Notes of MNCS

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CHAPTER-1

INTRODUCTION TO MULTI-NATIONAL CORPORATIONS

A multi-national corporation (MNC) is a business organisation which has its headquarters in

one country but has operations in a range of different countries. There are numerous examples

of such organisations, car manufacturers like Ford, Toyota, Honda and Volkswagen, oil

companies like Shell, BP and Exxon Mobil, technology companies like Dell, Microsoft,

Hewlett Packard and Canon and food and drink companies such as Coca Cola, Interbrew and

McDonalds.

Dell and Microsoft - two businesses operating in the high tech industry and who are both good

examples of multi-national companies. Copyright:Keran McKenzie andSam Disegno,

These firms, by their very nature, are large organisations. Their size means they often have

considerable power and influence and as a result have come in for some criticism of their

actions. One of the most famous of such cases was the problem faced by Nestl in marketing its

baby milk in Africa. Critics pointed out that Nestl was pushing the product on people when it

was likely to cause harm to babies. A code of conduct on marketing the product to countries in

Africa was being ignored according to a study in the British Medical Journal in 2003. In

addition, events like the Bhopal chemical explosion in 1984 has attracted much criticism and,

sometimes, an assumption that MNCs are of necessity a 'bad' thing. It is also assumed that

MNCs tend to locate operations in poor countries only. This, of course, is not the case. Honda

and Nissan have both invested heavily in production facilities in the UK but are Japanese

companies. Many European countries provide a home for MNC operations of different sorts. It

must also be remembered that many MNCs have interests in a country but not necessarily

production facilities. Nike, for example, does not own factories that make training shoes and

clothes. Instead, they make agreements with local producers to manufacture a particular range
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of products for them. This might bring different problems to light given that the immediate

control of production is not in the hands of Nike. Of course, it could be argued that this does

not absolve any corporation of any responsibility for the actions of the factories that they use to

outsource production.

Why the drive to MNCs?

For many companies, the following might be some or all of the reasons to expand into different

countries:

Reduce transport and distribution costs

Avoid trade barriers

Meet different rules and regulations (avoid non-tariff barriers)

Secure supplies of raw materials or markets

Cost advantages - for example low labour costs

Multinational corporate structure

Horizontally integrated multinational corporations manage production

establishments located in different countries to produce the same or similarproducts. (example: McDonald's )

Vertically integrated multinational corporations manage production

establishment in certain country/countries to produce products that serve as

input to its production establishments in other country/countries. (example:

Adidas )

Diversified multinational corporations manage production establishments

located in different countries that are neither horizontally nor vertically nor

straight, nor non-straight integrated. (example: Hilton Hotels )

MNC In India

MNC in India are attracted towards :

Indias large market potential

India presents a remarkable business opportunity by virtue of its sheer size andgrowth


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Labor competiveness

FDI attractiveness

Indias vast population is increasing its purchasing power

India is also emerging as the manufacturing and sourcing location of choice for

various industries

Success factors for MNCs operating in India

Commitment at global level

Raise the profile of India

Formulation of bold long term targets

Empowered local Management-More cost effective, enhances continuity,

leverages understanding of local environment

Localized product / market business models : create customized products and

services in response to unique environment in India

Deliver the right product at the right price with right positioning for India

Advantages of MNCs

Economic Growth and Employment

The essence of a MNC is that they bring inward investment to countries that are not their home

base. If they choose to expand by building production facilities they will be bringing in inward

investment into the country. This investment is likely to provide a boost, not only to the local

economy but also the national economy.

Building a new plant requires resources - land, labour and capital. Labour has to be found to

help construct the plant and all the equipment that goes into it and some firm somewhere will

be hired to build the machinery and equipment, provide the bricks, steel, cement, glass etc. that

go into the building. If it is announced that Company X from Germany are to build a new

distribution centre in the UK at a cost of 10 million, this effectively means that a whole host

of firms will be getting additional work to the value of 10 million.

Let us assume that a firm manufactures and supplies cable for electrical work. To this firm, the

contract to supply the cabling for the new plant might be worth 350,000. If the plant was not


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built then the firm would not generate that order and not receive that work. For workers in the

cabling plant, the order helps to maintain the flow of orders and can keep them in

employment.It can also be expected that the additional income will find its way through the

local economy. If additional people are hired, they will receive an income which they spend.

For existing workers, increased orders might equate to job security and they too might feel

more confident in spending on new items - furniture, house extension, new white goods,

holidays and so on. Inward investment therefore can act as a trigger to generating wealth in the

local economy. If a MNC is attracted to an area then this might also lead to other smaller firms

in the supply chain deciding to locate in those areas. Other firms providing services to these

firms are then attracted to the area and so on.

Honda located a factory in Swindon, Wiltshire, a town known for its railway industry. Now the

town is synonymous with car manufacturing. The Honda plant was an investment of over 1.3

billion. It is one of 120 Honda manufacturing facilities in 29 different countries. Copyright:Niels Laan, fromstock.xchng.

This type of wealth generation has been witnessed in many UK regions. The siting of the car

manufacturing plants in Sunderland, Swindon and Derby has done much to help those regions

experience a boost to the local economy. In the case of Sunderland and Derby, the investment

has partly helped to offset the decline in other industries that caused unemployment. For less

developed countries, inward investment can again act as a catalyst for other forms of
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investment. The effects of the investment might be less dramatic but nevertheless, it can be

something that is seen as essential for helping a country escape from poverty.

Skills, production techniques and improvements in the quality of human capital

It can be argued that MNCs bring with them new ideas and new techniques that can help to

improve the quality of production and help boost the quality of human capital in the host

country. Many will not only look to employ local labour but also provide them with training

and new skills to help them improve productivity and efficiency. In Sunderland, one of

Europe's most productive car manufacturing plants, the workers have had to get used to

different ways of working and different expectations than many might have been used to if

working for other British firms. In some cases this can prove a challenge but in others it can

lead to improvements in motivation and productivity. The skills that workers build up can then

be passed on to other workers and this improves the supply of skilled labour in the area. This

makes the area even more attractive to new industry as it helps to reduce the costs of training

and skilling of workers.

Availability of quality goods and services in the host country:

In some cases, production in a host country may be primarily aimed at the export market.

However, in other cases, the inward investment might have been made to gain access to the

host country market to circumvent trade barriers. In the case of many Japanese car

manufacturers the investment made into UK production has enabled them to get a foothold in

the EU and to avoid tariff barriers. The UK has had access to high quality vehicles at cheaper

prices and the competition this has created has also led to improvements in working practices,

prices and quality in other related industries.


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The location of businesses in different countries might mean the availability of high quality and

relatively cheap products being available to the home market. Copyright: Jannes,

Tax Revenues

For the host country, there is a likelihood that the MNC will have to be subject to the tax

regime in that country. As a result, many MNCs pay large sums in taxes to the host

government. In less developed countries the problem might be that there is a large amount of

corruption and bad governance and as a result MNCs might not contribute the tax revenue they

could and even if they do it might not find its way through to the government itself.

Improvements in Infrastructure

In addition to the investment in a country in production or distribution facilities, a company

might also invest in additional infrastructure facilities like road, rail, port and communications

facilities. This can provide benefits for the whole country.

The Costs of Multinationals

The costs can be summarised in the points below - for the most part, the costs are closely linked

to the benefits but it will depend on the extent of the benefits that might arise as a result of the

activity of the MNC.


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Employment might not be as extensive as hoped - many jobs might go to skilled

workers from other countries rather than to domestic workers.

There might be a limit in the effect on the local economy - it will depend on how big

the investment into the local economy actually is. Some MNCs may be 'footloose'; this means that they might locate in a country to gain

the tax or grant advantages but then move away when these run out. As a result there

might not be a long term benefit to the country.

How many new jobs are created depends on the type of investment. Investment into

capital intensive production facilities might not bring as many jobs to an area as hoped.

The size and power of multinationals can be used, it is argued, to exploit weak or

corrupt governments to get better deals for the MNC. Mittal, for example, a major steelproducer, negotiated a $900 million deal to secure rights to mine iron ore in Liberia.

The government that negotiated the deal was not elected. When a new, elected

government came to power, they re-negotiated the deal and took the investment to well

over $1 billion.

Pollution and environmental damage. Some countries may have less rigorous

regulatory authorities that monitor the environmental impact of MNC activities. This

can cause long term problems. In India, Coca-Cola has been accused of using up water

supplies in its bottling plant in Kerala in Southern India and also of dumping waste

products onto land and claiming it was useful as fertiliser when it appeared to have no

such beneficial properties.


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CHAPTER-2

THEORIES OF MULTI NATIONAL CORPORATIONS

MNC has become a concept of that concerns the business world with the establishment of the

so called first MNC, Dutch-East India Company in the 17th century. The company was the first

that allocates the risk as international trade has considerable risks and allows collective

ownership through share issuing that is the impulse of globalization. The modern MNCs were

formed mainly in Europe, particularly in Belgium (Cockeril), Germany (Bayer), Switzerland

(Nestle), France (Michelin) and UK (Lever) in the 19 th century and applied FDI strategies in

order to overcome the difficulties in exports resulted from tariffs. The aim of MNC is to get

capital where it is cheapest and produce where they get the highest rate of return.

Today the number of MNCs and their efficiencies in the world increase parallel with the

globalization process. Therefore theories of MNCs have been developed. The most significant

ones of these theories are the location and internationalization theories.

Location Theory

According to the location theory the location of the production is determined by the resources.

The determining factors of the location choice are the cost of transportation and trade barriers.

If the transportation costs are high then the production is located in the country or region where

the product will be marketed. Another reason of such relocation is the high tariff rates that the

host country applies.

Internationalization Theory

According to the internationalization theory the reason why production is done by only one

company instead of many in various locations is that it is more profitable to produce with one

company.

In the explanation of the advantage of internationalization the first approach of the

internationalization of MNCs emphasizes the importance of technology transfer. Technology

transfer may come across with some difficulties. It is difficult for a potential buyer to appraise

the actual value of knowledge. Besides knowledge can not be packed and sold. The intellectual

property rights are also difficult to secure. Therefore for a MNC the establishment of a new

enterprise in a foreign country is more profitable than the sale of technology to another

company.


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The second approach intensifies on vertical integration. For example under the assumption that

both companies are monopolies, the price of input used by first company and produced by

second company is tried to be lowered and increased by the first and second companies

respectively. Therefore a dispute between these two companies will exist. Moreover some

coordination problems may occur because of the demand and supply imbalances between two

companies. Volatile prices constitute high risks for both companies. In case of a vertical

integration of these two companies the problems will disappear or be relieved.

OLI Paradigm (Eclectic Paradigm)

The theory has the most extensive scope among FDI theories. Dunning has created the theory

by combining many former studies (eclectic).

According to Dunning production of a firm in a foreign country depends on these three

conditions:

1. Firm should have tangible and intangible assets and skills so that can compete with

the domestic firms of the host country who have national knowledge and experience.

2. For a firm through an advantage taken from the host country it should be more

profitable to produce in the host country than to produce in the home country and export it.

3. Making FDI should be more profitable than selling, leasing or licensing the skills.

These conditions which are called OLI by Dunning are the ownership (O), location (L) and

internalization (I) advantages respectively.

The ownership advantage can be achieved through privileged ownership of some income

bearing properties (patent, trade secrets or trademarks) and governance of separate but related

activities from one head firm (economies of scale and synergy, diffusion of geographical risk

and cross-country arbitrage).

The location advantages are those caused by the superiority of production method in the host

country, high transportation costs, cheap labor, and proximity to the consumers, local image

and the foreign governments trade applications.

Internalization advantage means the advantage that is caused by the imperfect competition.

Although the theory is much broader than the others, it is also criticized. First criticism is the

decreased significance of the variables as they are immense. The variables are correlated with

others. Another criticism is that the theory is static and can not explain the paths and processes

of firms in the internalization process. Some blames the theory as entirely micro economic and

even claims that it has no difference with the theory of internalization.


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Other Theories

Although these theories are not as popular as the main stream theories, they have significant

contributions in the development of main stream theories.

i. Caves Economies:

According to Caves, if a firm wants to invest horizontally (the production of the same product

in another location) its property should prevail the advantage of domestic firms in the host

country resulting from being resident and the firm should decide that FDI is more profitable

than either export or licensing.

Caves believes that the following factors are important in the decision stage of FDI:

Product differentiation (is formed with subjective alterations by little physical

modifications, branding, advertisement, marketing strategies and differences in the

complementary products; and maintained by property rights and high cost barriers against

physical imitation).

Oligopolistic market structure

Organizational skills

Transportation costs and tariffs

R&D activities

The FDI decision in vertical foreign investment (the production in which each part of

a product may be produced in different locations and finally assembled) is made after the

determination of optimal vertical integration level.

ii. Oligopolistic Reaction Theory:

According to the Oligopolistic Reaction Theory of Knickerbocker, one firm invests in one

country in order to increase its market share. Immediately thereafter the other rival oligopolisticfirms invest in that country in order not to lose their market shares. This kind of investment is

also known as Follow-the-leader. Besides as firms avoid ambiguities and risks, they wait for

an investment of a leader firm before themselves and its consequences and then they invest.

This constitutes the reasoning of follow-the-leader theory.

iii.Hymer and Kindlebergers Theory:

The most important contribution of Hymers doctoral dissertation -completed in 1960- to the

theory of FDI is that it explains why MNCs transfer intermediate goods such as knowledge andtechnology among countries.


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Hymer separates two types of the division of labor. He states that the division of labor among

firms is controlled by markets and therefore is the subject of international trade theory and the

intra-firm division of labor is controlled by the entrepreneurs.

Hymer and his instructor Kindleberger rather focus on firm-specific factors. Foreign firms havesuperiority such as the ability to find cheap capital, marketing experience, privileged entry

permits for some markets, patented or non-tradable technology, managerial efficiencies and

economies of scale.


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CHAPTER-4

WTO AND SERVICES

The World Trade Organization (WTO) is the only body making global trade rules with binding

effects on its Members. It is not only an institution, but also a set of agreements. The WTO

regime is known as the rules-based multilateral trading system. The history of the Organization

dates back to 1947, when the General Agreement on Tariffs and Trade (GATT), was set up to

reduce tariffs, remove trade barriers and facilitate trade in goods. Over the years, GATT

evolved through eight rounds of multilateral trade negotiations, the last and most extensive

being the Uruguay Round (1986-1994). The WTO came into being at Marrakesh on 1 January

1995, following the conclusion of the Uruguay Round. GATT then ceased to exist, and its legal

texts were incorporated into the WTO as GATT 1994.

The objectives of the WTO

The preamble to the WTO Agreement describes its objectives as including:

raising standards of living

ensuring full employment

The Agreement Establishing the WTO (Marrakesh Agreement)

The Parties to this Agreement,

Recognizing that their relations in the field of trade and economic endeavour should be

conducted with a view to raising standards of living, ensuring full employment and a large and

steadily growing volume of real income and effective demand, and expanding the production

of and trade in goods and services, while allowing for the optimal use of the worlds

resources in accordance with the objective of sustainable development, seeking both to

protect and preserve the environment and to enhance the means for doing so in a manner

consistent with their respective needs and concerns at different levels of economic

development,


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Recognizing further that there is need for positive efforts designed to ensure that developing

countries, and especially the least developed among them, secure a share in the growth in

international trade commensurate with the needs of their economic development.

realizing these aims consistently with sustainable development and environmental

protection

Ensuring that developing countries, especially the least developed countries (LDCs), se-

cure a proper share in the growth of international trade.

However, since its creation the WTOs emphasis has slipped from concentrating on these

public interest goals to seeing itself primarily as an organization for liberalizing trade, and

declaring that the systems overriding purpose is to help trade flow as freely as possible.

This has been the source of one of the fundamental tensions surrounding the mandate and

activities of the organization. Some such as developing countries and non-governmental

organizations would like to see added emphasis on the public interest goals, whilst other private

companies and some industrialized countries, for instance favour faster removal of obstacles to

free trade.

Today, an increasing number of voices are being raised to underline that free trade should notbe an end in itself, but rather a tool to achieve equitable development and a better world. That

the WTOs public interest objectives remain out of reach of many has drawn criticism that the

organization is dominated by rich countries, functions in a secretive manner, and helps feed the

greed of the rich in the name of trade liberalization.

The WTO agreements

The Marrakesh Agreement Establishing the WTO incorporated several new substantive

agreements, which gave the WTO a much broader mandate than GATT or any other trade

agreement:

The WTO introduced new rules on agriculture and textiles.

Most significantly, and unlike GATT, the WTO encompasses areas beyond trade in goods.

Three new subjects were brought into the multilateral trading system: trade in services

through the General Agreement on Trade in Services (GATS); intellectual property rights


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Higher objectives for the WTO

Certain principles other than just fair market access must also be respected in order to make the

global trading system fully fair to all. One such principle is that trade liberalization should not

be enthroned as an end in itself. It is but a means for achieving ultimate objectives such as high

and sustainable growth, full employment and the reduction of poverty. As such, trade policies

should be framed with these ends in mind and be evaluated accordingly.

That the purpose of the world trade regime is to raise living standards all around the world

rather than to maximize trade. In practice, however, these two goals - promoting development

and maximizing trade have come to be increasingly viewed as synonymous by the WTO and

multilateral lending agencies, to the point where the latter easily substitutes for the former the

net result is a confounding of ends and means.

Asias experience of gradual liberalization only after an initial period of high growth highlights

a deeper point. A sound overall development strategy that produces high economic growth is

far more effective in achieving integration with the world economy than a purely integrationist

strategy that relies on openness to work its magic. A relatively protected economy like

Vietnam is integrating with the world economy much more rapidly than an open economy

like Haiti because Vietnam, unlike Haiti, has a reasonably functional economy and polity.

Functions and structure of the WTO

The major functions of the WTO include:

administering the WTO agreements

handling trade disputes

monitoring national trade policies

serving as a forum for trade negotiations

cooperating with other international organizations


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Organizational chart of the WTO

Source: www.wto.org/english/thewto_e/whatis_e/tif_e/org2_e.htm

The Ministerial Conference

The Ministerial Conference is the governing body of the WTO. It has the authority to adopt

final decisions on all WTO matters. It meets at least once every two years for about four days,

and is composed of trade ministers of all Members. Any Member can offer to host the
http://www.wto.org/english/thewto_e/whatis_e/tif_e/org2_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/org2_e.htm


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Ministerial Conference, and Members decide on the venue by consensus. The next Conference

is scheduled to take place in December 2005 in Hong Kong .The trade minister of the host

country usually chairs the Ministerial Conference and can play a significant role. For example,

after the collapse of the Conference in Cancn in 2003, some participants pointed the finger at

the Mexican trade minister (and conference chair) Luis Ernesto Derbez, saying that he had

decided to end the meeting prematurely although there was still a chance of reaching

agreement.

Ministerial Conferences are where f inal decisions, such as whether to launch new negotia-

tions, are taken. Members begin preparing for Ministerials months in advance. This often in-

volves intense negotiations in Geneva where delegates discuss numerous draft Ministerial texts

for ministers to decide upon during the Conference, usually leaving the most contentious issues

to be determined at the ministerial level.

In practice, only issues concerning the strategic directions of the WTO are decided there, the

bulk of the WTOs work being carried out by councils and committees that meet throughout the

year in Geneva.

NGOs who can demonstrate genuine interest in trade are eligible for accreditation to

Ministerials, which is not the case for other WTO bodies. Almost 800 NGOs including busi-ness groups were accredited to participate in the Cancn Ministerial Conference. However,

unlike the UN, where the Credentials Committee of ECOSOC has clear procedures for granting

NGOs consultative status, the WTOs selection criteria are not clearly def ined, and remain ad

hoc. Since the Seattle Ministerial Conference in 1999, which saw unprecedented street protests,

the WTO Secretariat has placed increasingly strict controls on the number of accredited NGO

personnel that may attend. In Doha in 2001, each accredited NGO was allowed only two passes

to enter the Conference site; in Cancn, NGOs were only

The General Council

The General Council is the highest ruling body of the WTO when the Ministerial Conference is

not in session, and the only one which can make binding decisions outside the Ministerial Con-

ference. For instance, in July 2004 the General Council adopted a package of agreements, re-

ferred to as the July Framework, which effectively broke months of deadlock following the

collapse of minister-level talks in Cancn in September 2003.


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The General Council can meet whenever Members want. In practice its meetings usually take

place every two months, and are attended by the highest rank of trade diplomats in Geneva,

mostly ambassadors. It is common practice for the General Council to elect its chairperson and

those of other WTO bodies during its first meeting of the calendar year. The Councils

meetings are often preceded by informal sessions that are not announced publicly.

The functions of the General Council are wide-ranging:

it follows up on issues arising from Ministerial

it oversees the operation of WTO agreements, and shares with the Ministerial Council the

responsibility of adopting interpretations of the WTO Agreement. An example is its 2003

decisions on TRIPS and public health (discussed in Chapter 4).

it grants and extends waivers from WTO rules, on behalf of the Ministerial Conference.

An example is the Kimberley Process waiver, to prevent trade in blood diamonds

it meets as the Trade Policy Review Body (TPRB) and the Dispute Settlement Body (DSB);

the two bodies and the General Council are considered as second level bodies after the

Ministerial Conference, as indicated by the organizational chart

it deals with accession-related matters, including authorizing the accession of new

Members when the Ministerial Conference is not in session. For accession matters, the General

Council decides on the establishment of working parties on accession, and endorses accession

packages upon completion of negotiations.

Groups wishing to influence the content of Ministerials documents must start their work

many months before the Ministerial Conference for considerations as to whether it is worth

while for your NGO to apply to attend a Ministerial.NGOs cannot attend or participate in any

meetings of the General Council.

Chairpersons of negotiating groups under the Doha Work Programme, for instance, can be

influential in organizing the negotiations, setting interim deadlines, and producing draft texts

which can frame further discussions.

it supervises the overall conduct of negotiations such as the Doha Work Programme. Since

the Trade Negotiations Committee (TNC) was set up to carry out the Doha negotiations, theGeneral Council has regularly reviewed its work under a standing agenda item. The TNC


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reports to each regular meeting of the General Council on the activities of its negotiating

groups.

The General Council also deals with systemic issues such as selection of Directors-General

and external transparency), and performs specific tasks assigned to it by the Ministerial

Conference.

The Dispute Settlement Mechanism

The Dispute Settlement Mechanism (DSM) is a quasi-judicial system for resolving trade

disputes. The Dispute Settlement Body (DSB) can authorize trade retaliation measures, or

suspension of concessions in WTO jargon if Members do not comply with DSM panel or

Appellate Body rulings. This particular enforcement mechanism of the WTO regime, though a

last resort, remains unique among international tribunals.

The DSB is composed of all WTO Members. Its functions are:

to establish panels which examine the case in dispute

to appoint the members of the standing Appellate Body

to adopt reports of panels and the Appellate Body (the body which deals with appeals)

to monitor implementation of rulings and recommendations

to authorize sanctions or retaliation measures under the WTO agreements

to adjudicate cases on textiles and clothing if they are not resolved by the Textiles

Monitoring Body (TMB), the only other WTO body dealing with disputes

The WTO dispute settlement mechanism is arguably more efficient and effective than almost

any other international tribunal dealing with non-criminal matters. The DSM sets clear time-

frames for different stages in resolving trade disputes among Members, which avoids cases

drag- ging on for a long time. It usually takes between 12 to 18 months to settle a dispute, but

the application of rulings often takes longer.

The system nevertheless seems slow to traders, especially when the disputed measures are

temporary in nature. For example, the US decision to impose temporary (for three years) higher

tariffs on certain steel products triggered a dispute case in March 2002. By the time the DSBmade a final decision in December 2003 that the measures were illegal, the higher tariffs had


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been in place for 19 months, long enough for significant harm to have been caused to countries

and companies exporting steel to the US.

It is also worth noting that dispute complaints are typically filed at the request of business

interests, who usually seek their own expensive legal advice before turning to their govern-

ment to request it to take up their case.2

The mechanism applies to all WTO agreements, and can cover plurilateral agreements as well,

should parties to these agreements so decide. It applies only to WTO agreements: a Mem- ber

can only turn to the DSM for resolution of a dispute concerning a WTO rule.

Shrimp-Turtle case

The US banned imports of shrimp from four Asian countries India, Malaysia, Pakistan and

Thailand claiming that the way they caught shrimp harmed endangered species of sea turtles.

The four Asian countries above complained about the ban to the WTO. In their rulings, the

panel and Appellate Body took international environmental law into account in determining

that a ban such as the US had imposed, could be legitima te under WTO law.Therefore only

rule on other matters, such as environmental policy, human rights or social questions, if these

arise in a dispute concerning a WTO rule, as was the case in the Shrimp-Turtle dispute

.Nevertheless, the concern remains that the broad reach of WTO rules and their implications for

a wide array of domestic policies makes the DSM a particular threat because it ensures strong

enforcement of rules designed to favour trade liberalization, rather than to promote well-being

or respect for human rights.

Panels

A panel is a quasi-judicial body which examines the evidence and decides on the merits of the

case, according to the Dispute Settlement Understanding (DSU):

A panel usually consists of three (but sometimes five) experts from different countries.

Panellists for each case are chosen from a roster of qualified professionals or from else- where,

in consultation with Members involved in the dispute. The Director-General can also appoint

panellists if the parties cannot agree on the panel.

In a dispute between a developed country and a developing country, the latter can request

that at least one of the panellists be from a developing country.


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Panellists serve in their individual capacity and do not receive instructions from any

government. In general, panellists are considered to be impartial and competent.

Panels have the right to seek information and technical advice from any individual or body

which they deem appropriate. In many disputes the panel has consulted scientific experts or

appointed an expert review group to prepare an advisory report. However, the question of

uninvited, non-governmental input into the dispute settlement process is a contentious issue.

Appellate Body

Either party to a dispute may appeal to the standing Appellate Body against a panels ruling on

points of law and legal interpretation of WTO agreements. The Appellate Body can uphold,

modify or reverse the legal findings of a panel and its conclusion, but cannot re-examine

existing evidence or examine new issues.

Case study of a dispute: India versus the EU

The EU-India GSP dispute looked at whether industrialized country Members of the WTO

could grant different tariff rates to products originating in different developing countries under

so-called Generalized System of Preferences (GSP) schemes. In particular, the dispute

addressed whether countries granting trade preferences could condition access to their marketson labour and environmental standards, or efforts to combat illegal drugs.

India brought the complaint to the WTO in 2002, arguing that anti-drug arrangements included

in the EUs GSP were discriminatory, as the benefits the EU granted were available only to

certain specified developing countries. In particular, India pointed out that Pakistans entry

to the scheme and benefits under the GSP anti-drug arrangements had affected EUR 205

million of Indian exports, which faced higher tariffs than their Pakistani equivalents on the

EU market.

On 7 April 2004, the WTO Appellate Body released its report, where it ruled that WTO

provisions did not prevent developed countries from differentiating among products originating

in different developing countries under the GSP, provided that such differential treatment meets

certain conditions (set out in the so-called Enabling Clause). In so doing, it overturned the

earlier panel decision in the case, which had originally ruled in favour of India.

However, the Appellate Body decision was not a clear-cut victory for the EU. The conditionsincluded ensuring that identical treatment is available to all similarly-situated GSP


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beneficiaries that have the development, financial and trade needs that the treatment in

question is intended to respond to. Looking at the EUs special arrangement for combating the

production and trafficking of illegal drugs, the Appellate Body found that as the preferences

granted under the drug arrangements were not available to all GSP beneficiaries similarly

affected by the drug problem, they were not justified under the Enabling Clause. It therefore

urged the EU to bring its GSP scheme into conformity with the Enabling Clause conditions.

By contrast, the Appellate Body noted that the EUs GSP incentive arrangements for the

protection of labour rights and the environment, which were not at issue in this case, included

detailed provisions setting out the procedure and substantive criteria that apply to a request by a

country to become a beneficiary. This would seem to imply that these arrangements are WTO-

compatible, provided they meet the relevant conditions.

The process from notification of consultations to the release of the Appellate Body report took

just under two years. But it is not over yet. On 10 August 2004, following a request by India,

the WTO appointed an arbitrator to determine the reasonable period of time required for the

EU to bring its measures into conformity with WTO rules. As such, it could be another year

and a half before the EU either changes its GSP legislation or faces the threat of sanctions.

CHAPTER-5


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IMPACT OF TECHNOLOGY AND MARKETS

Technology has had a tremendous impact upon the global business environment.

Communication, transportation and production efficiency are various areas of business which

have been enhanced by the development and improvement of technology. As continual

enhancements are made, the world continues to "grow smaller" and businesses have further

reach than ever.

1. Computers

The most important technological development to impact the global business environment is

the world of computers. There are various programs which help maintain records of inventories

and shipments. Email allows for instantaneous communication almost anywhere in the world.

Besides its speed, email is easily forwarded and retained. The communication in the global

business environment is improved with the use of email.

The impact of computers on the global business environment is wide-ranging and also includes

the Internet, which is a useful tool for international companies. By using the Internet,

companies across the world can perform research and learn more about partners and suppliers.

2. Conference Calls and Video Conferencing

Conference calls allow people in multiple locations to be involved in the same conversation.

Video conferencing provides the same service, but with the added benefit of all parties being

able to actually see each other. Both of these forms of communication have a definite impact on

the global business environment. With either form of technology, a parent company in Norway

can have a conversation with a raw material supplier in Brazil and a manufacturing plant in

Taiwan. This improves communication on a global scale and enables all parties to understand

specific plans and agreements.

3. Transportation

The shipment of raw materials and finished products is absolutely vital to any business, but

particularly those with an international scope. Transportation technology enables a company on

one continent to send its raw materials or products to another company in a different continent.


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Technological advancements in airplanes, cargo ships and railways allow for quicker, cheaper

delivery, which impacts business by making global distribution more feasible.

4. Manufacturing Technology

Increased efficiency of manufacturing plants has a certain impact on the global business

environment. By having the capacity to produce materials and products more quickly and

efficiently, a company is able to produce quantities needed to supply global demand. Robotic

technologies and factory lines have enhanced the speed at which materials and products are

manufactured. For a company to be a player in the global business field, it must be able to keep

up with demand.

5.Shipment Tracking

Corporations now have the ability to track shipments virtually anywhere across the world.

Global Positioning Systems (GPS) allow accurate tracking. The implication of this technology

on the global business environment is the ability to let customers know exactly where their

shipments are at any given time. This technology creates secure relationships within the global

business field.

CHAPTER-6


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INTERNATIONAL VENTURES

International Ventures (IVs) are becoming increasingly popular in the business world as they

aid companies to form strategic alliances. These strategic alliances allow companies to gain

competitive advantage through access to a partners resources, including markets, technologies,

capital and people. International Joint Ventures are viewed as a practical vehicle for knowledge

transfer, such as technology transfer, from multinational expertise to local companies, and such

knowledge transfer can contribute to the performance improvement of local companies. Within

IVs one or more of the parties is located outside of United States or where the operations of

the IV take place and they frequently involve a local and foreign company.

Basic Elements of an International Ventures

Contractual Agreement. IVs are established by express contracts that consist of one or more

agreements involving two or more individuals or organizations and that are entered into for a

specific business purpose.

Specific Limited Purpose and Duration. International Ventures are formed for a specific

business objective and can have a limited life span or be long-term. International Ventures are

frequently established for a limited duration because (a) the complementary activities involve alimited amount of assets; (b) the complementary assets have only a limited service life; and/or

(c) the complementary production activities will be of only limited efficacy.

Joint Property Interest. Each International Ventures participant contributes property, cash, or

other assets and organizational capital for the pursuit of a common and specific business

purpose. Thus, a International Ventures is not merely a contractual relationship, but rather the

contributions are made to a newly-formed business enterprise, usually a corporation, limited

liability company, or partnership. As such, the participants acquire a joint property interest in

the assets and subject matter of the International Ventures

Common Financial and Intangible Goals and Objectives. The International Ventures

participants share a common expectation regarding the nature and amount of the expected

financial and intangible goals and objectives of the IV. The goals and objectives of a IV tend to

be narrowly focused, recognizing that the assets deployed by each participant represent only a

portion of the overall resource base.


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Shared Profits, Losses, Management, and Control. The IV participants share in the specific

and identifiable financial and intangible profits and losses, as well as in certain elements of the

management and control of the IV.

Benefits

Many of the benefits associated with International Joint Ventures are that they provide

companies with the opportunity to obtain new capacity and expertise and they allow companies

to enter into related business or new geographic markets or obtain new technological

knowledge. Furthermore, International Joint Ventures are in most cases have a short life span,

allowing companies to make short term commitments rather than long term

commitments.Through International Joint Ventures, companies are given opportunities to

increase profit margins, accelerate their revenue growth, produce new products, expand to new

domestic markets, gain financial support, and share scientists or other professionals that have

unique skills that will benefit the companies.

Structure

International Joint Ventures are developed when two companies work together to meet a

specific goal. For example, Company A and Company B first begin by identifying and

selecting an IV partner. This process involves several steps such as market research, partner

search, evaluating options, negotiations, business valuation, business planning, and due

diligence. These steps are taken on by each company. There are also legal procedures involved

such as IV agreement, ancillary agreements, and regulatory approvals.Once this process is

complete, the IV Company is formed and during this final procedure the steps taken are

formation and management.

Structuring IVs can pose a challenge when parties are from two different cultural backgrounds

or jurisdictions. Once both parties have come to an agreement on fundamental issues such as

commercial nature, scope and mutual objectives of the joint venture, the parties must decide on

where, geographically, the venture will take place and what the legal structure for the venture

will look like. Most of the time, the structure agreed on will be between different types of

corporations, partnerships, or some form of a limited liability company.

Management


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There are two types of International Joint Ventures: dominant parent and shared management.

Within dominant parent IVs, all projects are managed by one parent who decides on all the

functional managers for the venture.The board of directors, which is made up of executives

from each parent, also plays a key role in managing the venture by making all the operating and

strategic decisions.A dominant parent enterprise is beneficial where an International Joint

Venture parent is selected for reasons outside of managerial input.

On the other hand, shared management ventures consist of both parents managing the enterpris

Each parent organizes functional managers and executives that will be within the board of

directors.In this form of management, there are also two types of shared management ventures.

The first type is 50:50 IV and this is where each partner puts in 50% of the equity in return for

50% participating control. The second type is where both partners can negotiate that not all

shared management ventures are 50:50 and that one partner has more than a co-equal role in the

IV.

Finance

When two or more partners get together and form an International Joint Venture agreement,

they must decide early on in regards to what the financial structure will entail as this will aid in

management and control. Some of the steps include establishing the capital required to start theIV, the impact of securing a strong strategic alliance partner, and financial reporting. Once an

arrangement is made, a tax-planned joint venture will be created which will aid in maximizing

the after-tax returns.

Factors affecting IV

Economic Factors

Poor formation and planning

Problems that arise in joint ventures are usually as a result of poor planning or the parties

involved being too hasty to set up shop. For example, a marketing strategy may fail if a product

was inappropriate for the joint venture or if the parties involved failed to appropriately asses the

factors involved . Parties must pay attention to several analysis both of the environment and

customers they hope to operate in. Failure to do this sets off a bad tone for the venture, creating

future problems.

Unexpected poor financial performance


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One of the fastest ways for a joint venture is financial disputes between parties. This usually

happens when the financial performance is poorer than expected either due to poor sales, cost

overruns or others. Poor financial performance could also be as a result of poor planning by the

parties before setting up a joint venture, failure to approach the market with sufficient

management efficiency and unanticipated changes in the market situation. A good solution to

this is to evaluate financial situations thorough before and during very step of the joint venture.

Management Problems

One of the biggest problems of joint ventures is the ineffective blending of managers who are

not used to working together of have entirely different ways of approaching issues affecting the

organization. It is a well-known fact that many joint ventures come apart due to

misunderstanding over leadership strategies. For a successful joint venture, there has be

understanding and compromise between parties, respect and integration of the strengths of both

sides to overcome the weaker points and make their alliance stronger.

Inappropriate Management Structure

In a bid to have equal rights in the venture, there could be a misfit of managers. As a result,

there is a major slowdown of decision making processes. Daily operational decisions that are

best made quickly for more efficiency of the business tends to be slowed down because there is

now a committee that is in place to make sure both parties support every little decision. This

could distract from the bigger picture leading to major problems in the long run.

Economic Environment of IV

The ultimate goal of a successful JV partnership is more customers and a stronger body. To

ensure a JV's partnerships are as profitable as possible, it helps to look at them from the

customers point of view. The features a JV partnership should aim to address for an effective

marketing campaign: Channeling the expertise and strengths of both parties to maximize value

for the customers and stakeholders while downplaying the weaknesses and presenting a united

font.

Cultures of IV

When a joint venture is formed, it is literarily an attempt at blending two or more cultures in the

hope of leveraging on the strength of each party. Lack of understanding of the cultures of theindividual parties poses a huge problem if not addressed. A common problem in these multi-


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cultural enterprises is that the culture is not considered in their initial formation. It is usually

assumed that the cultural issues will be addressed later when the new unit has been created.

Usually, compromises are reached and certain cultural from the parties are kept on while others

are others are either out rightly discarded or modified.

Pros and Cons for IV

The joint venture is becoming a popular way for companies that outsource their operations to

retain a piece of the ownership pie. The creation of a new legal entity during the launch of a

joint venture comes with its share of ups and downs.

On the plus side

Joint ventures enable companies to share technology and complementary IP assets for the

production and delivery of innovative goods and services.

For the smaller organization with insufficient finance and/or specialist management skills, the

joint venture can prove an effective method of obtaining the necessary resources to enter a new

market. This can be especially true in attractive markets, where local contacts, access to

distribution, and political requirements may make a joint venture the preferred or even legally

required solution.

Joint ventures can be used to reduce political friction and improve local/national acceptability

of the company.

Joint ventures may provide specialist knowledge of local markets, entry to required channels of

distribution, and access to supplies of raw materials, government contracts and local production

facilities.

In a growing number of countries, joint ventures with host governments have become

increasingly important. These may be formed directly with State-owned enterprises or directed

toward national champions.

There has been growth in the creation of temporary consortium companies and alliances, to

undertake particular projects that are considered to be too large for individual companies to

handle alone (e.g. major defence initiatives, civil engineering projects, new global

technological ventures).


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Exchange controls may prevent a company from exporting capital and thus make the funding of

new overseas subsidiaries difficult. The supply of know-how may therefore be used to enable a

company to obtain an equity stake in a joint venture, where the local partner may have access to

the required funds.

On the minus side

A major problem is that joint ventures are very difficult to integrate into a global strategy that

involves substantial cross-border trading. In such circumstances, there are almost inevitably

problems concerning inward and outward transfer pricing and the sourcing of exports, in

particular, in favour of wholly owned subsidiaries in other countries.

The trend toward an integrated system of global cash management, via a central treasury, may

lead to conflict between partners when the corporate headquarters endeavours to impose limits

or even guidelines on cash and working capital usage, foreign exchange management, and the

amount and means of paying remittable profits.

Another serious problem occurs when the objectives of the partners are, or become,

incompatible. For example, the multinational enterprise may have a very different attitude to

risk than its local partner, and may be prepared to accept short-term losses in order to build

market share, to take on higher levels of debt, or to spend more on advertising. Similarly, the

objectives of the participants may well change over time, especially when wholly owned

subsidiary alternatives may occur for the multinational enterprise with access to the joint

venture market.

Problems occur with regard to management structures and staffing of joint ventures.

Many joint ventures fail because of a conflict in tax interests between the partners.

Disputes & Agreements Disputes

When two or more partners agree on an International Joint Venture, there are possibilities for

disputes to arise. Particularly in IVs, there can be issues between the partners whom are likely

to want their home countrys governing law and jurisdiction to apply to any disputes that may

come up; therefore, to avoid such a problem, a neutral governing law and jurisdiction if chosen

in some cases.A popular dispute resolution technique used in IVs is arbitration; however,

many times a court process is given priority as this system has more authority. Other disputeresolution strategies utilized are mediation and litigation.


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Agreements

Entering into an International Joint Venture agreement begins with the selection of partners and

then generally this process continues to a Memorandum of Understanding or a Letter of Intent

is signed by both parties.The Memorandum of Understanding is a document describing an

agreement between parties. On the other hand, a Letter of Intent is a document outlining an

agreement between the parties before the agreement is finalized. Before signing an IV, specific

aspects of the agreement must be addressed such as applicable law, holding shares, transfer of

shares, board of directors, dividend policy, funding, access, confidentiality and termination.

IV in Different Countries

IV in China

An IV is an attractive way to get into Chinese market for the people who are unfamiliar with

the completed culture and the less opened market. But China is becoming more and more

global and familiar to the world. IV is fading out because of the practical difficulties in picking

a proper partner, management, technology transfer profit sharing and soon.

There are two main types of IV in China: Equity Joint Ventures and Cooperative Joint

Ventures.

Equity Joint Ventures (EJVs):

An equity joint venture is a partnership between an overseas and a Chinese individual,

enterprises or financial organizations approved by the Chinese government. Companies in an

equity joint venture share both mutual rewards, risks and losses according to the ratio of

investment.A minimum of 25% the capital must be contributed by the foreign partners, and no

minimum investment for the Chinese partners.A joint venture is free to hire Chinese nationals

without the interference form government employment industries by abiding Chinese Labor

Law, and purchase land, build their own buildings, and privileges prevented to representative

offices.

Cooperative Joint Ventures (CJVs)

CJVs are a rather unevenly regulated form of IV between Chinese and foreign-based

companies. They are usually found in venture, which are both technology-based and have a

substantial requirement for fixed assets, for example infrastructure and volume manufacturing.


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No minimum foreign contribution is required to initiate cooperative venture and the

contributions made by the investors are not necessarily expressed in a monetary value. These

contributions can include excluded in the equity joint venture process can be contributed such

as labor, resources, and services.

Greater flexibility in the structuring of a cooperative venture is also permissible including the

structure of the organization, management, and assets.

IV in Turkey

International joint ventures have been played a significant role in the reform and liberalization

of the laws governing foreign investors as part of Turkey's economic program adopted after

2001. Turkey lies on the borders between Europe and Asia and is used as a way to achieve

strategic goals to enter into the Asian or European market, which is important for those wanting

to entre EU market since Turkey signed the European Customs Union (ECU). The Turkish

Accounting Standards Board requires that all enterprises established under the Turkish

Commercial Code in Turkey must prepare statutory financial statements in compliance with the

Turkish Accounting Standards Board, which makes all accounting data transparent and more

reliable for all parties involved. Under Turkish Law, a joint venture may be formed under two

umbrellas: Commercial Company, governed by the Turkish Commercial Code or OrdinaryCompany, Governed by the Turkish Code of Obligations.

Commercial Company

A Commercial Company is registered and recognized as having a legal identity separate from

its shareholders. According to the Turkish Commercial Code, the commercial enterprise JV

may be established under five titles; an unlimited partnership (general partnerships), limited

partnerships (special partnerships), companies limited by shares (stock corporations), limited

liability companies (corporations without shares) and cooperative companies (cooperative

societies).

Ordinary Company

The other form of joint venture, which is an Ordinary Company governed by the Turkish Code

of Obligations, is not recognized as having a legal identity. Normal ordinary partnerships and

consortiums are used as a vehicle for foreigners who want to partner with Turkish entities or


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participate in a tender and are ideal for achieving relatively short-term specific objectives for

example construction of a bridge.

Examples of successful IV

Aera Energy

Aera Energy covers a large area of California. The state's leading oil and gas producer

(accounting for 30% of California's total production), Aera Energy's properties extend from the

Los Angeles Basin in the south to Coalinga in the north. It has daily production of 165,000

barrels of oil and 50 million cubic feet of natural gas and boasts proved onshore and offshore

reserves of 800 million barrels of oil equivalent. Aera Energy also has interests in real estate

operations (in partnership with homebuilder Toll Brothers). The exploration and production

company is a joint venture of affiliates of Exxon Mobil and Royal Dutch Shell.

Omega Navigation Enterprises Inc.

Omega Navigation Enterprises Inc. is an international provider of marine transportation

services focusing on seaborne transportation of refined petroleum products.One of the vessels,

namely the Omega Duke, is owned through a 50% controlled joint venture with Topley

Corporation, a wholly owned subsidiary of Glencore International AG (Glencore). They havealso formed an equal partnership joint venture company with Topley Corporation, namely

Megacore Shipping Ltd.

Japan Nuclear Fuel Co., Ltd. (JNF)

Japan Nuclear Fuel Co., Ltd. (JNF), the predecessor of Global Nuclear Fuel Japan Co., Ltd.

(GNF-J), started operation here in Kurihama in 1967 as a nuclear fuel manufacturing joint

venture among General Electric Company (US), Toshiba Corporation and Hitachi

Limited.Since it began supplying the first domestically produced nuclear fuel in 1971, GNF-J,

a pioneer nuclear fuel manufacturer, has delivered more than 70,000 fuel bundles to various

nuclear power plants across the country and contributed to the stable supply of energy in Japan.

On January 1, 2000, the sales, design and development operations were transferred from the

three joint venture partners to JNF and JNF made a new start as a GE group company, later

changing its name to GNF-J, by offering core management services as well as handling MOX

fuel design and quality control.

IJM (India) Infrastructure Limited (IJMII) is a Company registered under the


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Companies Act 1956 IJMII is a Malaysian Multinational, which is a subsidiary of IJM

Corporation Bhd.(IJM), Malaysia. IJM, whose core competency is construction, is one of

the Malaysia's largest and most diversified construction groups, with world-wide presence

with specialization in the areas of construction, property development, manufacturing,

quarrying, plantation and international ventures. Its current operations are spread over

Malaysia, India, Australia, Argentina, Chile, China, Myanmar, Singapore and Vietnam.

IJM is a highly quality conscious company with the motto of " Excellence Through

Quality". IJMII has been actively participating in the high growth opportunities offered

by Indian Infrastructure Industry, more specifically in the construction sector. IJMII's

main thrust is in construction and upgrading of highways and property development

including world class townships and commercial buildings using modern technology and

equipment. IJM (India) Infrastructure Limited is firmly committed to its quality motto of

"We Deliver" On Time within Budget with Commitment.Tata Precision- Tata Precision is set up in1995, which is a 50:50 joint venture between Tata

Precision Industries Pte. Ltd., Singapore and Tata International Limited, India. The business

line includes precision metal and plastic parts for engineering, wireless control and automobile

sectors.

Tata Precision is a world class manufacturer of precision engineering parts and the company

has facilities in India, at Dewas. Tata Precision, an ISO 9001:2000 accredited organisation,

endeavours to provide customer delight through world class quality and services.

CHAPTER-7

HUMAN RESOURCE STRATEGIES OF MULTINATIONAL

CORPORATIONS


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Creating an effective global work force means knowing when to use "expats," when to

hire "locals" and how to create that new class of employees -- the "glopats." By John A.

Quelch and Helen Bloom

The scarcity of qualified managers has become a major constraint on the speed with which

multinational companies can expand their international sales. The growth of the knowledge-

based society, along with the pressures of opening up emerging markets, has led cutting-edge

global companies to recognize now more than ever that human resources and intellectual

capital are as significant as financial assets in building sustainable competitive advantage. To

follow their lead, chief executives in other multinational companies will have to bridge the

yawning chasm between their companies' human resources rhetoric and reality. H.R. must now

be given a prominent seat in the boardroom.

Good H.R. management in a multinational company comes down to getting the right people in

the right jobs in the right places at the right times and at the right cost. These international

managers must then be meshed into a cohesive network in which they quickly identify and

leverage good ideas worldwide.

Such an integrated network depends on executive continuity. This in turn requires career

management to insure that internal qualified executives are readily available when vacancies

occur around the world and that good managers do not jump ship because they have not been

recognized.

Very few companies come close to achieving this. Most multinational companies do not have

the leadership capital they need to perform effectively in all their markets around the world.

One reason is the lack of managerial mobility. Neither companies nor individuals have come to

terms with the role that managerial mobility now has to play in marrying business strategy with

H.R. strategy and in insuring that careers are developed for both profitability andemployability.

Ethnocentricity is another reason. In most multinationals, H.R. development policies

have tended to concentrate on nationals of the headquarters country. Only the brightest

local stars were given the career management skills and overseas assignments necessary

to develop an international mindset.

The chief executives of many United States-based multinational companies lack confidence in

the ability of their H.R. functions to screen, review and develop candidates for the most
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important posts across the globe. This is not surprising: H.R. directors rarely have extensive

overseas experience and their managers often lack business knowledge. Also, most H.R.

directors do not have adequate information about the brightest candidates coming through the

ranks of the overseas subsidiaries. "H.R. managers also frequently lack a true commitment to

the value of the multinational company experience," notes Brian Brooks, group director of

human resources for the global advertising company WPP Group Plc.

The consequent lack of world-wise multicultural managerial talent is now biting into

companies' bottom lines through high staff turnover, high training costs, stagnant market

shares, failed joint ventures and mergers and the high opportunity costs that inevitably follow

bad management selections around the globe.

Companies new to the global scene quickly discover that finding savvy, trustworthy managers

for their overseas markets is one of their biggest challenges. This holds true for companies

across the technology spectrum, from software manufacturers to textile companies that have to

manage a global supply chain. The pressure is on these newly globalizing companies to cut the

trial-and-error time in building a cadre of global managers in order to shorten the leads of their

larger, established competitors, but they are stymied as to how to do it.

The solution for multinationals is to find a way to emulate companies that have decades of

experience in recruiting, training and retaining good employees across the globe. Many of these

multinational companies are European, but not all. Both Unilever and the International

Business Machines Corporation, for example, leverage their worldwide H.R. function as a

source of competitive advantage.

Anglo-Dutch Unilever has long set a high priority on human resources. H.R. has a seat on the

board's executive committee and an organization that focuses on developing in-house talent and

hot-housing future leaders in all markets. The result is that 95 percent of Unilever's top 300managers are fully home grown. Internationalization is bred into its managers through job

content as well as overseas assignments. Since 1989, Unilever has redefined 75 percent of its

managerial posts as "international" and doubled its number of managers assigned abroad, its

expatriates, or "expats."

I.B.M., with 80 years' experience in overseas markets, reversed its H.R. policy in 1995 to deal

with the new global gestalt and a new business strategy. Instead of cutting jobs abroad to

reduce costs, I.B.M. is now focusing on its customers' needs and increasing overseas


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assignments. "We are a growing service business -- our people are what our customers are

buying from us," explained Eileen Major, director of international mobility at I.B.M.

When managers sign on with these companies, they know from the start that overseas

assignments are part of the deal if they wish to climb high on the corporate ladder. These

multinational companies manage their H.R. talent through international databases that, within

hours, can provide a choice of Grade-A in-house candidates for any assignment. Even allowing

for company size, few United States-based multinationals come close to matching the bench

strength of a Unilever or Nestl. The Japanese multinationals are even farther behind.

The strategy demands global H.R. leadership with standard systems but local adaptation. The

key underlying ideas are to satisfy your company's global human resources needs via feeder

mechanisms at regional, national and local levels, and to leverage your current assets to the

fullest extent by actively engaging people in developing their own careers.

The first, and perhaps most fundamental, step toward building a global H.R. program is

to end all favouritism toward managers who are nationals of the country in which the

company is based. Companies tend to consider nationals of their headquarters country

as potential expatriates and to regard everyone else as "local nationals." But in today's

global markets, such "us-versus-them" distinctions can put companies at a clear

disadvantage, and there are strong reasons to discard them:

Ethnocentric companies tend to be xenophobic -- they put the most confidence in

nationals of their headquarters country. This is why more nationals get the juicy

assignments, climb the ranks and wind up sitting on the board -- and why the company

ends up with a skewed perception of the world. Relatively few multinational companies

have more than token representation on their boards. A.B.B. is one company that

recognizes the danger and now considers it a priority to move more executives fromemerging countries in eastern Europe and Asia into the higher levels of the company.

Big distinctions can be found between expatriate and local national pay, benefits and

bonuses, and these differences send loud signals to the brightest local nationals to learn

as much as they can and move on.

Less effort is put into recruiting top-notch young people in overseas markets than in the

headquarters country. This leaves fast-growing developing markets with shallow bench

strength.


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Insufficient attention and budget are devoted to assessing, training and developing the

careers of valuable local nationals already on the company payroll.

Conventional wisdom has defined a lot of the pros and cons of using expatriates versus local

nationals. (See Exhibits I and II). But in an increasingly global environment, cultural sensitivity

and cumulative skills are what count. And these come with an individual, not a nationality.


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After all, what exactly is a "local national"? Someone who was born in the country? Has a

parent or a spouse born there? Was educated there? Speaks the language(s)? Worked there for a

while? All employees are local nationals of at least one country, but often they can claim a

connection with several. More frequent international travel, population mobility and cross-

border university education are increasing the pool of available hybrid local nationals. Every

country-connection a person has is a potential advantage for the individual and the company.

So it is in a multinational company's interests to expand the definition of the term "local

national" rather than restrict it.

Based on your company's business strategy, identify the activities that are essential to

achieving success around the world and specify the positions that hold responsibility for

performing them. These positions represent the "lifeline" of your company. Typically,

they account for about 10 percent of management.

Then define the technical, functional and soft skills needed for success in each "lifeline" role.

As Ms. Major of I.B.M. notes, "It is important to understand what people need to develop as


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executives. They can be savvy functionally and internationally, but they also have to be savvy

inside the organization."

This second step requires integrated teams of business and H.R. specialists working with line

managers. Over time, they should extend the skills descriptions to cover all of the company's

executive posts. It took 18 months for I.B.M. to roll out its worldwide skills management

process to more than 100,000 people in manufacturing and development.

A good starting point is with posts carrying the same title around the globe, but local

circumstances need to be taken into account. Chief financial officers in Latin American and

eastern European subsidiaries, for example, should know how to deal with volatile exchange

rates and high infiation. Unilever circulates skills profiles for most of its posts, but expects

managers to adapt them to meet local needs.

Compiling these descriptions is a major undertaking, and they will not be perfect because job

descriptions are subject to continuous change in today's markets and because perfect matches of

candidates with job descriptions are unlikely to be found. But they are an essential building

block to a global H.R. policy because they establish common standards.

The lifeline and role descriptions should be revisited at least annually to ensure they express the

business strategy. Many companies recognize the need to review the impact of strategy and

marketplace changes on high-technology and R&D roles but overlook the fact that managerial

jobs are also redrawn by market pressures. The roles involved in running an emerging market

operation, for example, expand as the company builds its investment and sales base. At I.B.M.,

skills teams update their role descriptions every six months to keep pace with the markets and

to inform senior managers which skills are "hot" and which the company has in good supply.

The main tool of a global H.R. policy has to be a global database simply because

multinational companies now have many more strategic posts scattered around the

globe and must monitor the career development of many more managers. Although

some multinational companies have been compiling worldwide H.R. databases over the

past decade, these still tend to concentrate on posts at the top of the organization,

neglecting the middle managers in the country markets and potential stars coming

through the ranks.

I.B.M. has compiled a database of senior managers for 20 years, into which it feeds names of

promising middle managers, tracking them all with annual reviews. But it made the base


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worldwide only 10 years ago. Now the company is building another global database that will

cover 40,000 competencies and include all employees worldwide who can deliver those skills

or be groomed to do so. I.B.M. plans to link the two databases by 2000.

Unilever has practiced a broader sweep for the past 40 years. It has five talent "pools"

stretching from individual companies (e.g., Good Humor Breyers Ice Cream in the United

States and Walls Ice Cream in Britain) to foreign subsidiaries (e.g., Unilever United States Inc.

and Unilever U.K. Holdings Ltd.) to global corporate headquarters. From day one, new

executive trainees are given targets for personal development

Evaluate your managers in terms of their willingness to move to new locations as well

as their ability and experience. Most H.R. departments look at mobility in black-or-

white terms: "movable" or "not movable." But in today's global markets this concept

should be viewed as a graduated scale and constantly reassessed because of changing

circumstances in managers' lives and company opportunities. This will encourage many

more managers to opt for overseas assignments and open the thinking of line and H.R.

managers to different ways to use available in-house talent.


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Some multinational companies, for example, have been developing a new type of manager

whom we term "glopats": executives who are used as business-builders and trouble shooters in

short or medium-length assignments in different markets. Other multinational companies are

exploring the geographical elasticity of their local nationals.

I.B.M. uses its global H.R. database increasingly for international projects. In preparing a

proposal for a German car manufacturer, for instance, it pulled together a team of experts with

automotive experience in the client's major and new markets. To reduce costs for its overseas

assignments, I.B.M. has introduced geographic "filters": a line manager signals the need for

outside skills to one of I.B.M.'s 400 resource coordinators, who aims to respond in 72 hours;

the coordinator then searches the global skills database for a match, filtering the request

through a series of ever-widening geographic circles. Preference is often given to the suitable

candidate who is geographically closest to the assignment. The line manager then negotiates

with that employee's boss or team for the employee's availability.


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The shape of a company's mobility pyramid will depend on its businesses, markets and

development stage and will evolve as the company grows. A mature multinational food-

processing company with decentralized operations, for example, might find a fiat pyramid

adequate, whereas a multinational company in a fast-moving, high-technology business might

need a steeper pyramid with proportionately more glopats.

Require over time that every executive join the global H.R. system. This makes it

harder for uncut diamonds to be hidden by their local bosses. Recognizing that people's

situations and career preferences shift over time, hold all managers and technical

experts responsible for updating their c.v.'s and reviewing their personal profiles at least

once a year.

Companies should make it clear that individual inputs to the system are voluntary but that H.R.

and line managers nevertheless will be using the data to plan promotions and international

assignments and to assess training needs

Compare the skills detailed in the personal assessments with those required by your

business strategy. This information should form the basis for your management

development and training programs and show whether you have time to prepare internal

candidates for new job descriptions.

Unilever uses a nine-point competency framework for its senior managers. It then holds the

information in private databases that serve as feeder information for its five talent pools. The

company thoroughly reviews the five pools every two years and skims them in between, always

using a three- to five-year perspective. In 1990, for example, its ice cream division had a

strategic plan to move into 30 new countries within seven years. Unilever began hiring in its

current markets with that in mind and set up a mobile "ice cream academy" to communicate the

necessary technical skills.

I.B.M. applies its competency framework to a much broader personnel base and conducts its

skills gap analyses every six months. Business strategists in every strategic business unit define

a plan for each market and, working with H.R. specialists, determine the skills required to

succeed in it. Competencies are graded against five proficiency levels.

Managers and functional experts are responsible for checking into the database to compare

their capabilities against the relevant skills profiles and to determine whether they need

additional training. Their assessments are reviewed, discussed and validated by each


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executive's boss, and then put into the database. "Through the database, we get a business view

of what we need versus what we have," explains Rick Weiss, director of skills at I.B.M. "Once

the gaps are identified, the question for H.R. is whether there is time to develop the necessary

people or whether they have to be headhunted from the outside."

Search for new recruits in every important local market as regularly as you do in the

headquarters country. Develop a reputation as "the company to join" among graduates

of the best universities, as Citibank has in India, for example.

The best way to attract stellar local national recruits is to demonstrate how far up the

organization they can climb. Although many Fortune 500 companies in the United States

derive 50 per cent or more of their revenues from non-domestic sales, only 15 percent of their

senior posts are held by non-Americans.

There may be nothing to stop a local national from reaching the top, but the executive suite

inevitably reflects where a company was recruiting 30 years earlier. Even today, many

multinational companies recruit disproportionately more people in their largest -- often their

longest-established -- markets, thereby perpetuating the status quo.

To counter such imbalances, a multinational company must stress recruitment in emerging

markets and, when possible, hire local nationals from these markets for the middle as well as

the lower rungs of its career ladder. Philips Electronics N.V.

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