Question

1.. Comment on a situation where the following statement does not hold:

In countries with autocratic regimes, MNEs can manage political risk effectively by focusing solely on their relationships with the government.

2. Comment on why the following statement is false. Provide an example

Increasing Intellectual property laws always stimulate innovation and emerging country-catch up.

3.How do MNEs decide on their product/service offering if they are faced with large cultural distance between them and the host-country? What did Starbucks do when they entered to Italy?

4. List indices/rankings that MNEs can use in their investment decisions. Choose 2 mini presentations, Comment on which ones are more relevant vs. less relevant to those 2 mini-team presentations.

Answer 1

1. Comment on a situation where the following statement does not hold:

In countries with autocratic regimes, MNEs can manage political risk effectively by focusing solely on their relationships with the government.

Ans:

The above statement cannot be hold. If a MNEs want to do business with autocratic regimes or any other foreign country they face certain limitation to operate and one of them is political risk. For MNE's political risk refers to the risk that a host country will make political decisions that proves to have adverse impact on profits and goals. Adverse political action can range from revolution against present government. This makes the economy of the host country instable. The instability could be due to change in government, legislative bodies, other foreign policy maker or military control. This hampers the return on investment of the MNEs.

We can divide political risk in two categories:

1. Macro risk and

2. Micro risk

Macro risk refers to adverse action that will affect all the MNEs whereas micro risk refers to adverse action that will only affect a certain industrial sector or business such as corruption and prejudicial actions against MNEs.

If any of the above situation arises MNEs lose lot of money if they are unprepared for such situation. This can be understood with an example:

When Fidel Castro's government took control of Cuba in 1959, hundred of millions of dollars of worth American owned assets and companies were expropriated. And companies were unable to get back their money invested. They lost their all money.

Having good relations with existing autocratic government is not enough for the MNEs but political risk can be managed or minimized by using following methods:

1. Research report

MNEs who want to invest in host country should get research report from a consultant or from their expert team. By analysing all factors decisions should be made and should work on whether it is a calculated risk or not. If company thinks business option is lucrative then it can have negotiation with host country and would have legal basis for recourse. But one problem a company can face is if any dispute arises it is difficult to win case in host country against that country.

2. Buying political risk insurance:

MNEs can buy political risk insurance. It should consult with the companies who are interested in selling such kind of insurance. This will help them to compensate if adverse condition arises.

From the above we can say that mere having good relations with autocratic government is not going to minimize the risk of MNEs.

2. Comment on why the following statement is false. Provide an example

Increasing Intellectual property laws always stimulate innovation and emerging country-catch up.

Ans:

Everyday people create ideas, goods and wealth which shapes the global economy. Those changes make the innovation creation of new goods and services the center of the economic activity.

Intellectual property rights are crucial for innovation. This indicates how they are performing in the new economic environment.

Intellectual property laws in developed countries gives best returns on investment. As a developed country it has lot of resources and money to invest in research for innovation. Developed economy everyday try to find out something new and bring it to the market. Dynamics of technological change in developed economies where the bulk of the world's knowledge is created and large number of firms have strong innovation capabilities; hence the appropriability issues are acute.

But same is not the case with the developing economies. Developed economies such as Latin America and Asian economy lacks the strong innovation capabilities. It is often thought that developing countries are imitators or adopters of technologies and knowledge developed elsewhere. And that is why debate on Intellectual Property Laws in such countries often focus on whether lax or strong Intellectual Property Laws are more favorable for technological change in those countries. The fact is that the relationship between competition patterns productive structures and innovation in developing countries is very different from that developing countries. Therefore we should also expect to find differences in the pattern use of Intellectual Property Laws and other appropriability mechanism.

This can be explained with the example in pharmaceutical sector.

When an innovation takes place in pharma industry in developed economies. The value of patent is recovered at the expense of health of the poor. So the developing countries suffer a lot in this trade.

That is why above statement cannot be hold true.

3.How do MNEs decide on their product/service offering if they are faced with large cultural distance between them and the host-country? What did Starbucks do when they entered to Italy?

Ans:

Cultural distance is the difference between the culture in home country and culture in host country. This culture difference effects on the decisions of the firm to internationalize it.

If a MNEs want to expand its business internationally and offer their product/service in host country then they should follow following steps:

1. Location choice:

This is the important aspect in setting up business. Having right location can increase profitability but wrong location can hamper the growth of the company. If people are interested in buying cold coffee and if business location is lower middle class then it will hamper the business. Targeted group should be identified and accordingly location will be chosen.

2. Entry mode / Establishment mode / Degree of ownership

How MNEs want to enter in host country market. It would have options such as franchising, joint venture, acquisition. This will help to establish a firm there in host country.

3. Integration of foreign operation:

After location choice and entry mode now it is important to decide how operations in host country will be managed.

4. Subsidiary performance / MNEs Performance

As MNEs want to do business in host country performance is always viewed as negative due to cultural distances. As it faces difficulties and complexities in running the business.

When Star Bucks entered into Italy they followed following strategies:

In Italy Star Bucks has opened its first in Milan in Sep'2018. First challenge they faced there was how to break barrier of Italy's coffee culture.

1. They have chosen location Milan in Italy to start its operation.

2. It is not typical outlet but it is designed in painstaking detail decked out in marble with hand chiseled palladiana flooring and a staircase leading to an "Arriviamo Bar" inspired by the Italian tradition of aperitivo (a drink before dinner to stimulate an appetite).

3. The company has partnered with an Italian brand management firm and a real estate group named Percassi for help with entering the market.

4. Starbucks offered customer seating place

5. Integration of foreign operations are managed by licensing partner Percassi