Question

You have been hired by Amazon to serve as their international financial analyst. Your first task is to support Amazon’s M&A prospecting efforts by create a country risk rating for three countries: Algeria, Hungary, and Laos. To do so, you must select and use a method to assess these country’s risks.

1. Name and describe a method (or methods) that you would use to gather information to evaluate these three countries’ risks.
2. Name at least three steps Amazon can take to reduce the risk of a host country’s government taking over their business.

Answer 1

International investing is a great way to diversify any stock portfolio, but investing in Italy or Nigeria isn't the same as investing in the United States. Country risk refers to a country's economic and political risks that may affect its businesses and result in investment losses. These evolving risk factors are critical for international investors to monitor over time. Here's how to quickly and easily measure and analyze country risk.

Measuring Risk

Measuring a country's risk can be a tricky endeavor. From tax laws to political upheaval, investors have to take hundreds, if not thousands, of different factors into consideration. For instance, tangible moves like an interest rate hike can dramatically hurt or help a country's businesses and the stock market, but even a mere comment from a prominent politician hinting at future plans can have just as large of an impact.

A country's risk can generally be divided into two groups: economic risks and political risks. Economic risks are associated with a country's financial condition and ability to repay its debts. For instance, a country with a high debt-to-GDP ratio may not be able to raise money as easy to support itself, which puts its domestic economy at risk. Political risks are associated with a country's politicians and the impact of their decisions on investments. For instance, desperate politicians supporting nationalizations could pose a threat to investors in certain strategic industries.

In some cases, economic and political risks can be intertwined. Argentina's economy under former Peronist regimes is a great example. In that case, populist politicians implemented policies that undermined the economy, such as energy subsidies and spending from foreign reserves.

Analyzing Risk

There are many different ways to analyze a country's risk. From beta coefficients to sovereign ratings, investors have several different tools at their disposal. International investors should use a combination of these techniques to determine a country's risk, as well as the risk associated with any individual international investment or security.

Methods used to assess country risk are either quantitative or qualitative. Quantitative analysis uses ratios and statistics to determine risks, such as the debt-to-GDP ratio or the beta coefficient of the MSCI index for a given country. International investors can find this information in reports from rating agencies, magazines like the Economist, and through various other online sources.

Qualitative analysis uses subjective analysis to determine risks, such as breaking political news/opinion or realistic market rumors. International investors can find this information in financial publications like the Economist and the Wall Street Journal, as well as by searching on international news aggregators like Google News.

The most common way that investors assess country risk is through sovereign ratings. By taking these quantitative and qualitative factors into account, these agencies issue credit ratings for each country and give investors an easy way to analyze country risk. The three most-watched rating agencies are Standard & Poor's, Moody's Investor Services, and Fitch Ratings.

Checklist & Other Tips

International investors can determine country risk using this simple three-step process:

1. Check sovereign ratings: Look-up the country's sovereign ratings issued by the S&P, Moody's, and Fitch to get a baseline look at the country's level of risk.
2. Read the latest: Search on Google News or other international news aggregators for any economic news surrounding a country as a form of qualitative research, or check public data sources like the International Monetary Funds or World Bank.
3. Check the asset's risk: Determine the specific investment's risk by looking at quantitative factors, such as the beta coefficient; a higher beta coefficient equates to greater risk.

However, just because a country is risky doesn't mean investors should ignore it. Sometimes increased risk equates to higher potential returns. For instance, a country undergoing an economic reform may be riskier now, but its long-term future may be brighter as a result. International investors can still incorporate risk into a diversified portfolio to enhance potential returns. Here are a few tips to keep in mind when considering riskier investments:

• Stay diversified: A diversified portfolio can help mitigate the effects of any one security falling sharply. Try and limit any single security from accounting for more than 5% of a portfolio's value.
• Hedge your bets: Some strategies, such as writing covered calls or buying index put options, can help hedge against a market downturn. Advanced investors may want to consider these options.
• Monitor the situation: Always keep an eye on your investments. Things can change rapidly in international markets - particularly risky ones - so make sure you see any dark clouds before the storm hits.

Algeria: Country Risk Factors

Strengths

• Major oil and gas reserves; significant potential for shale gas development
• Potential in agriculture, renewable energies, and tourism
• Low external debt

Weaknesses

• Highly dependent on hydrocarbon revenues
• High youth unemployment rate
• Overly large public sector
• Acute political and social crisis triggered in 2019
• Red tape, financial sector weaknesses, and an uncertain business environment

Hungary: Country Risk Factors

Strengths

• Diversified economy
• High quality infrastructures thanks to European funds
• Integrated within the European production chain
• Trained workforce
• Low corporate taxation
• Generally positive payment behaviour

Weaknesses

• Ageing population, low birth rate
• Exposed to European economic trends as a small and open economy
• Regional disparities; lack of mobility
• Deficiencies in vocational education
• Poor levels of innovation and R&D, high content in imported inputs for exports
• Limited room for manoeuvre in terms of budget
• High debt level of companies (although falling)
• Fragility of the banking sector (public and private)

Loas: Country Risk Factors:

Strengths

• Abundant natural resources: minerals (copper, gold, bauxite, iron, zinc), oil and agricultural commodities (maize, rice, sugar cane, rubber, manioc, soya, coffee)
• Expansion of the hydroelectric sector and economic diversification
• Foreign investment in the commodities and energy sectors
• Regional integration (ASEAN) and WTO membership

Weaknesses

• Persistent large current account deficit
• Weak foreign exchange reserves
• Governance shortcomings and high inequality
• Fragile banking sector
• Significant sovereign risk due to high external debt stock, specially Chinese-owed external debt
• Sensitivity to commodity prices as well as regional economic cycle and geopolitics (landlocked country)

Steps Amazon can take to reduce the risk of a host country’s government taking over their business:

Since the early 1970s, host governments have intervened more and more in the affairs of multinational corporations. Today they regularly establish rather demanding conditions for MNCs wanting to do business in their countries. What kinds of conditions are these? What type of threat, if any, do they pose to the normal operation of corporate decision making or to the strategic autonomy of corporate managers? Most important, how should the managers of multinationals respond to them? And according to what criteria should they calculate their responses? In this article, the authors—themselves engaged in a long research project on MNCs—seek to provide answers to these questions. First, they show that both host government restrictions and MNC responses can be readily classified. Next, they provide guidance for the necessary but difficult act of matching that managers must attempt between various categories of government demand and corporate reaction. Finally, they suggest some of the implications of achieving a proper balance for the organizational structures of multinationals.

• The carefully drawn strategic plans of a multinational company (MNC) call for new production facilities to be built in Europe, but the prospective host government establishes unusually strict sales and export volume conditions before giving the necessary permission.

• National managers of an MNC’s Latin American subsidiary attempt to implement a multinational competitive strategy set by the parent company, but host governments insist that the subsidiary enter into joint venture arrangements with local companies.

Unusual situations? Not any longer. During the 1950s and 1960s, host governments rarely intervened in the affairs of multinational companies. Since 1970, however, those same governments have increasingly begun—for reasons of policy and/or ideology—to limit the considerable strategic autonomy of MNC managers. In developed countries, these limitations tend to cluster in industries of central importance to the government, such as telecommunications equipment. In developing countries, merely being an MNC is often sufficient grounds for attracting host government intervention.

Drawing on intensive research on a number of multinationals in both developed and developing nations, we shall (1) describe the major problems and the trade-offs government intervention poses for MNC managers and (2) discuss the possible lines of MNC response to this encroachment on their traditional strategic autonomy.

Types of Intervention

In recent years, the efforts of host governments to maintain control over their own national economies have increasingly restricted the freedom of MNC managers in deploying economic resources. Of equal importance, host governments have often interfered with the autonomous process of MNC strategy formulation.

Managers who are or who are likely to be faced with such restrictions may find it useful to distinguish between these two different kinds of government intervention. The first, which sets the fiscal and regulatory ground rules for an MNC’s decision to compete in a host country, is best understood as a limitation to strategic freedom. The second, which seeks to influence the internal mechanics of an MNC’s decision-making process, is best understood as a threat to managerial autonomy. Together they constitute a major infringement on the general strategic autonomy of MNC managers. Let us make these various terms clear in the discussion that follows.

Limitations to Strategic Freedom

As foreign trade and investment have made national economies less responsive to such chestnuts of economic policy as the stimulation of demand to increase production, host governments have progressively moved toward the closer regulation of entire industrial sectors. This regulation has primarily affected multinationals in the form of such locally sensitive issues as product/market choice, use of technology, level of employment, and national trade balance.

For example, Spain set explicit sales and export volume conditions before allowing Ford to establish production facilities there. The Spanish government limited Ford’s sales volume to 10% of the previous year’s total automobile market and required that its export volume be equal to at least two-thirds of its entire production in Spain. Further, Ford had to agree not to broaden its range of automobile model lines without government authorization.

Australia has taken a slightly different approach. The Australian national telecommunications administration has standardized production requirements for the MNC subsidiaries from which it buys equipment. As a result, the L.M. Ericsson subsidiary often ends up manufacturing ITT-designed equipment, and vice versa. In the past, with well-known switching technology, this was not a major problem. In the 1970s, however, the practice of allocating to one company the production of another’s equipment has made it difficult for multinationals to protect new proprietary switching technology.

Each of these restrictions limits the strategic freedom of multinationals but does not really threaten their managerial autonomy. Though Ford accepted significant government-imposed constraints on its new operations in Spain in 1973, it still requested and received full local ownership—that is, Ford retained full control, full “operating flexibility.” Thus Ford could take the Spanish demands explicitly into account before it had to deploy resources in Spain.

As the head of European operations for one large MNC put it, “On any significant decision such as plant construction, plant closing, or reallocation of production, we take a first cut at an economically optimal solution, then we amend this economic solution to fit with the demands of governments and arrive at a compromise that is acceptable both to the governments and to our top management in the United States.”

Threats to Managerial Autonomy

Beyond establishing conditions that MNC policymakers must take into account, host governments have also sought to influence directly the process by which that strategy is formulated. Characteristically, developing countries in South America, West Africa, and the Far East regularly request joint ownership of local MNC subsidiaries. The workers’ codetermination schemes, which are now gaining momentum in the developed countries of Europe, may ultimately have the same effect of forcing MNC subsidiaries to share their strategic decision making with representatives of local constituencies —be they government officials, local business people, local workers, or local unions.

This type of intervention most commonly occurs when MNC subsidiaries are involved in industries perceived by the host government as critical to national economic, social, or political objectives. In such cases, the usual demand is for multinationals to decentralize decision making to autonomous subsidiaries and for those subsidiaries to share that process with one or another local constituency.

“In the long run,” commented a top manager of one MNC confronted by just this kind of threat, “we risk becoming a collection of inefficient government–subsidized national companies unable to compete on the world market. Yet, if we rationalize our operations, we lose our preferential access to government contracts and our R&D subsidies. So we try to develop an overall strategic plan that makes some competitive sense, and then we bargain for each part of it with individual governments, trying to sell them on the particular programs that contribute to the plan as a whole. Often, we have to revise, or abandon, parts of our plan for lack of government support.”

MNC Responses: Adapt or Withdraw

Any restriction of managerial autonomy or strategic freedom is a serious matter. Exhibit I briefly summarizes the major dimensions of these infringements on MNC strategic autonomy. These restrictions may be sufficiently troubling to prompt an MNC either not to enter a national market or, if already present, to withdraw from it. The threat of such infringement may also lead multinationals, such as IBM, to avoid certain businesses, like the public sector of the telecommunications equipment industry, in all countries.

Exhibit I Infringements of MNC Strategic Autonomy

Other multinationals, such as CPC International or Du Pont in the United States and Brown Boveri or Nestlé in Europe, have accepted and adapted to this infringement in return for continued market presence or the penetration of new markets. A senior manager in one of these companies expressed this willingness quite clearly:

“If you consider the world map, there are but a few developing countries that have the infrastructure or the domestic market needed for sophisticated products—countries like India, Nigeria, Brazil, Mexico, South Africa, and Indonesia. We are willing to compromise our worldwide rationalization strategies in these countries where getting a foothold is of great importance. Maybe in the future MNCs’ strategies will have to be more flexible and responsive to host government demands—more than hitherto.”

Still, hard questions remain. Which response—that of IBM or that of Nestlé and Du Pont—is more appropriate? Is it better to sacrifice market participation to preserve strategic autonomy? Or is it better to make the necessary compromises to guarantee market participation?

There are, of course, good reasons for and sound objections against both courses of action. If, for example, a company is late in expanding internationally, its need to attract the support of host governments for some of its businesses may be great enough to offset any required sacrifice of strategic autonomy. This trade-off has characterized much Japanese investment abroad when Japanese companies were trying to establish quickly a presence in new markets.1 Yet when Toshiba, Hitachi, and Matsushita set up components plants in Malaysia to serve markets in developed countries, they demanded full ownership. Sourcing plants, on which home production depended, were generally 100% Japanese owned; plants producing end products for local markets were usually joint ventures with local interests.

Sacrifices of strategic autonomy are never without their cost. Over time they make it difficult for an MNC to respond to worldwide competition because they tend to lock managers into the practice of considering each national market separately. For example, when its electric motor business met with heavy price competition from Far Eastern and East European companies, Brown Boveri (the Swiss electrical giant) found it very difficult to develop and implement a consistent multinational response among its various subsidiaries. Because most of the national utilities to which it sold electric equipment required that national subsidiaries be independently managed, both the administrative procedures and the attitudes of general managers were not attuned to coordinating a multinational response.

Restrictions in India

Acceptance of host government regulations may also have a troubling impact on an MNC’s diversification strategy. Consider the case of India. Until 1970 the primary type of diversification among MNC subsidiaries doing business in India has been characterized as “related”—that is, based on linkages with existing competencies of the parent company in distribution and marketing, production technology, or the exploitation of R&D. Between 1970 and 1975, however, there was a sudden shift among MNC subsidiaries toward “unrelated” diversification, in which these linkages do not exist and in which the only rationale for continuing the parent–subsidiary relationship is financial.2 This shift occurred at the same time that the Indian government began systematically to restrict the strategic autonomy of MNCs; in fact, the shift was very much the product of that restriction.

Technology–based multinationals weathered the storm of Indian regulation in better shape than did those that were marketing based and, correspondingly, showed less of a shift toward unrelated diversification. To take one example, managers of Union Carbide’s Indian subsidiary were able to identify technological capabilities of the parent company in a number of fields (such as carbon products and agricultural chemicals) of great importance to the host government.

ITC, the Indian subsidiary of British American Tobacco, a marketing-intensive MNC, could not do likewise. Hence its movement into shrimp fishing, general exports, hotels, and lumber products represented unrelated diversification. Under growing pressure even the subsidiary of Union Carbide had to move in this direction. It is currently said to be examining a project in ready-to-wear clothing for export (a priority sector).

Withdrawal from a market also has its cost. As already mentioned, IBM’s decision not to remain in India stemmed largely from its desire (1) to maintain central control of product development and thus a fully compatible product line, (2) to protect its worldwide rationalized production system, and (3) to retain full control of all equipment leased to customers. But India was not a large market for IBM. What if the same corporate reasoning suggested a withdrawal from larger markets such as Mexico or Brazil? Would lBM’s policy of limited compromise still be defensible?

The Counteractive Response

Quite obviously, these questions admit of no simple or single answer. To the contrary, they suggest that to think in straight either/or terms— adaptation to host government intervention or withdrawal from the market—is misleading. Such intervention confronts multinationals not with the choice between two but with the choice among several possible lines of response. Between adaptation and withdrawal lies the broad middle ground of what we shall call the “counteractive” response: a careful use by an MNC, given its competitive position within its own industry, of its bargaining power vis-à-vis the host government in order to gain some competitive advantage against other multinationals.

Consider these examples of counteractive response:

• In the late 1950s, the Japanese government solicited participation by leading U.S. semiconductor companies in the development of a domestic semiconductor industry. As a condition for American entry into the Japanese market, the government required that joint ventures be established with Japanese partners.

Texas Instruments (TI), though quite interested in the Japanese market, was unwilling to sacrifice its managerial autonomy and thus compromise whatever technological lead it then had over its competitors by transferring its technology to a Japanese joint venture. After protracted and at times heated negotiations, TI reached an agreement according to which it would set up a wholly owned subsidiary in Japan to supply the Japanese electronics industry with high technology components and circuits. TI was able to maintain its managerial autonomy because of an obviously superior technology for which Japanese industry could find no easily available alternative.

• Not unlike the response of TI is the notorious reluctance of U.S. aerospace companies, such as Boeing, to participate in any cooperative schemes in which foreign companies would be more than mere subcontractors and would share design and engineering responsibilities. As with TI, state-of-the-art technology confers an immense advantage in bargaining power.

• Conversely, faced with tough competition, some multinationals in the computer industry have found that sharing subsidiary ownership with host governments or national companies provides them with significant advantages in terms of access to resources or markets. Honeywell, for instance, merged Honeywell Bull, its French subsidiary, with the ailing Compagnie Internationale pour I’Informatique (C2I), the French national company. Thus it was able to gain preferential access to the French public administration market and to an R&D budget (including government contracts and grants) roughly equal to its own. It also acquired the competent R&D team of C2I and a strong market position in Eastern Europe, where the support of the French state had won sizable contracts for C2I.

• A more extreme example of this kind of counteractive response is Chrysler’s wholesale transfer of strategic and financial responsibility for its ailing British subsidiary to the British government in 1975. Ironically, Chrysler’s weak competitive position gave it significant bargaining leverage with the British government, which had more to lose—both economically and politically—by letting Chrysler close its plants in the United Kingdom than by subsidizing them.

In summary, the experiences we have examined suggest that, not surprisingly, the kind of counteractive response an MNC can select depends primarily on the company’s bargaining power vis-à-vis the host government as well as on its competitive posture within its own industry. In fact, it may be of use to picture these choices of counteractive response as lying at various points along a spectrum defined by MNC bargaining power. At one end of the spectrum is TI with its strong technological position; at the other, Chrysler. In the middle lies IBM, with Boeing leaning toward the TI extreme and Honeywell toward the Chrysler. Exhibit II summarizes the effects of bargaining power on MNC responses to host government intervention.

Exhibit II Effects of Bargaining Power

It is therefore important to understand both the sources of bargaining power between multinationals and host governments and the impact of position within the industry on the choice of counteractive response.

Sources of MNC Bargaining Power

The key bargaining strength of an MNC is its ability to provide efficiently a technological package that the host country could not otherwise easily obtain. Scale economies and product differentiation may also contribute. Conversely, the key bargaining strength of a host government is its ability to control ease and attractiveness of access to its national market.

The sources of bargaining power of an MNC are therefore much the same as the sources of competitive advantage in a concentrated industry: technology, economies of scale, and product differentiation.

Technology:

The ability of an MNC to provide, under competitive conditions, products or services not easily obtainable from another source (multinational or not) is the necessary foundation for any counteractive response. Put simply, a government has to deal on the MNC’s terms or look for costly and uncertain alternatives. MNC managers, however, must be able to judge how the objectives of a government affect the value of their company’s technology.

When, for example, a country wishes to become a major exporter to very competitive markets, it requires the best technology available. This was the situation TI faced in Japan in the late 1950s with regard to semiconductors. But when a country seeks merely to substitute local production for imports, then an internationally competitive technology is not of crucial importance. The technology adequate to its needs can, in fact, be quite old. Even today India finds sturdy, easy-to-maintain, 1950s Mercedes-Benz trucks more suited to its road conditions and maintenance abilities than more modern vehicles.

Similarly, an MNC’s advanced production methods may not always offer a real bargaining advantage. To compete in the worldwide electronics industry, an MNC must achieve a very low component rejection rate in its process technology—a rate best achieved by increasing automation. But a host government may actually prefer a relatively inefficient production process if it employs many workers.

Economies of scale:

Such well-known sources of competitive advantage as size and experience curve effects can also provide MNC bargaining power. By creating specialized plants in various countries and by shipping components or end products among them, multinationals can both produce at volumes larger than the minimum efficient scale and accumulate experience quickly. Further, the higher the minimum efficient production scale in a given industry and the stronger the experience effects, the more difficult it is for host countries to set up their own domestic industries.

Consequently, it is harder for host countries to force MNC subsidiaries to sacrifice managerial autonomy: the economic inefficiencies would be prohibitive. In microelectronics, for instance, smaller companies like SESCOSEM in France have much higher manufacturing costs than do larger, integrated multinationals like TI or Motorola and would incur major losses if not allowed to concentrate on only a few products.

Remember, however, that older production processes—ones that use more labor and less capital than do those of an integrated MNC—may be less sensitive to these economies of scale and thus more attractive to some host governments.

Product differentiation:

It is necessary to distinguish between marketing-based differentiation and differentiation based on technology. Our research indicates that, confronted by a determined government, multinationals may well find some kinds of marketing-based differentiation to be of little help. When, for example, differentiation is based only on consumer perceptions created through marketing—as with different brands of soap—the government may restrict the number of brands or limit advertising without doing any harm to the national economy. However, when differentiation is based on actual characteristics of product technology—say, the performance features of a tractor or other piece of agricultural machinery—then such differentiation may well prove a source of MNC bargaining power.

Sources of Host Government Bargaining Power

The key bargaining strengths of a host government are its abilities to control market access and to offer a variety of inducements to encourage market participation.

Control of market access:

Spain was able to attract Ford’s new plant to Valencia by letting Ford sell just enough cars in Spain to make the greenfield site at Valencia preferable to the company’s expanding its existing plants in Germany or the United Kingdom. Had Spain been a member of the European Community and thus not able to restrict imports or legislate market share allocations, it could have done only what other European countries do to attract MNC investment in the automobile industry: hold out the promise of subsidies and grants.

When governments control customer purchases, even though products are officially freely traded, they also gain bargaining power. In the early 1970s, the French government starved Honeywell Bull by directing public orders to C2I. Faced with similar conditions, IBM has had a much lower market share in the British public sector than in the private sector market.

Control of market access, depending on its degree of completeness, provides host governments the wherewithal to require multinationals to enter into joint venture arrangements, to place government representatives on their boards, or even to participate in R&D with state-owned customers.

Inducements:

Host governments may also sweeten the pot for multinationals by offering substantial support for R&D efforts. For example, ITT’s European telecommunications equipment subsidiaries have received large research contracts and subsidies from host governments on the condition that they develop equipment well suited to local needs. Similarly, Valvo (Philips’s German electronic components subsidiary) received major grants from the German government, which feared Japanese competition in the TV industry, to support its development of very large scale integration circuits for color TV sets.

Competitive Position Within the Industry

Of course, multinationals not only bargain with host governments to retain their freedom and autonomy; they also compete against each other. Depending on its position within its own industry, a given MNC may choose to take a firmer or a softer stance on host government interference. Our research confirms the commonsense expectation that the larger, more dominant companies in an industry tend to be able to resist government interference with strategic autonomy. By contrast, the smaller, weaker companies tend to find alliances with host governments useful and are, as a result, more willing to accept the corresponding loss of strategic autonomy.

Smaller multinationals stand to lose when competition in an industry becomes global and larger MNCs organize themselves to take full advantage of rationalized production and low-cost manufacturing locations. When this happens, smaller MNCs may well find they need privileged access to markets to remain marginally competitive. They may also need some influx of resources from host governments to develop new products.

In other words, smaller multinationals often survive in a competitive world market only by enlisting host government protection and assistance. From the case of C2I-Honeywell to the recent, though abortive, attempt by Volvo to enlist the Norwegian government as a shareholder, there are any number of instances of smaller competitors in a worldwide industry trying to ally themselves with host governments.

This distinction in size is less significant in those industrial sectors where markets are fully government controlled. Here overall size and international competitive posture are only of secondary importance because production takes place locally and products have to be adapted to national specifications. In these sectors, technology alone determines how much strategic autonomy an MNC has to relinquish.

Organizational Adjustments

These situational determinants of counteractive response do not tell the whole story. Host government intervention with the strategic autonomy of multinationals creates problems of internal organization as serious as those of external competitive posture. No MNC faces the same kind or level of interference in each of its businesses and in all regions of the world. Instead, MNC managers must regularly devise and implement not a single but a quite varied range of responses—a task that places tremendous and often conflicting demands on organizational structure and management capability.

The stress placed by multiple responses on organizational structure and management alike increases as host governments impose linkages among an MNC’s lines of business. By, say, threatening to cut off telecommunications orders from a diversified electronics MNC, a government could attempt to coerce the company into setting up a TV assembly plant in the country. Managers can no more overlook the fact of such linkages—or of their tendency to require asymmetrical structures—than they can ignore any other challenge to strategic autonomy. But with linkages there is inevitably an increased premium on the coordination of businesses, strategic planning, and organizational units.

Yet such coordination is difficult because the responses needed in each business tend to create organizational differences among businesses. It thus becomes problematic for top management to assess the costs and benefits of interbusiness linkages or dependencies.

The real managerial task, after all, lies not merely in understanding these problems but in transforming understanding into effective management systems and structures. Our research suggests that, once the variety of restrictions on strategic autonomy goes beyond a certain threshold, it may well become necessary for an MNC to make a number of adjustments to maintain the necessary degrees of coordination and flexibility.

Geographic Segmentation

When the variety of restrictions on international activities becomes too great, an MNC may decide to segment its global affairs into two categories: operations in countries with few restrictions and operations in countries with substantial restrictions.

For the first group (the European Community or North America, for instance) managers can devise and implement overall multinational strategies; for the second (say, Latin America) they can arrange to follow the pattern of a holding company management. Consider the position of an automobile company like Ford. Though the automobile industry in Western Europe affects many sensitive issues, Ford is nonetheless able to maintain its strategic autonomy and, along with it, a fully integrated, centrally managed, Europe-wide manufacturing system.

By contrast, in Latin America an automobile company faces stiff challenges to its autonomy from various host governments acting both individually and in concert with each other. Moreover, in India the national government demands almost complete control over the development of the automobile industry but allows the assistance of MNC joint–venture minority partners.

Product Group Segmentation

ITT has been able to meet government demands in Europe without serious dislocation because its operations are grouped on a product line basis. Managers of the automotive group (auto parts and accessories) have pursued multinational integration quite eagerly and have carefully protected their centralized control of group businesses. Conversely, managers of the telecommunications equipment group have divided their operations into a number of distinct national subsidiaries. From time to time, top management has moved individual businesses among groups as warranted by competitive, technological, or governmental factors.

Functional Staff

To a large extent, ITT’s organizational flexibility is the result of Harold Geneen’s legendary ability to analyze the needs of each individual business. Such virtuosity, however, is rare. Indeed, matching the variety of host government demands with the variety of possible MNC responses puts a tremendous strain on top management. Especially in those multinationals that prefer to modulate their responses on an ad hoc, case-by-case basis and not to segment operations by region or product line, this strain tends to produce incredibly complex organizational adjustments.

These adjustments lead, in turn, to the extensive use of corporate staff—both functional and administrative—to monitor coordination among product lines and national subsidiaries. At Brown Boveri, for example, corporate marketing staffs, in conjunction with several levels of planning committees, coordinate operations of the various national subsidiaries product line by product line.

Faced with similar problems, IBM gives all of its many business units the right to object to any plans of other units that would adversely affect their own activities. In this manner, IBM forces its middle managers to consider the interdependencies among businesses in their own planning and budgeting processes and to reach jointly acceptable solutions before submitting their plans for approval. Top management can, of course, take the initiative and identify key strategic issues requiring a significant degree of coordination as “focus issues” to be considered explicitly in the planning process. At the same time corporate staffs are expected to help identify and resolve discrepancies among the plans of individual business units.