AMERICAN INTERNATIONAL

UNIVERSITY OF BANGLADESH (AIUB)

Mid Term Take Home Exam

Course name: Global Business Strategy

Prepared For
Mohammad Abu Yusuf, PhD
EMBA Program, AIUB

Prepared By
Salah Uddin Md. Rakib
ID: 19-91239-1

EMBA Program
Spring 2019-2020, AIUB
Name: Salah Uddin Md. Rakib
ID: 19-91239-1

Ans to the ques no: 4

a. Liability of foreignness (LOF)

The term 'liability of foreignness' (LOF) was coined by Zaheer in her seminal work (Zaheer, 1995) to refer
to the additional costs that firms operating internationally experience to local firms. Zaheer built on an
earlier contribution by Hymer (1960) that theorized the costs experienced by firms investing overseas as
a fundamental aspect of the theory of foreign investment. Zaheer refined the concept and
supplemented the economic approach that characterizes Hymer's theorization with an organizational
perspective that stresses liabilities that arise from lack of local knowledge and unfamiliarity with the
norms and social expectations in foreign countries. Zaheer's work has sparked substantial research
interest in the costs associated with a foreign activity.

A Google Scholar search of articles containing the phrase 'liability of foreignness' yielded 505 hits
in2011, up from 3 in 1995, when Zaheer's paper was published.

The Liability of foreignness' is a term describing the additional costs that firms operating outside their
home countries experience above those incurred by local firms. These costs originate in limited local
knowledge, local stakeholders ' discriminatory attitudes and the difficulties of managing organizations
whose subunits are separated by time and distance.

This entry presents a definition of the construct 'liability of foreignness' as a term that describes the
costs associated with business activity in foreign countries. It presents major theoretical and
methodological developments within this area, which include attempts to identify the sources of these
liabilities, an examination of the country, firm and time contingencies that determine their prevalence,
as well as methodological approaches to the operation and measurement of this construct. The entry
concludes with a discussion of recent extensions that conceptualize the consequences of foreignness
more broadly and identify circumstances whereby it is an asset rather than a liability.

The initial research focused on inquiries into the origin of the LOF. Scholars’ identified costs originating
in discriminatory attitudes towards foreign firms by local stakeholders who often prefer to deal with
localfirms, as well as host governments whose discriminatory policies put foreign firms at a disadvantage
relative to local firms (Hymer, 1960; Zaheer, 1995). Others, building on organization theory and
sociology, have studied costs resulting from the often conflicting conformity pressures of the local
environment and the parent, and the difficulties associated with being controlled remotely by a parent
that may lack understanding of the local market (Westney,1993).

Refinements of the concept Building on these contributions, subsequent research sought to identify the
contingency conditions under which the LOF manifests itself. This research identified several homes and
host country characteristics that affect the extent to which firms experience the LOF (Miller and Parkhe,
2002). Other studies have on firm characteristics to explain why certainfirms are more likely to
experience the LOF than others (Mezias, 2002; Miller and Eden, 2006; Nachum, 2010). Yet others study
the changing dynamics of the LOF over time (Zaheer and Mosakowski, 1997), suggesting that although
the LOF includes some permanent costs, most of the costs are apparent at the time of entry and tend to
dissipate and may completely disappear over time. There have also been attempts to deepen the
Name: Salah Uddin Md. Rakib
ID: 19-91239-1

theoretical underpinning of the classification of the factors that constitute the costs and advantages
(Nachum, 2011). This research distinguishes between costs and advantages that are experienced at
different levels within the MNE (the organization as a whole, HQs, affiliates), as well as identifying the
extent of control MNEs have over these factors (Mezias, 2002).Notwithstanding variations across
countries, firms and time, this research finds evidence that foreign firms underperform comparable local
firms, a performance gap that is attributed to the liabilities they experience on the ground of their
foreignness (Mata and Portugal, 2002; Mata and Freitas, 2012). These findings have generated interest
in exploring ways to mitigate the LOF. Hymer (1960) was explicit in recognizing the superior advantages
that foreign firms have relative to local firms, which enable them to overcome the LOF and compete
successfully with them. Subsequent research has refined the under-standing of these superior
advantages. Zaheer (1995) suggested that, in addition to building on their parents' advantages (Hymer,
1960), foreign affiliates can mitigate their liabilities by imitating the practices of successful local firms.
Luo, Shenkar and Nyaw (2002) distinguished between defensive and offensive strategies, referring,
respectively, to greater reliance on the parents and on formal institutions in host countries, and deeper
local embeddedness, as complementary means of dealing with the LOF.

Measuring the LOF along with these theoretical developments, considerable attention has been given
also to methodological issues related to the operation of the LOF and the study design for its testing.
Most research operationalizes the LOF by some performance indicators, measured relative to
comparable local firms (Zaheer, 1995; Miller and Parkhe, 2002; Nachum, 2003; Millerand Eden, 2006). A
few studies have relied on other measures, such as survival (Zaheer and Mosakowski,1997; Mata and
Portugal, 2002; Kronborg and Thomsen, 2009; Mata and Freitas, 2012), labor lawsuits (Mezias, 2002)
and innovation (Un, 2011). The Employment of multiple and varied measures is important in that
different measures are informative of different aspects of the LOF. Some research attention has also
been given to the unit of analysis that is appropriate for the study of the LOF. The LOF is experienced by
the parent firm and the affiliates, as well as by their employees, but it is manifested in different ways.
Most research in this area is conducted at the level of the affiliates and, subsequently, the theory of the
LOF is most developed to this level of analysis. In an interesting recent contribution, Mezias and
Mezias(2011) study the LOF at the individual level and show the importance of varying levels of analysis,
which reveal different aspects of the LOF. The prevalence of the LOF depends on the localfirms with
whom foreign firms are compared, and hence the structure of the local sample that is employed as the
benchmark is critical. A few studies examined matched samples of foreign and local firms and were able
to isolate the impact of foreignness from many other causes of the differences between these firms
(Zaheer, 1995; Nachum, 2010). Several studies distinguished between purely domestic local firms and
local MNEs, and show that many of the differences between foreign and localfirms disappear when
foreign firms are compared only with local MNEs (Jungnickel, 2002; Nachum,2010). This suggests that
liabilities attributed to foreignness may originate in geographic scope.

c) Multinational Company (MNC):

A multinational company (MNC) is a public limited company, usually, a large one that produces in more
than one country. For instance, the US-based MacDonalds has outlets in many countries, the UK based
Lloyds TSB Bank has branches in a range of countries and the Japanese based Toyota has factories in
many countries.
Name: Salah Uddin Md. Rakib
ID: 19-91239-1

There are some benefits MNCs hope to gain by spreading their operations in more than one country.
Producing in countries where products are sold rather than exporting to those countries will reduce the
MNCs' transport costs and enable them to keep in close contact with the market.

It may also enable them to get around any restrictions on imports, to gain access to cheaper labor and
raw materials. They may also receive grants from the governments of the countries in which they set up
their franchises.

MNCs can have several effects on the countries in which they are located, some beneficial and others
harmful. They can increase employment, output and tax revenue, bring in new technology and
management ideas and help in the development of infrastructure. They may, however, be more prone
to pollute and willing to close down plants in foreign countries.

Their size and their ability to shift production may mean that they can put pressure on the governments
of the countries, in which they have plants, to give them tax concessions and not to penalize them for
poor safety standards.

Besides, although MNCs may increase employment, there is a risk that they may drive domestic firms
out of business. The profits they earn may be paid to shareholders in other countries rather than being
reinvested in the host country.

Recent years have seen the growing importance of MNCs. These companies are increasingly seeing
countries, throughout the world, as their markets and possible locations for production. Besides setting
up the operating plants abroad which produce the complete finished good, they are also spreading
different parts of the production process in different countries.

For instance, an MNC producing cars may base its design in a country with a strong tradition in design,
its assembly in a country with a skilled but low-cost labor force and its administration and marketing in
other countries. The production process of some products is spread over more than fourteen countries.

e) Why businesses go global?

In general, companies go international because they want to grow or expand operations. The benefits of
entering international markets include generating more revenue, competing for new sales, investment
opportunities, diversifying, reducing costs and recruiting new talent.

Going international is a strategy that is influenced by a variety of factors and is typically implemented
over time. Sometimes, a government will incentivize companies to enter their country's market to build
their economies.

Improving Profit Margins:

Improving profit margins is one of the most common reasons for entering international markets. When
growth strategies are used upon the national level, the next path is often to seek out international
growth. Distributing your products in additional countries increases your customer base. As you offer
Name: Salah Uddin Md. Rakib
ID: 19-91239-1

compelling solutions and build loyalty across international markets, revenue strengthens and escalates
as well.

Competing for New Sales:

Closely connected to the goal of improved profit margins is the desire to increase sales. Even if company
operators generally are satisfied with revenue levels, international expansion can further improve
overall revenues. The race to expand internationally is often about gaining a presence in foreign
markets. Being the first to arrive in a new market can provide significant advantages.

If you don't enter a ripe market with your solution, competitors do. Not only do you miss the revenue
source, but you lose out on other valuable assets that you could use to promote your company at home
and abroad. In some cases, a strong domestic company gets overrun by a lesser player that succeeds
globally and grows big through global synergy.

Bear in mind that in the modern economy, many companies are already global thanks to technology.
Companies develop specific international strategies to gain competitive advantages in the new global
economy.

Diversifying the Business:

The international expansion allows a company to diversify its business in a couple of key ways. First, you
spread the risk of slowing demand across multiple countries. If one market never gains or loses interest
in your offerings, you can pick up the slack with success in other countries. Also, you can connect with
suppliers in international markets and take advantage of raw materials and resources unavailable in
domestic markets.

Also, companies often enhance innovation and develop additional variations of their solutions when
they operate in multiple countries. Product diversification similarly insulates you from the risks of
declining interest in a particular item.

Examples of Diversification:

For example, Xiaomi, one of the most popular smartphone manufacturers in China, seeks to expand in
India over the next few years. In addition to mobile devices, the company is planning to sell electric
folding bikes, self-balancing scooters, fitness bands and other products. This will allow it to reach a wider
audience and diversify its operations.

Diversifying your brand's offerings and its customer base are two popular reasons for international
business expansion. Sometimes, a product isn't a bad product, but a bad fit for the market where it was
originally launched. Launching that product again in a different market, toward people with a different
culture and a different budget can mean an entirely different, much more positive reception for that
product.
Name: Salah Uddin Md. Rakib
ID: 19-91239-1

Recruiting New Talent:

Operating in international markets also gives businesses access to a larger and more diversified talent
pool. Employees who speak different languages and understand different cultures enhance connections
with a broader customer base. Having an international brand that is well-reputed will invite top talent to
the company. Businesses can also structure global work teams in a way that allows for synergy in
building a global brand.

Qs: 3. Please analyse the CASE ‘What Panasonic Learned in China?’ and answer to the following: (a)
what did Panasonic learnt about the unique features of Chinese market? (b) Discuss the importance of
understanding ‘lifestyle’ of people of the destination country in getting success in global business.

Ans to the ques no: 3

Multinational companies tend to insulate their headquarters from operations in emerging markets.
Sure, they welcome the opportunity to save money by manufacturing in China or managing customer
service out of India, and they're especially pleased when they make profits selling to customers in such
markets. But regardless of their global footprints, American, European, and Japanese companies remain
fundamentally American, European, and Japanese. The home country's executive offices too often have
an "us" and "them" mindset and encourage a one-way flow of ideas and directives—from us in the
home country to them in emerging markets. Local initiatives are expected to stay local. Companies do
this to minimize cost and risk, and because they believe that their brands already hold enough cachet to
woo emerging-market consumers. Multinationals may be in global markets, but they're often not of
them; therefore, they're unable to expand their products' appeal to broader audiences around the
world.

Q-a) It is surprising, then, when an established giant goes to an emerging market seeking the usual
benefits of cheap labor and low manufacturing costs and comes back to a changed company. That's
what has happened to Panasonic in China over the past decade. After the Japanese company's leaders
saw growth slow in China, they realized that they needed to engage more deeply with customers there.
Panasonic's desire to do that was rather remarkable because of the historical animosity between Japan
and China, which can suddenly flare-up. In October 2012, for instance, after Japan announced the
purchase of the disputed Senkaku Islands, protests in China forced several Japanese companies, such as
Canon, Toyota, and Panasonic, to suspend their China operations temporarily. Although the difficulties
have subsided, they have probably created a sense of awkwardness among the Japanese and Chinese
employees of multinationals.
Through its efforts in the Chinese market, Panasonic learned to bridge two strategies that are often seen
as mutually exclusive: on the one hand, finding competitive advantage through expertise in integrated,
worldwide operations, and on the other, focusing locally to meet consumers' particular needs. The
Name: Salah Uddin Md. Rakib
ID: 19-91239-1

inherent tension is well understood: Worldwide integration calls for cooperation and uniformity; local
adaptation values independence and diversity. The tension is especially high in multinationals that are
chasing growth in emerging markets while desperately trying to keep costs down at home.

Q-b) Learning About Lifestyles

The next step came two years later when the Home Appliances Company created the Shanghai-based
China Lifestyle Research Center, the first serious attempt by Panasonic to develop a deep understanding
of consumer lifestyles in a market outside Japan. It would be the nerve center for the company's new
approach to China and globalization.

Tetsu Miyoshi, an experienced product planner, was called on to direct the center. Miyoshi established a
clear mission that went beyond simply collecting lifestyle data: The center would focus on interpreting
that data.

Miyoshi searched hard for local talent, going beyond the standard interview process and asking job
candidates to interpret raw marketing data so that he could assess their ability to uncover hidden needs.
He then personally trained the researchers to generate consumer insights and better understand the
cost ramifications of product concepts.

From the very beginning, Miyoshi embraced the tension between cross-border integration and local
adaptation. Believing that product development required global technology, he strongly encouraged his
staff to learn about Panasonic Japan's sophisticated technologies, including those still under
development, and develop new product proposals built on them. To ensure approval from the business
units, he required that the center's researchers back up their product concepts with hard data.

The center began amassing local knowledge about consumer preferences specific to various regions and
income groups. For example, in thinking about how to develop rice cookers, researchers observed that
there was a preference for short-grain rice in the north, medium-grain rice in central China, and long-
grain rice in the south. The data were made available to all of Panasonic's business units and their
subsidiaries.

In addition to conducting interviews and engaging in other forms of conventional market research, staff
members visited consumers' homes and took note of such elements as floor plans and kitchen counter
heights. In studying some 300 households in areas such as Beijing, Shanghai, and Guangzhou, they
noticed that in Chinese kitchens, which are typically small, the space for a refrigerator is usually just 55
centimeters wide. Panasonic's standard refrigerator width was 65 centimeters. Working with the R&D
team in Hangzhou and Panasonic's researchers in Kusatsu, Japan, the lifestyle center developed slimmer
refrigerators for the Chinese market. Consumers reacted enthusiastically. At one point, Panasonic's sales
in the most popular category of refrigerators increased 10-fold over the previous year.
Name: Salah Uddin Md. Rakib
ID: 19-91239-1

Throughout the process, staff members held regular meetings and established informal networks with
engineers from various business units. These relationships allowed the lifestyle center staff to gain new
technological knowledge and engineers to develop a deep understanding of the needs and preferences
of the Chinese market.

By fostering formal and informal relationships among market-research staff members in China and
engineers in Japan, Miyoshi ensured that the center's staff could address both local adaptation and
worldwide integration. Knowledge flowed in both directions: from China to the rest of the company and
from various business units into the China center. The more deeply the company adapted to local
conditions, the more extensive was the worldwide integration of knowledge.

Recognizing the importance of culture in the business world is an important step toward success in the
global marketplace.

Understanding a country's culture is a sign of respect. It also helps to foster effective communication, a
vital factor in business success. Developing an appreciation for another culture does not have to be
difficult. Here are some considerations to keep in mind:

Cultural Stories:
Each culture has underlying themes. Values and attributes such as frugality, trust, and endurance may
be viewed differently in other countries. In some cases, these themes may translate into varying
expectations for business partnerships and negotiations.
Communication: In many cultures, communication, including non-verbal, may be subtle and nuanced,
rather than the direct approach often associated with the United States. Learn how people in your new
market use words and phrases, hand gestures, body language and other cues to communicate. Find out
which non-verbal gestures used in the United States are acceptable and which are not to avoid
offending or embarrassing a new business partner. Other strategies can also be incorporated to ease
communication, including using visual references as much as possible and allowing for pauses or silence
during presentations.

Decision Making: How do people make decisions? Individually or as part of a large group? In some
countries, it may take months to issue a group decision on a contract. Elsewhere, unilateral decision-
making may be the accepted norm.

Time Perception:
How do your potential overseas partners perceive time and deadlines? While punctuality may be
expected in one culture, in other countries a meeting time might be considered more of a suggestion
than a hard-and-fast schedule. Similarly, some cultures may place greater emphasis on long-term
planning and overall company health, viewing success not through the lens of quarterly financial reports
but rather from a perspective of five-year blueprints.
Name: Salah Uddin Md. Rakib
ID: 19-91239-1

Savvy businesses of all sizes are realizing the necessity of breaking into the global marketplace. If your
company plans to expand into international markets or use global partners, the key participants must
understand and appreciate the culture of the people with whom they'll be doing business.

Creating a Virtuous Circle of Localization and Integration:

Most leaders understand that there is a tension inherent in meeting local customers' needs while
seeking an advantage through integrated global operations. Here's how to make that tension work for
your company.

Establish a dedicated unit:

One organization should be devoted to embracing the tension. The aim of Panasonic's China Lifestyle
Research Center was to both understand Chinese consumers and draw on Panasonic Japan's R&D
capacity.

Create an on-the-ground mission:

The unit's mission should state explicitly how local adaptation and cross-border integration support
company strategy. The lifestyle center's mission was "data interpretation," not just data collection, to
ensure that insights led to viable product proposals that leveraged Panasonic's global technology assets.

Develop core local staff:

The unit should develop local staff who can engage in both localization and cross-border integration
activities. At the lifestyle center, each staff member spent a year getting training and extensive coaching
in fieldwork and proposal writing.

Extend the reach:

The unit must constantly push to expand its influence. The lifestyle center's leader ratcheted up
communication and interaction between the center and engineers at Panasonic Japan to broaden the
organizational scope of tension-embracing activities.

Sufficient authority should be given to overseas subsidiaries to enhance their autonomy while ensuring
sound cross-border integration. Seeing the early successes of the lifestyle center, Panasonic gave
increasing authority to its China operations for deeper local adaptation while maintaining integrated
cross-border working relationships between China and Japan.

Reference:
https://hbr.org/2012/12/what-panasonic-learned-in-china