incumbents and new entrants, making start-ups easier and challenging monopolies. E-business has created a new set of ethical and social issues. The ease of accumulating and distributing an array of information about each individual challenges the concept of privacy rights. “Spamming” and online marketing to children can enter a gray area in terms of ethics, while certain criminal activities such as identity theft and fraud are facilitated by the Internet.

The traditional pharmaceutical business model is being threatened by a new biotech model and by generic manufacturers. In the past, each pharmaceutical firm commanded a value chain that it integrated from clinical trials through production and marketing. Each firm would generally test an array of compounds in a trial-and-error method in the search for an optimal drug to treat a widespread illness. Today, an alternative discovery procedure rests on the scientific analysis of how a specific disease develops and the design of a drug that can interfere with the disease process. “Rational drug design” can lead to medicines that are customized for specific subgroups of people who may have somewhat different versions of a disease. This emphasis on scientific research has led to a host of partnerships between universities, research institutes, and biotech firms. Meanwhile, the traditional value chain is being separated into distinct segments with individual firms specializing in each segment, including specialized clinical research organizations, drug manufacturers, and providers of sophisticated drug delivery systems. As a result, the industry structure has changed, redefining the role of Big Pharma firms with a new focus on the coordination of these separate firms and the marketing of the final products.

A “drug divide” exists between the developed nations and the less developed nations. The United States, Western Europe, and Japan consume nearly 85 percent of the world’s production of pharmaceuticals. Big Pharma firms have focused their research on health issues of the high-income populations, often searching for lifestyle drugs. They have tended to ignore diseases that are prevalent in the low-income, less developed world.  Furthermore, while firms in the developed nations have built their R&D programs on the expectation of patent protection, the less developed nations have often ignored these patents. Generic production with much lower prices has led to a growth in parallel trade. In response, international trade negotiations have sought to create global standards for patent protection, largely unsuccessfully.

New social and political forces are compelling firms, particularly those in the developed countries, to create technologies that can reduce their usage of materials and energy, improve the efficiency of production processes, expand recycling practices, and improve end-of-life product management.  These challenges have led many firms to institute Environmental Management Systems in order to integrate new environmental technologies more completely into their traditional business goals and activities. Some authors argue that the pursuit of these innovations can enhance a firm’s profits and its international competitiveness. Consequently, more stringent government standards may benefit the firm, as well as society as a whole.

Global warming has been receiving widespread and increasing attention.  Managers confront a variety of alternative strategies as possible responses to the impacts of greenhouse gas emissions. The creation of emission trading schemes means that managers must compare the costs of purchasing certified emission reduction credits with the costs of implementing new emission reduction technologies. Some countries are not bound by the Kyoto Protocol’s commitment to emission reductions and have not imposed emission caps. Consequently, managers must decide whether inter-jurisdictional differences in standards should be considered in their investment location decisions.

Global warming has focused attention in particular on alternative electricity generation technologies. Among the potential renewable resources that could generate electricity, wind has gained prominence because of its relatively low cost and because of various drawbacks of other technologies.  New technologies have greatly reduced wind generation costs. Wind generation facilities can be built on a relatively small scale, so individual firms and consumers can now consider investments to satisfy their own needs. Governments have instituted subsidy programs, as well as standards that mandate certain targets for generation by renewable resources.  In many jurisdictions, electricity distributors must ensure that specific percentages of their electricity are derived from “green” energy. These pressures are creating many opportunities for entrepreneurial responses.  For a number of reasons, the United States may not be the most attractive market for these investments. Hence, even U.S. firms may be tempted to invest in wind electricity generation in other nations. Meanwhile, government programs and policies are expanding quickly and consumer preferences are changing quickly.

Economic Forces

Economic forces differ among nations and continually change over time.  Analyses of their likely impacts and the creation of appropriate economic strategies can be the central determinant of a firm’s success. The attractiveness of a particular market depends on its industry structure, including the competitiveness of existing firms, the threat of substitutes and new entrants, and the bargaining power of suppliers and customers. New communication technologies have facilitated international outsourcing, enabling each firm to locate each activity in whatever country offers the optimal combination of cost, quality, and other attributes. New organizational structures may be required to coordinate international networks and to stimulate international innovation.

An industry’s profit potential depends on the structure of that industry, and industry structures differ in significant respects among nations.  For managers, this perspective is crucial in international business decisions.  Where a single firm dominates the marketplace, the interrelationships between that firm and its customers can have a unique configuration, where the firm has power to maintain prices and profits above competitive levels. The degree of the monopolist’s strength in price negotiations will be impacted by the threat of new entrants and the threat of substitutes. If these threats are weak, then a monopolist may gain exceptionally high profits. However, even if no substitutes currently exist, the threat of new entrants may make the market “contestable,” such that a monopolist has to act as if potential entrants were already in the marketplace. When only a small number of firms exist in an industry, the investment, price, and output decisions of any one firm impact the decisions of the others. Game theory provides frameworks for analyzing these inter-firm reactions. Each firm knows that if it raises prices, it may lose market share.  However, if its competitors also raise prices to a similar extent, then the profits of all firms in the industry may increase. Hence, each firm makes its decisions based on its expectations about the responses of its competitors.  This reality can result in an unstable market, with prices and market shares shifting dramatically. Alternatively, this mutual interdependence may result in price agreements that seek to stabilize prices at higher than competitive levels.

With modern communications and transportation technologies, outsourcing can involve any nation; so the value chain has become an international web. Many firms participate in value chains where their profitability depends on cooperation. A group of firms may work together to expand the value that is added by their group as a whole. While the group as a whole faces competition from other groups, the organizational dynamic within each group may seek to improve the outcomes for all participants.  This international web will strive continually to create unique goods and services so that potential substitutes are further removed from the final customer’s purchasing decision. Coordinating this complex network so that it involves an ongoing innovation process has become a key determinant of each firm’s success. To achieve innovation, a firm can no longer simply accept the components or products it is offered by export agents or distributors from other countries. Firms must now create organizational structures that facilitate an ongoing international collaboration focused on the innovation process. This may require an exchange of personnel among firms on a regular basis, as well as ongoing dialogue and exchange of research information.

The MNE must choose investment locations in the context of each nation’s ever-changing macroeconomic variables. Growth rates, unemployment and inflation rates, and foreign exchange rates may all impact a firm’s business plans. Technological progress can increase a nation’s growth rate and income levels so that consumer demand offers new opportunities. Each nation’s international competitiveness differs among industries, so each nation’s relative attractiveness as an investment location is not the same for all firms or all business activities. Consequently, each MNE must develop its own combination of strategies and management in response to economic forces.

In recent years, the macroeconomic objective of maximizing economic growth has led governments to implement certain industry-level policies.  Governments have devoted greater attention to privatization and deregulation, education, skills training, and funding of R&D in the expectation that these programs will increase the nation’s productivity and, hence, increase its growth rate. In the formerly communist nations, liberalization reforms have been extensive and have altered industry structures in significant ways. Particularly in the less developed nations, unemployment has generally not been perceived as a result of inadequate aggregate demand. Rather, analysts have emphasized inappropriate human skills, obsolete technologies, and inadequate capital stock. Here as well, certain sector-level policies and programs seek to ameliorate these shortcomings.  Consequently, government policies may impact industry structures, competitiveness, and national economic prospects in ways that managers must understand and to which managers must adapt their strategies.

In The Competitive Advantage of Nations, Michael Porter (1990)  analyzes the basis for a nation’s competitiveness by drawing a diagram  of a diamond, where each of the four corners represents an underlying  feature: factor conditions, demand conditions, related and supporting  industries, and firm strategy structure and rivalry. He emphasizes that for any particular industry in a specific country to be internationally competitive, it must have a strong domestic presence of each of these four features as they relate to that industry. From this perspective, the international competitiveness and the future income and growth of a nation’s firms will be determined by strengths and weaknesses with regard to these four features.

A nation’s competitive advantage will not be spread evenly across all industries. Each nation will have a unique combination of these factors.  This unique combination will be best suited for only certain kinds of industry. Consequently, a nation will have a cluster of industries that depend on a similar combination of factors and that will form the competitive advantage for that particular nation. Within such a cluster, there will often be many different firms in the same industry. These competing firms or rivals may all be internationally competitive. Backward and forward linkages to suppliers and purchasers are necessary to create a vertical cluster that is internationally competitive.

Political and Governmental Forces

Political and governmental forces are related to each of social, technological, and economic forces. These forces play a key role in the building of social capital, the fostering of entrepreneurship, and the facilitation of immigration. There are many ways through which cultural values shape political forces and through which interest groups influence government decisions. The attempt to reduce corruption illustrates the reverse flow, in which laws and their enforcement seek to change common business practices. In the context of these interactions, the firm must adjust its strategies and management practices in response to social and political forces, but the firm may also seek to influence these forces through lobbying of government and by relating with interest groups.

Political forces are also related to technological forces through the development of “the knowledge economy” and ongoing partnerships within the “triple helix.” Government ownership and regulations can influence the speed with which firms adopt information technologies, microelectronics, and e-business. Governments determine the nature of the pharmaceutical industry, subsidizing research, approving new  drugs, and controlling drug prices. Increasingly, environmental concerns are leading governments to encourage the implementation of new technologies. In all of these respects, analyses of technological forces involve the discussion of political forces.

Governments continually attempt to alter the functioning of specific markets. Each firm’s industry structure is subject to government intervention in response to externalities or third-party effects and monopolistic pricing. Yet many governments have recently engaged in liberalization programs with privatization and deregulation in the hope of stimulating economic growth and particularly the productivity improvements that underlie it. Meanwhile, a government’s fiscal, monetary, and exchange rate policies determine the economic environment within which the firm operates.

Public policies differ among nations, and these differences can impact the firm’s trade and investment decisions. Some public policies interfere with business strategies, while others can support and assist the firm.  Many countries have been altering their public policies in order to attract more international investment. Some have created special economic zones or high-tech corridors within which investors are promised particularly attractive public policies. In view of these situations, a firm can create a competitive advantage through its ability to relate with and adapt to the political process in each country. Furthermore, a firm may be able to influence the process of making laws and regulations, both directly in its lobbying of politicians and civil servants and indirectly in its communications with NGOs and the public. Consequently, it is important for firms to develop nonmarket strategies that underlie and are integrated with their market strategies. Government policies that traditionally were regarded as “domestic” have now become of international importance, as they can distort price ratios and, hence, trade patterns or even act as trade barriers. However, trade and investment agreements contain provisions that place constraints on each signatory’s public policies for the purpose of creating a level international playing field.

For MNEs, relevant public policies include ownership, regulation, taxation, and subsidies, all of which impact business strategies and management.  Most nations have created impediments to certain types of investment. In some nations, the use of price regulations can alter projected rates of return. In others, businesses may confront sanctions, screening agencies, or continual government intervention in business decisions. Some, such as Venezuela under Chavez, are implementing new restrictions on foreign investment. Yet in recent years, many nations have implemented liberalization reforms that reduce the degree of government intervention in order to stimulate economic growth. China, India, and Eastern Europe illustrate the challenges and opportunities created by liberalization reforms.

Many nations have devised schemes to offer foreign investors special incentives. They seek to attract not only foreign capital but also advanced technologies and managerial skills. As early as 1979, China created special economic zones with modern infrastructure and tax concessions. Many nations have copied this model. Some, such as Malaysia, have focused their zone on the attraction of high-tech firms. Meanwhile, the relatively advanced nations have been striving to retain jobs in the context of corporate “offshoring” to low-wage countries, and some have created special subsidy programs for this purpose. However, such government policies may conflict with provisions of trade and investment agreements, such as the World Trade Organization.

For some issues, a new trend has developed in the creation of international, rather than national, public policies. The protection of intellectual property requires that all nations adhere to a consistent set of government rules. The physical environment is a global phenomenon as the pollution of each country becomes the pollution of all countries. In this context, some businesses may be tempted to reduce costs by shifting their investment locations to countries that have lower standards or poorer enforcement.  Competition or antitrust policy now needs to be based on international market behaviour rather than just national market behaviour.  The internationalization of financial institutions has led many to advocate global regulations. This new interconnectedness within the global economy is shifting certain public policies toward an international level, but how these international agreements should be formulated and enforced remains a subject for debate.

Trade and investment disputes are a continual threat for MNEs. In particular, China’s rapid and substantial expansion throughout the global economy has created a host of concerns about unfair competition and distortions that prevent the creation of a level playing field. Sanctions can suddenly disrupt established trade and investment patterns. Some nations see the growth of sovereign wealth funds as a potential danger to their own national sovereignty, leading to pressures for new protectionism. In the context of these new developments, managers must learn how to deal with the ongoing transformations in the environment of business.