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Doing business in emerging markets: the Global Management Program - Georgetown, March 12-16, 1995.

In March, a joint NACM, FCIB, and Center for International Business Education and Research (Georgetown University School of Business) senior executive program provided in-depth exposure to selected topics essential to understanding international business. Designed to assist executives in sales, credit, finance, and related fields, this program bridged the gap between domestic and international responsibilities. Experts from industry, government, and academic fields presented sessions on risk management, ethics, cultural issues, negotiation, trade finance, and third-world management issues. Here are some highlights.

Doing Business in Emerging Markets of the World

This session provided an introduction to financial reporting for foreign operations and foreign currency transactions. U.S. reporting requirements, International Accounting Standard Committee (IASC) rules, and accounting standards of major countries were compared. Tony Sondhi, visiting associate professor, Georgetown University School of Business, presented a comparative analysis of the effects of different reporting methods on key financial statement relationships and ratios. Analytical principles derived from those reporting differences were applied to case studies of real international corporations.

One of the highlights of this session was NAFTA: One Year Later and Beyond, presented by Regina Vargo, director, NAFTA Office of the U.S. Department of Commerce. The impact and benefits of NAFTA for the U.S., Canada, and Mexico were reviewed as well as its effects on Latin American neighbors.

U.S. exports to Mexico are expected to decline in 1995. Imports will cost more in peso terms than before the devaluation; however, the impact on U.S. exporters will vary according to the type of goods produced. Non-essentials, such as consumer goods, will be hit hardest, although luxury market items may fare better because upper-class Mexicans have more discretionary purchasing power and often have dollar holdings.

U.S. companies may find opportunities as a result of the lower price of Mexican exports. Mexican companies gearing up to export and with access to financing will require increasing amounts of capital and intermediate goods. Mexico's infrastructure also needs investment, and the Mexican government has announced plans to privatize more government-owned operations to raise cash. And, a number of petrochemical plants are expected to be put up for sale - U.S producers of goods related to these sectors will want to follow developments carefully.

Exporters are cautioned that financing and payments will be even more important than in the past. Interest rates have skyrocketed, increasing risks to the exporter and making trade finance even more crucial. Those not using foreign receivables insurance should consider it for future sales.

Letters of credit are not expected to experience payment delays; Mexican banks appear to be in an adequate position to liquidate their obligations. However, letters of credit should be confirmed until the markets calm.

U.S. exporters are urged to continue their efforts in Mexico. Many opportunities remain, however, caution should be used in trade financing. Over the long-term, Mexico's market for U.S. goods will continue to grow. NAFTA is not expected to play as prominent a role in U.S. export growth in 1995; Mexico's demand for U.S. goods will slacken in the short-term due to a continued depreciation of the peso, lower Mexican incomes, and the government's austerity program. As the Mexican economy adjusts over the next couple of years, U.S. exports will probably rise again as prosperity returns. Faster economic growth in Europe and Japan will likely pick up this slack in 1995.

Another highlight of the Global Management Program came in the examination of the business climate in several countries, including China and Vietnam. Both countries come from long traditions of Communism, but are now capturing the imagination of capitalists, who predict more openness in business and trade in the coming years.

In the China discussion, seven assumptions were presented about the future of the country:

1. The next seven years are critical.

2. Deng dies and no strong leader will emerge.

3. The political system and society are under-institutionalized, making it difficult to manage tensions.

4. Center-periphery tensions will grow.

5. The quest for great power and international status will heighten.

6. Military goal: modernized forces.

7. China has a sense of being victimized by foreign powers.

Of course, these are merely assumptions about China's internal affairs, and it was pointed out that firm or reliable predictions about the country's future are difficult to make. Many factors make China's future uncertain, but six factors in particular were presented as the most problematic:

1. Weak government macroeconomic controls; 2.Exploding energy and resource demand; 3. Weak statistical and information controls; 4. A leadership ideology inconsistent with capabilities; 5. Near-term political issues of significant consequence; 6. High potentials for regional conflicts.

While no one can predict the course of events for certain, China does face much change in the near future. Foremost in the minds of China-watchers is the expected succession crisis following Deng's death. Many expect the Chinese leader to die within the next couple of years, creating an unstable transitional regime before new leadership can take power, probably sometime early in the next century.

Other impending events include the reversion of Hong Kong to Chinese rule on June 30, 1997, and the question of Taiwanese independence, which some predict will occur sometime between 1996 and 2000. Korean succession and nuclearization are also of concern to China now and in the coming years.

With all that's happening in China, Western governments and businesses have added concerns over whether China will play by the rules when doing business. The U.S. government estimated Chinese piracy of copyrighted products such as software, videos, and CDs cost American companies more than $1 billion last year alone. After much protest, China averted a trade war with the U.S. by agreeing to protect intellectual property rights and crack down on piracy.

Human rights remains another contentious point for would-be foreign investors in China. Human rights abuses in China have not abated in recent years and any influence the U.S. had through trade sanctions was all but removed last year when President Clinton and Congress de-linked Most Favored Nation (MFN) trade status from human rights. A recent State Department report found, "numerous human rights abuses, including arbitrary detention, forced confessions, and torture." In addition, it said, "the government attaches higher priority to maintaining public order and suppressing political opposition than to enforcing legal norms."

In the Vietnam portion of the discussion, Allan E. Goodman, academic dean, school of foreign service, addressed Hanoi's view of the country's emerging market.

The discussion focused on:

1. how American businesses can relate to this emerging market and what they need to understand about Vietnamese history and national development objectives;

2. the process by which decisions affecting foreign trade and investment are made in Hanoi; and

3. the lessons learned so far in doing business competitively under the conditions of rapid social and economic change that now prevail in Vietnam.

It was noted that for at least 10 years after the end of the Vietnam War, U.S. and other industrialized as well as non-Communist Asian countries treated Vietnam as a pariah state, shunning virtually all contact. In addition, a U.S.imposed trade embargo was honored by many countries; the country's oil reserves were left untapped because oil companies were prevented from purchasing exploration rights. Between 1985 and 1990, Vietnam encountered more problems, as the Soviet Union broke apart and Russia dramatically decreased aid to Vietnam. At one time, aid from the USSR accounted for nearly 10 percent of Vietnam's Gross National Product. By 1990, it was cut to $332 million from more than $1 billion. In 1992, Russia eliminated aid to Vietnam altogether.

Despite the odds, Vietnam survived these cuts and the resulting inflation by embarking on an ambitious national economic plan. Part of the plan was to increase agricultural production by 35 percent. The country stopped importing rice and became an exporter (number three in global trade). Increased productivity in other areas, including power generation and cement production, resulted in an increase in the value of hard currency exports from $221 million in 1985 to $2.7 billion in 1993 and $3.6 billion in 1994. Tourism is on the upswing, helping the overall economy to grow at 8.8 percent in 1994.

High-level diplomatic negotiations between the U.S. and Vietnam have resulted in progress on issues of MIAs and other hold-overs from the Vietnam War. The Diplomatic Liaison Office for the U.S. government opened its doors in Hanoi on January 28, 1995, and Vietnam opened a diplomatic office in Washington, D.C. on February 1.

By providing a historical perspective coupled with an explanation of laws relating to business, the Global Management discussions and country case studies provided a better understanding of how to do business in other countries and cultures.

Fine Art of Negotiation and Ethics

A reading, case study, and participatory approach to cultural issues and negotiation strategies led by Douglas M. McCabe, Ph.D. made for an informative and highly interactive approach to this cornerstone of international business. As a professor of human resource management, labor-management relations, and organizational behavior, McCabe provided the relationship building, negotiating tools, and reference points needed to conduct business in various cultures.

He began with several models such as those developed by Philip R. Harris and Robert T. Moran to provide an understanding of how cultural and national variables affect work behavior. In the Harris and Moran model, for example, one needs to develop an understanding of eight areas which form the fabric of any society: kinship, education, economic system, politics, religion, associations, health, and recreation.

Hofstede's approach relies on how four key value dimensions: power distance, uncertainty avoidance, individualism, and masculinity impact the workplace.

Power distance is the level of acceptance by a society of the unequal distance of power in institutions which translates to the extent to which subordinates accept the chain of command. In countries where people display high power distance such as in Malaysia, the Philippines, and Mexico, employees respect the formal position of superiors in the hierarchy, while in countries with low power distance, such as Austria, Denmark, and Israel, superiors and subordinates are apt to regard one another as equal in power.

The second value dimension, uncertainty avoidance, refers to the extent to which people in a society feel threatened by ambiguous situations. In a business context this translates into the degree to which they are willing to take risks, challenge the system, and change jobs.

Individualism refers to the tendency of people to look after themselves and their immediate family as opposed to a more collective approach which values "the organization" and group decisions. The fourth value dimension, masculinity, refers to the degree of traditionally "masculine" values - assertiveness, materialism, and a lack of concern for others - that prevail in a society.

Hofstede's study of more than 116,000 people in 50 countries resulted in "cultural maps of the world" which show at a glance where various countries are in relation to various work values, and therefore, in relation to potential employee behaviors.

Other studies included those which reviewed concepts and principles that frequently cause problems for Americans dealing in international management such as attitudes toward time, change, material factors, and individualism.

All of this groundwork is necessary to develop management and negotiation styles which are appropriate in various countries. While this may appear obvious, it is surprising how subtle differences in negotiating styles can make or break deals and destroy credibility.

Americans, for example, may favor the facts or logic in their negotiating style, which is precisely the wrong way to approach an Arab, who prefers an emotional appeal, or an Eastern European, who prefers an appeal to high ideals.

Consider, for example, these variables in the negotiating process adapted from S. E. Weiss and W. Stripp, Negotiation with Foreign Business Persons: An Introduction for Americans with Propositions on Six Cultures noted in Figure 1.

Then, too, the whole process of relationship building in the negotiating process is generally regarded with much more significance in most parts of the world than it is in the U.S. A sense of urgency can hinder business transactions as can use of the wrong tactics like promises or threats in the wrong context or opening with an extremist position when a more middle-of-the-road position is called for. Some of the most difficult messages to interpret are non-verbal clues and signals such as the use of silence and interruptions.

The whole area of decision making also varies widely across cultures and each culture may be at different points along utilitarian-idealist and individualist-collectivist continuums. The same can be said for autocratic vs. participative leadership styles.

Next, it was on to some dynamic case studies as students examined various business ventures where these principles were either applied or misapplied.

While adapting to another cultural perspective may be wise in the negotiating arena, it may actually prove destructive from an ethical viewpoint, as the session led by Thomas Donaldson, Ph.D., professor of business ethics, Georgetown University, demonstrated. International business often requires that the traveller steer a middle course between moral relativism and moral absolutism. While every nation wants to reduce pollution and develop its economy, for example, different tradeoffs may rationally be made by a third-world country than by a developed one.

While there are core values fundamental to the human condition - freedom, safety, dignity - all would agree must be respected, the degree and means of upholding these values may vary greatly across cultures. Through several situations draw from their own and others' experiences, students were asked to examine and articulate their values.

Many more sessions and discussions made this premier Global Management Program truly outstanding.

RELATED ARTICLE: NAFTA: The First Year

* Trade among the NAFTA partners soared 17 percent in 1994, growing more than $50 billion in just one year. The 1994 trade advance was spurred by strong economic growth in North America and reduced trade barriers under NAFTA.

* Three-way trade of $348 billion represents roughly $1,000 in trade for each of NAFTA's 380 million consumers.

* U.S. exports and imports to NAFTA partners rose sharply in 1994. Total trade with Canada reached $243 billion; trade with Mexico exceeded $100 billion.

* U.S. merchandise exports to Canada and Mexico grew twice as fast as U.S. exports to the rest of the world, accounting for half the gain in U.S. exports.

* NAFTA accounted for only $4 billion of the $36 billion deterioration in the U.S. merchandise trade balance. (Virtually all of the deterioration was U.S.-Canada trade.)

RELATED ARTICLE: Figure 1

Variables in the Negotiation Process

1. Basic conception of negotiation process: Is it a competitive process or a problem-solving approach?

2. Negotiator selection criteria: Is selection based on experience, status, expertise, personal attributes, or some other characteristic?

3. Significance of type of issues: Is it specific, such as price, or is the focus on relationships or the format of talks?

4. Concern with protocol: What are the importance of procedures, social behaviors, and so forth in the negotiation process?

5. Complexity of communicative context: What degree of reliance is placed on nonverbal cues to interpret information?

6. Nature of persuasive arguments: How do the parties attempt to influence each other? Do they rely on rational arguments, on accepted transition, or on emotion?

7. Role of individuals' aspirations: are motivations based on individual, company, or community goals?

8. Bases of trust: Is trust based on past experience, intuition, or rules?

9. Risk-taking propensity: How much do the partries try to avoid uncertainty in trading information or making a contract?

10. Value of time: What is each party's attitude toward time? How fast should negotiations proceed, and what degree of flexibility is there?

11. Decision-making system: How does each team teach decisions - by individual determination, by majority opinion, or by group consensus?

12. Form of satisfactory agreement: Is agreement based on trust (perhaps just a handshake), the credibility of the parties, commitment, or a legally binding contract?
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Publication:Business Credit
Date:Jun 1, 1995
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