Global Business #4 May 7, 2012

Dept of Technology Management for Innovation (TMI), Graduate School of Engineering Professor Kazuyuki Motohashi

工学系研究科 技術経営戦略学専攻教授 元橋一之

http://www.mo.t.u-tokyo.ac.jp

Today’s class

• Role of local government in global business for emerging economies

• Understanding Institutional Voids • Risk analysis • Practical guide for (global) business planning

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, anti-

dumping, safe guard rules etc.

Tariffs revision schedule (China’s accession to WTO)

0%

10%

20%

30%

40%

50%

60%

2001 2002 2003 2004 2005 2006 2007 2008

All Product (7,151)

Air Conditioner

Refridgerator

Color TV

Computer

Passenger vehicle

Auto Chassis

Auto Body

Motor Bike

MB Components

Deregulation schedule for retail and wholesalse sector in China

Regional integrations with ASEAN

FTAs (EPAs) in Asia

Supply Chain of Automotive industry in Asia -> Fragmentation of production

© 2010 Kazuyuki Motohashi

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 change

Large and unpredictable (such as Shanghai

industrial park case）

Large but predictable (such changes are based on democratic process

Institutional Voids

Developed world

No institutions (Chaotic world)

(Khanna and Palepu, 2010)

Product Market

Financial Market

Labor Market

Macro Condition

China Relatively well retail sector, competitive

Murky firm info., under-developed 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

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, VaR, 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?

Case 0 & suggestions

Evaluation Criteria: ①Understanding the contents, ②Specificity, ③Logic & Originality

Grade distribution: A: 6, B: 17, C: 8, x: 6, xx:3 Guidelines (3 DON’Ts) : - Do not hand-write, type it. - Do not be late, be punctual - Do not be too long, be concise Suggestion: Be specific and precise