INTERNATIONAL ORGANIZATIONAL BEHAVIOR:

International Organizational Behavior 2e Chapter 1 Page 1 © 2018 Taylor & Francis. All rights reserved.

CHAPTER 1

INTERNATIONAL ORGANIZATIONAL BEHAVIOR:

CHALLENGES AND OPTIONS FOR MANAGEMENT

CHAPTER INTRODUCTION

People need to come first in the mix. As companies seek to build local operations in countries such as Brazil, Russia, India, and China, identifying and tapping local talent pools becomes increasingly important. Striking the right balance between standardization and localization is always a work-in-progress, but the vast cultural and language gaps from country to country demand it. The days of overseas operations run exclusively by expats are over.—Miles White, CEO of Abbott

If one day you’re asked to manage a supply chain in Malaysia, the next day you’re managing your virtual team in China, and the next you’re optimizing your company’s call center in India, you know that it’s just not possible to be an expert in every culture or geography in which you do business. What is possible is developing the mindset of a globalist—or, in other words, mastering cross-cultural core competency.—Denise Pirrotti Hummel, former CEO of Universal Consensus, a cross- cultural advisory firm helping businesses to succeed across cultures1

The aspects that I see motivating in global work are the excitement of how we overcome small misunderstandings and other common challenges [of cross-cultural collaboration], witnessing the people from totally different cultural backgrounds getting together for a common goal and succeeding together.—Oliver, an Italian employee working in a Finnish multinational corporation

This chapter’s opening comments capture common management and talent challenges facing multinational companies and underscore where multinationals see the biggest growth opportunities. Successfully expanding overseas requires critical management skills and abilities.

Advances in technology have made it possible to operate businesses around the world 24/7— simultaneously lowering barriers between nations while enabling firms to manage their global supply chains with maximum flexibility.

(International Organizational Behavior Transcending Borders and Cultures, 2e Dean McFarlin, Paul Sweeney) (Instructor Manual all Chapters) 1 / 4

International Organizational Behavior 2e Chapter 1 Page 2 © 2018 Taylor & Francis. All rights reserved.

CHAPTER REVIEW OUTLINE

MANAGING PEOPLE IN A DYNAMIC GLOBAL CONTEXT

The interdependence that is globalization produces ripple effects as rapidly growing nations such as China and India are now producing home-grown firms that are challenging established multinationals’ ability to keep up in everything from innovation to hiring the best talent. Several developing countries now have a total gross domestic product (GDP) of over $2 trillion, with China arguably surpassing the U.S. in 2015, at least when purchasing power parity (PPP) is taken into account ($19.4 trillion versus $17.9 trillion, respectively). Increased international competition and the loss of key talent were listed among the top five threats executives said they were most concerned about.

I. Globalization: The Rise and Advance of Emerging Markets

The strongest growth in international business has been in developing countries rather than in traditional economic heavyweights such as the European Union (EU), Japan, and the United States. Between 1989 and 2015, China’s annual GDP growth rate averaged over 9%, more than three times that of the U.S. Developed nations continue to attract considerable investment; however, Brazil, Russia, India, China, and South Africa (the “BRICS”) are developing countries on the move. In 2014, four of the top five recipients of foreign direct investment (FDI) were developing countries, including China and Brazil.

GDP is growing at a much faster pace in developing nations. By 2020, the rise of developing nations may create over 700 million new members of the middle class.Developing countries will have a more affluent citizenry with more disposable income. Multinationals view developing nations as huge sources of new customers.International firms now see these countries not just as sources of cheap labor, but rather as increasingly affluent populations eager for better products and services.

Especially attractive in developing countries are the innovative home-grown products of native frugal innovators, priced to match the lower incomes of local citizens. For example, in recent years, Indian firms have been designing and selling $100 stoves and refrigerators. Established companies from developed nations have started paying attention, creating locally designed products for emerging markets.

Developing countries are also producing world-class companies that are challenging their more established developed-country brethren. Developing countries had only one firm among the 500 biggest companies in 1997. In 2016, over 100 of the 500 largest firms in the world were headquartered in China. 2 / 4

International Organizational Behavior 2e Chapter 1 Page 3 © 2018 Taylor & Francis. All rights reserved.II. International Challenges in Doing Business and Managing Talent

Companies now face a dynamic competitive environment when they venture abroad, and must cope with management challenges unique to international business. These challenges include specific issues related to managing talent. However, international managers must be able to grasp foreign cultures and adapt their own behavior accordingly to be effective.

A. Emerging Market Complexity: The Case of China

Foreign firms in China face major regional differences in culture and language, as well as a host of competitors. Foreign companies may struggle in China, especially when selling directly to consumers. At the same time, the pace of competition in China is frenetic. Over 660,000 foreign companies operated there in 2009, nearly double the number in 2000, plus millions of local firms. Economic power has been shifting China’s way (see the boxed feature Culture Clash).

B. Another Headache: Currency Volatility

Challenges facing international managers include rapid changes in currency values that produce havoc and have serious ripple effects across countries.Currency swings can be a response to rapidly changing business dynamics or merely whims of investors and traders. Consequently, international managers must attend to currency swings to avoid sudden losses.

Some managers use currency hedging to protect against big currency swings. In essence, buying what amounts to an insurance policy that effectively freezes currency rates for a fixed period. Currency hedging is expensive and hardly foolproof. Another option is to make products where they are sold, relying on local suppliers in the process. This natural hedging is used by many large firms to insulate themselves from currency problems. Using natural hedging means companies must manage more facilities in a wider variety of countries, which can produce new challenges in managing talent effectively across borders.

C. Offshoring and Onshoring: Recent Trends

• Offshoring involves sending jobs abroad, often to places where labor is cheap.

Large and small firms alike have been engaging in offshoring for decades.Traditionally, companies based in developed nations with expensive labor have sent jobs to cheaper countries to cut personnel costs (up to 75% in some 3 / 4

International Organizational Behavior 2e Chapter 1 Page 4 © 2018 Taylor & Francis. All rights reserved.cases). Popular offshoring destinations include China, Mexico, and the Philippines. India, another offshoring recipient, is an attractive destination due to its deep reservoir of inexpensive, well-educated technical talent with good English-speaking skills. However, offshoring comes with management challenges, such as difficult logistics, poor work quality, poor customer service, high shipping costs, long delivery times, intellectual property theft, cultural differences, and communication problems.

• As a result of these challenges, some firms have shifted once-offshored jobs

back home. This trend, labeled onshoring, occurs when firms conclude that the costs outweigh the benefits of offshoring (in a recent survey of manufacturers, 55% were dissatisfied with offshoring). Firms are trying to capitalize by offering themselves as alternatives to offshoring (see the boxed feature Global Innovations).

Offshoring works if management bridges cultural and communication differences, provides sufficient support, and sets clear expectations. Firms need to think carefully about what work should be offshored, and then search diligently to hire the best foreign employees. The reality is that the practice of offshoring is not going away any time soon. Many executives view offshoring as part of the global competition for jobs and talent. While many offshored jobs involve basic service support, firms are increasingly offshoring sophisticated work, including new product development and innovation.Motivation, when complex work is involved, has less to do with cutting labor costs than with hiring the best employees in the world, developing the firm into a global power, achieving faster revenue growth, and entering foreign markets quicker. Skilled knowledge workers—especially given globalization, technology advances, and intense competition—are at a premium.

• The Best Talent Wins

The quality of a nation’s workforce relates to how competitive that country is in job creation and its ability to produce outstanding companies that can excel globally. Training, educational quality, motivation, and cutting-edge skills are parts of the equation that determines the quality of a nation’s workforce. Table 1.1 lists the top 20 most competitive nations for 2016. One common characteristic shared by top nations is the quality of their workforce. Sophisticated work can be done anywhere with a good supporting infrastructure (such as high-speed internet connections) and employees who are properly trained, motivated, and educated.

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