Political risk insurance (PRI) is a guarantee or hedging mechanism available to a foreign corporation operating under domestic political risks. PRI allows premium payment to the foreign corporation from the loss or damage consummate with the potential loss. Under PRI, three broad categories of political risks would generally be covered; namely, war/ political violence (i.e. due to unprofitable operations), expropriation/ breach of contract (i.e. due to adverse affects to income streams from assets and operations) and transfer risk/ inconvertibility (i.e. restriction of capital movement across country borders). Since political risks are country-specific phenomenon, multinational companies varying PRI policies that makes PRI highly dependent not only to the nature of politics of the host country but also the managerial strategy of multinational corporations. The latter is an indication that companies can minimize political risks according to their way of handling them and incorporating into corporate strategy.
On the other hand, local debt financing (LDF) is a part of the foreign corporation’s total financing comprises of bank borrowings, bonds, operating-leases and trades of credit which does not entitle its creditors ownership of the company. Although LDF keeps internal control to the corporation, it requires interest payments and more rigid policies and requirements to ensure liquidity and long-term financial health of the debtors. Like PRI, LDF can serve as hedging mechanism to reduce the risk of blockages of earned funds to a foreign subsidiary due to repatriation policies from the home country. In addition, when the foreign corporation (e.g. or subsidiary in this case) allows local currency debt, it minimizes the adversary risks of foreign currency changes of the home country where parent company is located. LDF allows subsidiaries to use the available capital of the host market to augment its financial and business needs where home funds, currencies and assets are not accessible, restricted or costly to obtain.
However, PRI and LDF have features that are compatible in certain situations that can optimize or rationalize their uses. PRI usually serve as a pro-active action of the foreign corporation to hedge political risk while LDF is largely based on sudden reaction of the corporation to prevent financial problems. When PRI is not availed in the first place, the corporation should use LDF while the presence of PRI can be maximize if combined with LDF options. Due to this, PRI can exist without LDF and still come-up with a relatively predictable outcome while LDF would be too ambiguous without PRI as the latter serves as the ultimate insurance policy. If any, LDF uses can be maximized from the perspective of gaining efficient asset portfolio. But if the corporation wishes to have a super-efficient portfolio, it should incorporate PRI that can be classified as zero-risk investment. Further, PRI can be applied in developing and poor countries where political risks are high due to relative economic instability while LDF can be a very lucrative option that can be applied in more stable developed economies that can save foreign corporations of insurance and other transaction costs.
2. List and discuss at least six variables in the negotiation process.
Also called bargaining, negotiation is a sequence of actions in which parties involved are solving their perceived demands and other proposals by reaching an agreement with the result of changing the behavior of at least on participant. Since there is a need to look on the relatives rather than absolutes, finding and working with variables is the essential key to have a greater chance of finding an acceptable exchange. To illustrate the importance of negotiation variables, a simple case should be analyzed like negotiation between members of an international economic organization. Here, the relevant variables are strategies, cultural characteristics, context, potential outcomes, information, and decision alternatives.
The strategy is the variable that shows the different behaviors of parties involved in the negotiation and are associated with the plan to reach some objective. Strategies are consisted of an action subset called tactics which does not tend to follow strategies strictly at all times instead adapt to specific situations. To be expected is a high variation in strategy execution which can take two main forms; namely, value-claiming behavior and value-creating behavior. The former behavior is distinguished from the latter because it necessarily leads to win-loss situation while the latter is loss-loss situation. Value-claiming behavior is a strategy that has attributes of one party such as failing to cite the well-being of the other party, insisting its side with no concessions and concealing of information about true priorities. On the other hand, value-creating behavior is a strategy that is best described as expanding the pie instead of splitting it and characterized by parallel objectives between parties, openness to information and joint effort to solve conflicts. Strategies can be considered as the framework used in executing the means to reach the ends.
In international negotiations, culture can be viewed as the identity of the party who embodies the tradition, beliefs, values, political ideology and religious convictions of its country. Cultural characteristics can mean the strength of one culture and the subordination of the other due to their historical, current and future elements. Alternatively, different cultures in the negotiation can impose important issues circling a certain idea that can be different from one party to another. In conjunction with this, context may be evaluated in different views as the cultural environment of the parties is assumed to be fixed. As a result, international negotiators take cultural characteristics as givens in creating the context but context can also share the negotiation process in a manner to bypass cultural differences of the parties. For example, a negotiation context in which a predetermined war is used as the central theme would minimize cultural differences and decision blockage because peace has a universal appeal.
Potential outcomes from a negotiation represent the payoffs and the ends attributed to a certain strategy. Evaluation of potential outcomes during the bargaining is the key source of information on how well parties are accomplishing their stated goals. This evaluation can lead to variations in tactics within bigger strategies which can shift a value-creating behavior to value-insisting one or vice versa. Information has broad implications in negotiation process as it can mean the level of knowledge to available strategies, cultural backgrounds of participants, rationale behind the context and potential outcomes of tactics/ responsibilities. However, a high level of information does not necessarily mean a better-off situation to any party as there is a condition called overload or impracticability. Lastly, decision alternatives are the last options of the parties at times when the goal cannot be achieved on a minimum level. They are the risk disaster plan and the ultimate measure to curve a substantial turnaround on the expectations of the negotiation variables.
3. Must a firm be proactive in internationalizing its operations in order to be successful?
Being proactive is controlling a situation by causing something to happen rather than waiting to respond on potentialities after they arise, therefore, it is the opposite of being reactive which infuse action to a stimulus. To determine the level of success when proactive behavior is applied, internationalization theories and approaches will be intertwined in analysis; namely, industrial organization (IO), international product life cycle (IPLC), internationalization (INT), resource-based (RB) and network theory (NT). As a general rule, proactive behavior in addressing a task or certain issue is a useful tool in evaluation of its cost-and-benefits and rationalizes decision-making. Therefore, the level or intensity of being proactive should be largely considered. Initially, proactive behavior is an intrinsic part of the intention to internationalize operations as entrepreneurs and managers face a range of costs and challenges when they expand internationally particularly due to liability of foreignness (Jones, 2005, p. 15).
Through its history, News Corporation (NC) had exemplified acquisition strategies to be able to grow and internationalize. . In a chronological order, NC bought newspapers in London, Britain and US to gain entry in the international media industry (cited in Hill, Jones & Galvin, 2004, pp. C101-C102). There are two applicable theories such as RB (i.e. postulates that the firm created competitive advantage) and NT (i.e. postulates that the firm got the incentive to prevent tedious and costly understanding of firm behavior and performance). In effect, high levels of proactive behavior is required since NC had to evaluate possible synergies in cross-border acquisitions especially its targets are financially-troubled. In addition, the strength of social, professional and economies ties of those targets should also be studied. Without being proactive, NC cannot optimize the benefits of RB and NT while can lead to bankruptcy due to huge investments required to buy targets and corporate restructuring.
Established in 1920, Perdue Farms is US-based firm known for geographical expansion as theme of success and shown in selling chicken feet to China when US prohibited the chicken part domestically (Rubenson & Shipper 2001 C416). There are two applicable theories such as IPLC (i.e. minimization in costs of factors of production) and INT (i.e. minimization of transaction costs). In applying IPLC, Perdue Farms is protected with low levels of proactive behavior because expansion to China is a mere move to maximize sales and it is widely known that the country uses chicken feet as a delicacy. Without knowing other country factors, Perdue had no choice but to trade or loose potential revenues. On the contrary, high levels of proactive behavior should be applied in INT rationale because Chinese ports and delivery trucks are designed inefficiently that makes the products short-lived leading to limited Chinese geographical distribution. INT cannot be applied if Perdue did not apply a significant effort in evaluating distribution channels and compatibility of perishable qualities of chicken feet that can cause a loss due to huge transaction costs.
Since its inception in 1963, Nike is already outsourcing production to sub-contractors in Asia (Morris & Lawrence 2001 C367). The strategy is proved to be efficient particularly in labor costs in which the home country in US cannot provide. The IPLC model is followed by Nike operations. In the introductory phase, the home market designs and approves the market feasibility of the products (C367). As demand grows and matures in both actual and forecasted figures, the mass production of the models is delegated to the host operations (C367). The two operations are distinguished by the stages in the product life cycle in which they play both significant roles. In this respect, since Asian countries are known as cheap source of labor force, low levels of proactive behavior is required. However, IO (i.e. opportunity to create monopolistic dominance through multinational investments) is eminent as it employs substantial part of Asian labor force but providing relatively minimal compensation (e.g. In 1990, Indonesian employees are paid at around / day compared to US / hour). With IO, high levels of proactive behavior would be incurred because there are global, cultural and legal issues in the process that can lead to cancellation of manufacturing operations due to unfair labor treatment.
4. List and discuss the characteristics of the four ways in which an integrated global structure can be organized?
The cooperative form is an integrated global structure in which divisions are using the constrained diversification strategy of the products and markets and can be considered as on that thinks globally but acts locally (HItt et al 2003). In this form, there is a large scale of information sharing between global marketing efforts and local customer preferences to enhance corporation’s competitiveness. Fast and accurate spread of knowledge is important is succeeding this form since all of related-constrained firm’s divisions are sharing one or more corporate strengths such as production, marketing and channel competencies.
The strategic business unit (SBU) form consists of three levels; namely, corporate headquarters, strategic business units and SBU divisions where the divisions have highly related products or markets with their SBU but SBUs have little common products/ markets (HItt et al 2003). Although SBUs are considered the profit-centers, they are evaluated by headquarters especially on financial control aspects. Alternatively, SBUs apply strategic controls to their divisions to determine the effectiveness of each business portfolio. The weakness of this structure is that it tends to be complex and is used by highly diversified and large corporations.
The competitive form places high independence on each division partially because they do not share common corporate strengths (HItt et al 2003). Competition is a requisite because the low to zero relatedness of division’s products/ markets that results in three main advantages. First, internal competition creates flexibility in which the headquarters is endowed with decision alternatives in allocating resources and funds to fuel the key competency of individual divisions which can lead to cost-savings and differentiated strengths. Second, this structure creates managerial entrepreneurship as managers tend to be drivers of their own unit’s destiny. Lastly, it induces corporate effort in which divisions can endeavor the best that they can be and thus maximize returns to the company.
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