Institutional Context ofMultinational Management

(Business Environment)

Chapter 3

Factors in theBusiness Environment

Economic systems, privatization, and nationalization

Laws and regulations that affect business

Level of industrialization Religion Education Culture

Economic Systems

Capitalist/market economy: production is decentralized to private owners Owners perform activities to make profits

Socialist/command economy: production resources are owned by the state Production decisions centrally coordinated

Mixed economy: combines aspects of capitalist and socialist economies – wide variety of mixed economies

Economic Systems (2)

When government is more involved in the economy, there will be more regulations and restrictions on business Social goals, such as full employment, may

be more important Example: It is more expensive to

terminate employees or close a business facility in Europe than in the United States.

Index of Economic Freedom compares the level of government regulation in different countries

Exhibit 3.2: Selected Country Scores on Index of Economic Freedom

Privatization

Privatization is the sale of government-controlled enterprises to private investors

Methods of privatization Issue stock in the enterprise Sell the enterprise to a company Sell the enterprise to individual investors

Privatization (2)Reasons for Privatization

In developed countries, privatization helps companies become more competitive in the global economy.

Developing countries often privatize companies to get more rapid economic growth.

Many former Communist countries privatized their enterprises to make the transition to a market economy. This is one condition that countries must meet to join the European Union (EU).

China now has a mixed economy, with both public and private enterprises.

Post-CommunistMembers of the EU• Poland• Hungary• The Czech Republic• Slovakia• Slovenia• Estonia• Latvia• Lithuania• Bulgaria• Romania

Candidates• Croatia• Macedonia• Croatia

Privatization Issues inTransition Economies

Foreign investment was often needed to replace obsolete equipment and facilities.

Some companies had to invest in infra-structure, such as roads and sewer lines.

Privatized firms employed fewer people, which caused high unemployment

Labor was often inexpensive. Workers were sometimes suspicious of business

and hard to motivate. Enterprises devoted to military production often

could not be made profitable and had to close.

Nationalization

Nationalization is the conversion of a private enterprise to government ownership. The government may or may not pay the

company's stockholders or investors for the enterprise.

When no payment is made, the conversion is called expropriation.

Nationalization in Russia

Russia privatized its energy industry in the 1990's and recently re-nationalized most of it.

Russia just forced Shell and several other western companies to a controlling interest in the Sakhalin 2 oil project to the government energy monopoly (Gazprom)

Russia has large oil reserves and the world's largest reserve of natural gas

Nationalization in South America

Most government enterprises in South America were privatized in the 1980's.

Socialist presidents have been elected in Bolivia, Ecuador, Venezuela, and Nicaragua.

Venezuela just announced that it will privatize the telecommunication and electrical industries. Will compensation will be paid? Venezuela is likely to nationalize other

industries. Bolivia and Ecuador have also nationalized some

companies.

Industrialization

Pre-industrial society: agriculture dominates the economic environment

Industrial society: dominance of the secondary or manufacturing sectors

Post-industrial society: emphasis on the service sectors

Exhibit 3.4: Distribution of Production Activities by Sectors

Implications of Industrialization

There is a direct correspondence between industrialization and economic development Industrial societies favor growth and

innovation Favorable environment for business Industrial societies present significant

market size and growth

Industrialization

Pre-industrial countries provide cheap labor and untapped markets People are often highly motivated to

achieve a better life Post-industrial societies

Emphasis on quality-of-life as opposed to economic achievement

Religion

Christianity, Islam, Hinduism, or Buddhism are followed by almost 71% of the world’s population

Religion affects ethics and worker behavior

Know the implications of Islam, Hinduism, and Buddhism for business

Importance of Education

Gives an idea of the skill level of workers in any society

The more educated, the more skills workers have

Companies look at educational attainment scores to determine the nature of the workforce

Organizations Alike: Globalization and

Convergence

Globalization is pushing organizations to be more similar Global customers and products Growing levels of industrialization and

economic development Global competition and global trade

Globalization and Convergence

Other convergence forces Cross-border mergers, acquisitions, and

alliances Cross-national mobility of managers Internationalization of business education

Caution: customers in different customers still have somewhat different preferences and needs.