Global Business （Chap 3) Dept of Technology Management for Innovation (TMI), Graduate School of Engineering Professor Kazuyuki Motohashi 学系研究科 技術経営戦略学専攻教授 元橋一之 http: //www. mo. t. u-tokyo. ac. jp
Administrative Distances • Difference in currency • Tariff and non-tariff barriers (such as safety regulation): but this distance decreases over time (WTO, regional integration by FTA) • Local government FDI policy (restrictions and incentives) • Political disputes, conflicts
What is WTO? • World Trade Organization（HQ: Geneve, UN organization, 151 countries, established in 1995, former GATT) • WTO principles – MFN（Most Favorable Nation) 最恵国待遇： Exception for regional integration (FTA, EPA) – NT(National Treatment) 内国民待遇 • WTO rules – Tariffs in goods and services：ITA(Information Technology Agreement) – Trade Related Investment Measures（TRIMS) – Trade Related Intellectual Property Rights（TRIPS) – Government procurement, safety regulation, antidumping, safe guard rules etc.
Tariffs revision schedule (China’s accession to WTO)
Deregulation schedule for retail and wholesalse sector in China
Regional integrations with ASEAN
FTAs (EPAs) in Asia
Why “role of government”? • Administrative distances are greater for developing economies. (WTO, FTAs … but…) • Institutional fragileness in government agencies: limited human resource capacities, fragile legal institutions and discretions of local government officers. • Risk management perspectives; understanding local government incentives (sometimes government officer individual level) and relationship building is important.
India vs China: public organization China India Political Organization Chinese Communist Party (virtually one party control) Multiple parties competition NDA (National Democratic Alliance) such as INC (Congress) vs UPA (United Progressive Alliance) such as BJP National Congress National People’s Congress （全人代） Two house system (Upper house and Lower house) Administrative organization Centralized Local (state) independency Officers Bureaucrats (CCP member) IAS system Governance mechanism 人治 (ruled by human) 法治 (ruled by law) Discretion Small in central, but large in local Small by legal system, but large for executions Risk associated with policy Large and unpredictable Large but predictable (such change (such as Shanghai industrial changes are based on park case） democratic process
Institutional Voids Developed world Product Market Financial Market Labor Market Macro Condition China Relatively well retail sector, competitive Murky firm info. , underdeveloped banking Potentially good, but small amount of manager supply Institutional voids are covered by state control, but info. controlled India Protected and fragmented retail, disastrous PI Relatively well developed Strong labor unions and actions Government policy is politicized, open info exchange No institutions (Chaotic world) (Khanna and Palepu, 2010)
Strategy questions from IV view • Again, replicate (aggregation), adapt(adaptation) or exploitation (arbitrage)? – Examples of exploitation: METRO cash and carry, Blue River Capital (IV in financial market) • Compete alone or collaborate? – Working together with local partner? This will be discussed later in my course • Accept or attempt to change market context? – Filling IV by yourself? Influence on local government? (Toyota supply chain system in Guangzhou) • Enter, wait or exit? – Investment (exit) decision making with risk analysis
Risk factor identification • Risk: Uncertainty which might be under control • Types of global business risks – PEST（Politics, Economics, Society, Technology) – Global business: beyond PEST, risks inherited in institutional voids • Management decision under uncertainty -> Project evaluation (NPV, Monte Carlo simulation, Va. R, real option approach etc. ) • Major caveats for Japanese firms: too many risks -> don’t invest (discount factor may be too high).
Major risks associated with China business • Increasing production cost: particularly labor costs, worker protection policy and labor activist movements. • Technology leakage: Weak IPR enforcement, high labor turnover • Lack of transparency with government policy, various regulations: discretionary power of (local) government, sudden change of policies
Decision under uncertainty • Risk factor identification • Setting variance of risk factor (risk scoring) • Modeling risk project and simulation – Investment decision for new project (or exist from existing project): NPV, real option valuation (waiting options) – Risk management for existing project: determing major risks which should be treated • Independent project making or company wide strategic move?
How to mitigate institutional risk? • Case of Shanhai Jiading industrial park: Japanese firms was forced to be out • Case of Tata’s factory case: pull out from West Bengal Two qeustions • What could have been done in advance? • How to treat this?
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