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Cultural Analysis

Posted by mjmedlock on October 8, 2011 in Intercultural management |

Cultural analysis is important for international managers because they need to be able to predict what behavior is typical of the cultural group they are working with. Research into cultures is needed to establish a scientific to give managers valid tools for conducting an analysis.

Most cultural analysis models are based on comparative models. These models measure one culture against another. This method is useful for managers because it can help managers answer important questions such as:

  • Where should I build a new factory, office or research facility?
  • How can I adapt our company’s Japanese incentive plan to our Indonesian workforce?
  • Will the matrix structure that works well in Denmark work in Bolivia?

As the world continues to globalize these questions will become ever more important. However, the use of comparative analysis in cultural studies is not without controversy. In particular the following concerns have been raised:

  • Can one culture really be measured against another?
  • When you ask a question about , for example, individualism, do the cultures have the same definition of individualism?
  • How do members of the culture adapt their values to those of other cultures they interact with?
  • Is bi-lateral analysis relevant to organisations that work in multi-cultural environments?

While these concerns are valid, they should not stop the manager from using comparative analysis in her tool kit to help he be a more effective international manager.

 Major contributors to cultural analysis

The following researchers are discussed elsewhere on this site

Kluckholm & Strodtbeck (1961)

Hall (1976)

Hofstede (1980)

Laurent (1983)

Trompenaars ( 1997)

Schwartz (1994, 1999)

House et al (2004)

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How To Be A Global Company

Posted by mjmedlock on August 13, 2011 in Strategy |

This post on how to be a global company is actually a link to Strategy + Business article.

The article by C.K. Prahalad and Hrishi Bhattacharyya posits the theory that to be a truly global company firms must deliver on three imperatives: Customization, competencies and arbitrage.

To explain their ideas they draw on the experience of GE Healthcare (customization), McDonald’s (competencies), and the Chinese and Indian mobile telephone industries (arbitrage).

Read their article on How Be A Truly Global Company. Do you agree with their ideas? Or is this just another idea that desperate companies will jump on for a quick fix to their problems?

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Inflation rate expectations and exchange rates

Posted by mjmedlock on July 8, 2011 in international economics |

Inflation affects the future purchasing power of any currency. If you have inflation in the Eurozone then €1 today will buy more than €1 in the future. In other words the currency becomes less valuable.

If two currencies experience different levels of inflation then their purchasing powers will deviate over time, because one currency loses its value faster than the other. If you apply the law of one price then logically this will have an effect on forward exchanges rates of the two currencies.

Before we see how to apply we need to consider that the rate of return on an investment can be measured in NOMINAL terms (e.g. the interest rate the bank advertises) and in REAL terms (the rate after inflation has done its nasty work on your investment).

Nominal rate = Real rate + the effect of inflation

(1 + nominal rate)n = (1+ real rate)n x (1+ inflation rate)n

n= number of years

In the following example we are going to calculate the market expectations of inflation for two different currencies. The market’s expectations of inflation in the two currencies will be reflected in the forward exchange rates.

Assume that the Eurozone and USA have real interest rates of 4%. Nominal interest rates are 8.94% for the Euro and 6.5% for the dollar.

Expected inflation for the Euro

(1.0894)1/2/(1.04)1/2 = (1 + Eurozone expected inflation)1/2

1.04374/1.0198 = (1 + Eurozone expected inflation)1/2

(1 + Eurozone expected inflation)1/2 = 1.0234852

(1 + Eurozone expected inflation) = 1/2√1.0234852

1/2√x = x2

(1 + Eurozone expected inflation) = 1.02348522

=  1.0475

Expected Eurozone inflation = 4.75%

Expected inflation for the dollar

(1.065)1/2/(1.04)1/2 = (1 + expected dollar inflation)1/2

1.0320/1.0198 = (1 + expected dollar inflation)1/2

(1 + expected dollar inflation) = 1.01196312

= 1.0240

Expected dollar inflation= 2.4%

The ratio of the difference in inflation should be reflected in the ratio between spot and forward exchange rates between the currencies.

Inflation difference ratio

(1.0475)1/2/(1.0240)1/2 = 1.02348/1.0119

Ratio = 1.01144

To find the 180 day forward rate based on inflation expectations we must multiply the spot rate by the inflation difference ratio.

1.01144 x 0.6266 = 0.6337

(You may get a slightly different result, (0.63377), this is because in the original calculation I did not reduce the number of decimal places to four).

Note.

We have calculated the market’s expectations of inflation NOT how they arrive at their expectations. Many factors may influence expectations of inflation including government policy, the economic cycle, free trade agreements, war, natural disasters and new technology to name but a few.

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Balance of Payments

Posted by mjmedlock on July 7, 2011 in international economics |

The balance of payments equals the transactions between a country and the rest of the world. The balance of payments is made up of two divisions – the current account and the capital account.

Transactions that occur due to export and import activity are entered into the current account.

Transactions that occur due to the sale or purchase of assets are entered into the capital account. When economists talk of assets they mean any kind of form in which wealth can be stored, for instance, money, shares, building or land. The capital account records all international sales and purchases of assets. When a German company buys a UK factory that transaction is entered as a negative on the German capital account and a positive on the UK capital account. Why? Think of the purchase of the UK factory as an import of an asset and the selling to a German firm as an export of an asset.

The two divisions of the balance of payments must add up to zero. This is because, just as in company accounts, every transaction is entered twice: once as a credit and once as a debit.

Current account + capital account = 0

What goes into the current account?

We learned before that the current account is the net of a country’s exports of goods and services. These come in three categories:

  • Merchandize trade, the import and export of goods.
  • Investment income, interest and dividend payments from abroad and repatriated profits
  • Other services, trade in services such a tourism, consultancy, etc.

An additional type of international transaction is also included in the current account. This is called net unilateral transfers. Net unilateral transfers are international gifts, international aid and workers’ remittances (wages that workers earned abroad and then sent home).

What goes into the capital account?

The capital account measures the difference between sales of assets to foreigners and purchase of assets in foreign countries. If a German were to lend money to a UK resident this is buying a promise of interest payment. Therefore, the German investor is buying a UK asset so the purchase goes into the capital account under assets. We can say that there is an inflow of capital to the UK and an outflow from Germany. You should note that the interest payment generated from the loan is counted in the current account.

Difficulties and differences in data collection and definition mean that there can be differences in the capital account and the current account. This difference, balancing item, is called the statistical discrepancy.

Governments as well as private firms and individuals also hold internationally tradable assets. These are usually in the form of gold and currencies. The US dollar is the main currency held, however in recent years the euro has gained popularity. These government holdings of gold and currency are called the official reserve assets. Governments hold these reserves for two reasons; emergency assets for times of economic problems, and foreign exchange intervention.

Related posts on this site

National income account

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National Income Accounts

Posted by mjmedlock on July 7, 2011 in international economics |

The national income accounts are called GNP and GDP. They both measure the value of the economy in a year, yet they are slightly different.

GDP, gross domestic product, is the total value of all the final* goods and services produced by domestic factors of production and sold in the domestic market in the year (or specific time period).

GNP, gross national product, differs from GDP in that it includes net receipts of income from the rest of the world.

Most countries now use GDP as a measure of national income rather than GNP. Why do think that is?

*Only final good and services are counted to avoid double counting.

Components of GDP

 

National Income Identity: Closed economy

In a closed economy GDP is comprised of:

Consumption

Investment

Government purchases

The equation for national income identity can be expressed as follows:

Let Y= output, C=consumption, I=investment, G=government purchases

Y= C +I+G

 

Savings: closed economy

 

Savings (S) is all the national income not given to consumption or government purchases.

S=Y-C-G

In the previous equation we can see that also that Y= C +I+G. We can rearrange the equation to show:

I=Y-C-G

Therefore

S=I

Therefore, in a closed economy savings (S) is equal to investment(I) and so if a closed economy wants grow national income it can only do so by saving more and reducing consumption and government purchases.

What about in an open economy?

The current account

In an open economy there will be trade with other nations. This will be in the form of exports (EX) and imports (IM). The balance of imports and exports is called the current account (CA).

CA=EX-IM

If a country has a more exports than imports it has a current account surplus. If it has more imports than exports it has a current account deficit.

The current account has important implications for domestic output. A prolonged current account deficit implies that there will be a fall in output. The current account also indicates the amount and direction of international borrowing and lending. If a country is running a deficit it must have a way to finance it. How? It can do this either by running down previously acquired foreign wealth or by international borrowing.  Likewise a country can continue to have a surplus with the countries it trades with by lending them the money to buy its products.

Saving and the current account

An open economy has the ability to save either by building up capital stock or by acquiring foreign wealth. A closed economy can only save by building up its capital stock.

An open economy can raise investment without having to increase saving. It can do this by borrowing money from abroad. In essence it is importing present consumption and then later exporting future consumption in the form of paying back the loan.

S=I+CA

For example: The UK wants to buy German machinery to build up its capital stock and therefore increase national output. However, it doesn’t want to reduce current consumption. To get the required investment the UK borrows money from German investors. The machinery increases the UK’s capital stock (I). It also increases the UK’s current account deficit by the amount equal to the increase in investment.

Related posts on this site

Balance of payments

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External economies of scale and trade

Posted by mjmedlock on July 6, 2011 in international economics |

Effects of external economies of scale on trade

The effects of external economies of scale in international trade may not be entirely beneficial to all countries. A country with a large production in an industry will tend to have lower costs in producing a good. This will lead to positive circle, whereby lower costs will lead to increased production, and increased production will lead to lower costs. Therefore, countries that begin as large producers tend to remain large producers: Even if another country has the potential to produce the goods more cheaply.

The figure below shows the economies of scale in producing widget X. These economies are all external economies of scale, in other words there are no economies of scale at the level of the firm.

graph shows exteranl economies of scale

Country A’s cost curve lies below country B’s. This means that at any given level of production A’s costs are below B’s. This should mean that A should be able to supply the world market. However, suppose that B is already in the market and A is just thinking about it. At the moment B produces Q1 units at a price of P1(point 1 on demand curve). If A were to enter the market the price would drop to point 2 on the demand curve. Yet there is a problem. When A enters the market its production will be C0. Any individual firm from A that enters the market will have a higher cost than firms from country B. It is therefore unlikely, or at least risky, to enter the market. B’s head start allows it to continue to hold onto the market.

 

Dynamic increasing returns (learning curves)

We have seen that external economies mean there is no guarantee the best most suitable economy will produce a particular good. But why did they produce the good in the first place, and why do they continue to do so?

We have said before that historical accident and virtuous circles may the cause of external economies carrying on. Are there any other factors?

Internal economies of scale depend on current output to gain efficiencies. External economies tend to rely on cumulative output. This means all the output from the beginning of production until now. This is the learning curve: costs reduce over time due to cumulative experience and are known as dynamic increasing returns.

The graph below shows how the learning curve can help an economy lock in advantage by starting first.

graph shows effect of learning curve

This effect is often used as justification for protectionism. After all, if your country could potentially produce goods at a lower cost (by using cheaper labor or having better access to ray materials for example), it would be a benefit both to your country and to the global economy. The only thing stopping your country’s firms entering the market is that they need time to realize the dynamic scale economies. It seems reasonable therefore to protect or subsidize your firms to give them time to gain experience. This is called the infant industry argument. However, as with many things in economics, there is a problem in identifying which situations will lead to increasing returns.

Other posts on economies of scale on this site

Economies of scale and internaltional trade patterns

The Economics of dumping

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Economies of scale and international trade patterns part 1

Posted by mjmedlock on July 5, 2011 in international economics |

Economies of scale a quick review

Economies of scale, definition: When you produce a good or service at lower unit cost for each extra unit you produce, you are achieving economies of scale.

Example:

Cost to produce 10,000 cars = €70,000                   Cost per car = €7,000

Cost to produce 25,000 cars = €150,000 Cost per car = €6,000

Economies of scale are often achieved because the fixed costs are absorbed by more units.

 

Economies of scale and market structure

 

There are two kinds of economies of scale, external economies of scale and internal economies of scale.

The difference between the two types of economies of scale can be shown by these examples. Suppose and industry consists of 20 firms each producing 100 widgets.  In scenario one the industry doubles in size by doubling the number of firms. There are now 40 firms each still producing 100 widgets. If efficiency of production rises, we have a case of external economies of scale.

In scenario two, total industry production remains the same, but the number of firms is halved. Each firm now produces 200 widgets. If the efficiency of production rises, we have a case of internal economies of scale.

In an industry in which there are mostly external economies of scale we tend to see many small firms. This is because there is no advantage in being big. This leads to perfect competition. In an industry in which there are mostly internal economies of scale we tend to see an industry with a few, large firms. This is because size brings a cost advantage. This leads to an imperfectly competitive market.

Imperfect competition and international trade

 

For the purposes of this explanation we will assume that imperfectly competitive markets will result in a market characterized by monopolistic competition. In monopolistic competition firms differentiate their products. For example, Apple and Dell both produce computers, but they appeal to very different sets of buyers with very different requirements and expectations. This means that price is not important for competition between the firms. (Although price will still of course affect the demand for each firm’s products).

In autarky (a closed market) where internal economies of scale are possible, the variety of goods and the opportunity to gain from economies of scale are limited by the size of the home market. There is a trade-off between cost and variety: consumers can have more variety, but at a higher price. In a situation of free (or even just freer) international trade firms have access to a larger market. This means that each country can specialize in making a narrower range of goods and yet at the same time allowing the consumers to choose from an increased variety of goods.

For example imagine that two countries each have a market for 2 million televisions per year. If they trade with each other there would be a combined market for 4 million televisions. In this market there is an opportunity to have more variety produced at a lower average cost.

graph shows how economies of scale come from two markets joining to make one larger market

 

The figure shows that everyone is better off through integration of two (or more) markets. Customers have more choice, and each firm can produce more at a lower unit cost.

 

How economies of scale affect the pattern of trade

 

Suppose we calculate that an integrated market will support 10 firms making computers. From this result can we predict the pattern of trade? The answer is no. The firms may all be located in one country, equally divided between both countries or skewed in favor of one country.  To understand where production might take place we need to think about how comparative advantage interacts with economies of scale.

Suppose we live in a world with two economies, Inner and Outer. Each of these countries has two factors of production, capital and labor.  Inner is a capital-abundant country (it has a higher capital-labor ratio). There are also two industries in this world, manufactures and food. Manufactures is the more capital intensive industry.

 

Scenario 1: A world without economies of scale

Factor models of trade would lead us to the conclusion that because Inner is more capital-abundant it would have a relatively larger supply if manufactures and would therefore tend to export manufactures and import food. Trade would be a simple exchange of equal value of food for equal value of manufactures.

Scenario 2: A world with economies of scale and monopolistic competition

In reality firms mostly create differentiated products. This means that they are being monopolistically competitive. In this, more realistic scenario, economies of scale will not allow for the efficient production of a full range of manufactures in each country. Therefore each country will produce some manufactures, but will manufacture different things. (Due to local demands and tastes)

Although Inner will still be a net exporter of manufactures, Outer will still produce manufactures that some inhabitants of Inner will prefer to buy. Inner therefore will both import and export manufactures.

Two kinds of trade

 

In this model we can see two kinds of trade. Trade of manufactures for manufactures is called intraindustry trade. The exchange of manufactures for food is called interindustry trade. There are four important points about this kind of trade:

  1. Interindustry trade reflects the comparative advantage of the countries.
  2. Intraindustry trade does not reflect the comparative advantage of the countries. Economies of scale are stopping the countries producing the full range of products at home. This means that economies of scale can be a source of international trade.
  3. We cannot predict the precise pattern of intraindustry trade. We cannot say anything about which country will produce which goods. This is often a result of history and randomness.
  4. How import interindustry and intraindustry trade are depends on the similarity between the two countries. If they have similar capital-labor ratios there won’t be much interindustry trade.  In this case intraindustry trade centered on economies of scale will be the dominant pattern. However, if there are significant differences in capital-labor ratios, there will be little if any intraindustry trade centered on economies of scale.

Importance of intraindustry trade

 

Intraindustry trade is often seen among advanced nations trading manufactured goods. This is probably because over time advanced nations look increasingly similar in terms of resources and technology. This means that there is rarely any clear comparative advantage and so trade is probably mostly a result of economies of scale. Such goods tend to be sophisticated manufactured goods. Where goods are less sophisticated and more labor-intensive there is relatively little intraindustry trade. Clothing, simple toys and shoes are typical examples of these kinds of goods. These goods tend to be produced by developing economies that have a clear comparative advantage in production.

Intraindustry trade is also politically important. Loosening trade regulations when the trade is mainly driven by differences in comparative advantage is politically hard to sell. Many workers will lose their jobs as trade shift from one nation to another. It is hard to convince these workers that their sacrifice is worthwhile for society as a whole. Intraindustry trade on the other hand, tends to give consumers more choice and cheaper goods, with far less risk of people losing jobs having to accept significantly lower salaries. Therefore, it is much easier to convince citizens of the benefit of EU economic integration than of European and East Asian integration.

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The Economics Of Dumping

Posted by mjmedlock on July 4, 2011 in international economics |

What is dumping?

Dumping is a form of price discrimination across borders. Price discrimination is the practice of charging different customers different prices for the same or similar products/services. For example you might pay €90 per night for a hotel room and another person €60 per night for the same grade of room. The hotel uses pricing models that may be based on how you booked your room (internet vs. travel agent) or your country of origin (Germany vs. UK). These pricing models may indicate that one group of people are willing to pay more than another for the same product.

Price discrimination is an important political issue in world trade. If price discrimination results in foreigners being charged less that the home country consumers, economist call this dumping. Many people see the practice as unfair.

For dumping to occur two conditions need to be met. (1)The industry must be imperfectly competitive -meaning that firms have price setting power. (2) The markets must be segmented so that it is not easy for home country consumers to purchase product intended for foreign markets.

Is dumping unfair? An example

Your company sells 1000 widgets at home and 100 abroad. The price for home goods is €20 per widget and €15 per widget abroad. It seems logical that pushing for more domestic sales will lead to greater profits than an equal increase in foreign sales.

However, to expand your sales you may need to reduce your price by €0.01. This means that the increase in revenue of one extra widget sold would be €19.99. However, you will almost certainly have to reduce the price of all the widgets to €19.99 – not just the 10,001st. This will reduce the total receipts for the 10,000 widgets by €10. Therefore, the marginal revenue for selling one extra widget will be €9.99 not €19.99.

Let’s look at the foreign sales. If you reduced the price by €0.01 you would receive only and extra €14.99 per extra widget. However, the impact of the price reduction on the revenue of the original 100 would be €1. This means your margin revenue on increased exports would be €13.99. In this case it would be more profitable to push for increased foreign sales than domestic sales.

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Six sources of influence change agents can use in change management

Posted by mjmedlock on July 4, 2011 in Change management |

How can change agents influence behavior?

Change agents can make use of the behavioral change model developed by Patterson, Grenny, Maxfield, McMillan and Switzler. This model identifies six sources of influence. These are personal motivation, personal ability, social motivation, social ability, structural motivation and structural ability. Effective change agents can use a combination of these six sources to help them successfully implement difficult change efforts.

 

Motivation

Ability

Personal

Turn undesirable tasks and behaviors into desirable ones. Over invest in skills training.

Social

Use the power of peer pressure Find strength in numbers.

Structural

Design rewards and require accountability. Change the environment.

Read more…

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Change management – How can a change agent change minds?

Posted by mjmedlock on June 29, 2011 in Change management |

A change agent in changes minds

Identifying key behaviors is just the start of a change agent’s job. To get people or organizations to change the change agent needs to convince people of the need to change: she needs to get people to think differently. But here’s the big problem; people resist change. How then can a change agent persuade people of the need to change?

Vicarious experience

People don’t like to be told what to do. Think about how you respond to being lectured to about changing your behavior. If you are like most people, lecturing increases your resistance to change.

A vicarious experience is an experience you have through observing someone else’s experience. This is often used in treating phobics. For example someone who has a phobia against spiders will be shown other people interacting with spiders. The vicarious experience can help convince him that the spider is not set on killing him! As time goes on the phobic will be asked to repeat the actions he has being observing.

Storytelling as a vicarious experience

Most of us will experience vicarious experience through story telling. Aesop’s fables are a good example of messages being transmitted through vicarious experience. Organizations can use storytelling to help spread messages about the benefits of behavioral change.

Here are some useful storytelling techniques that a change agent can use to help highlight the need and possibilities for change.

  1. Make the audience identify with a change as someone she knows.
  2. Create an image that might have happened in her life.
  3. Make sure them is some emotional content to create empathy.
  4. Provide a solution to the situation.

After highlighting the need and desirability to change the change agent now needs to move onto the actual process of changing key behaviors. The next post deals with the 6 sources of influence that can help drive successful change.

Further reading on change management in this site

Six sources of influence change agents can use in change management

Change management: finding key behaviors

Strategic change management

 

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