International Management: Government and National Competitiveness - Research Paper Example

Government and National Competitiveness Dunning (1997) said that academics have argued, “Government intervention in economic activity had made adverse impact on the economy as compared to the social benefit which government planned to make”. It has been noticed that view of academia regarding alternative organisation form and the role played by organisation has changed over time. As per Lipsey (1997), technological up-gradation acted as stimulus for the process of globalisation. He identified two main reasons behind for multinational trade which are: revival of market in post communist era and changes introduced by developing economy in their development strategy. Lipsey also argued that with the passage of time, role played by government has changed. Large and intrusive government are loosing their charms. With the change in international economical environment, role of government has to be redefined so that further growth in technology and economy become possible. Dunning argued that “perestroika” of government intervention in “fordist” environment is out dated. Such approach is more visible in Japan and NICs as compared to America and Europe. Changes which will be visible in different governments will depend on different factors specific to each country. Dunning also argued that different MNEs have their home in many countries other that than headquarter in home country. This is influenced by existence of national agglomeration economies such as telecommunication networking and also by micro regional cluster formed by economical activities. Both Dunning (1994) and Porter (1990) identified and suggest that role of modern & democratic government is to assist sustainable economic system. So Dunning suggest that government should discuss challenging economical vision, government should also take care that organisations are capable to carryout their responsibility in changing economical environment. The required framework should be provided by government for up-gradation. The term national competitiveness indicates ability of a nation to create sustainable values, which one attains through enterprise and by managing high stander of living for the country people. This competitiveness is measured in term of level of output per capita input used. To remain competitive, nations have to provide most productive labour and highly conductive environment for industries and businesses. This attracts furthermore investment and development of business in the country. Many matters related to growth and developments of the nation are in direct control of government which they monitor through legal, social, political and macro-economical policies (The National Competitiveness Center, 2007). The role of Government in national competiveness is unquestionable, so to understand position of a nation in terms of its competiveness, Porter’s Diamond Model can be applied. Fig- 1: “Porter’s Diamond Model for National Competiveness” (Source: Michael Porter, 2009). Traditionally as per the economic theory, factors responsible for competitive advantage are land, location, natural resource, labour and local population size. But as per M. Porter these factors does not lead to competitiveness of a nation, so he proposed cluster or group of factors which interconnect firm, suppliers related industries and institution of the particular industry. As per the theory it can be said that by inter connecting these factors, government should take proactive action to achieve national competitiveness. The inter linked factors of Diamond Model are 1. Firm Strategy, Structure and Rivalry- The more competition exist in between firms, more they try to improve their productivity and bring innovation in their products and production processes. So a healthy competition should exist between the firms to keep the industry’s growth sustainable. 2. Demand Conditions- High demanding customers create pressure on firms to improve the products and to introduce innovation in them. Thus this leads to innovation and high productivity in firms and finally in that industry. This results to competition within firms for fulfilling demand of customers in most profitable way. 3. Related Supporting Industries- When the related industries, whether up-stream or down-stream have good interconnection and communication in between themselves, then there is exchange of information and ideas and all these firms can manage sustainable growth and innovation in long run. 4. Factor Conditions- as per Peter, the non-key, general use factors like unskilled labour and raw material cannot lead to competitive advantage to a nation as because these factors are easily available to everybody. So the key factors are “skilled labour, capital and infrastructure”. No firm or nation can easily imitate these factors and thus these can be regarded as vital factors for acquiring competitiveness. As per this model, government’s role should be like a catalyst or activator for bringing competitiveness in nation. Government can directly influence the above maintained factors for making nation competitive and bringing sustained growth. Government can remove barriers for free trade like tariffs, quotas and subsidies to introduce competition and rivalry in between firms, this increases competition and will compel firms to introduce innovation and to improve their products. To bust demand, government can become itself consumer of goods and services produced by these firms. Government can also start arranging training for unskilled labour force so that their productivity and skill can be enhanced, and can teach them how they can participate in quality implementation within theirs firm. By making investment in infrastructure like road, communication facilities, water and power facilities or other public utility services, government help firms to expand their business and to start new ventures. Many a time government can make direct investment in these projects. By developing infrastructure, the nation attracts foreign direct investment which play important role in development of nation, increase employment opportunities and thus up-lift standard of living; finally consumption of goods and services increases and again production moves up, thus through a spiral path the whole country develops. Different policies like monitory policies, fiscal policies foreign relation policies like import and export polices are the tools of government through which they can keep control on vital factors like monitory circulation in the nation, liquidity, direct and indirect taxes, fiscal investment and many other. The 2008’s global slowdown represented a good example in front of whole world that if government provide excessive freedom to industries & private sector and does not participate in polices followed by private financial sectors, then the outcome can be highly devastating. Hence it can be concluded that government should always keep a tag of what is happening in private sector and if required should take strict action to prevent any major crisis in future. In the same way, private sectors should take the government policies into consideration and should not go against them just for the sake of making profit. A nation can achieve growth only and only if both the government and private sector works together to attain sustainable growth and prosperity in the long run. Business Groups Business group or corporate group, as they are some time called consist of legally independent firms which are operating in multiple industries as are tied with each other by some formal or informal bonding (Khanna, & Yafeh, June 2007, pp. 1) Many a time it is seen that outside investors also participate in these groups. These groups are very common in emerging countries like India, China, Brazil, Chilly, Indonesia, Mexico, South Korea & Thailand and in many developed countries like Sweden and Italy. In United Arab Emirates, Business Groups are known as Trade association. Adidas Group and Icelandair Group are among few of the successful Business Groups. Definition of these Business group given by Leff (1978) is quite different; he defined Business group as “a group of companies who carries out business in different market under control of common finance and administration; the members are linked with each other through interpersonal trust or business ethics.” As per Powell and Smith-Doerr (1994), “business group is a network of different firms that collaborate with each other over long period of time” where as Khan and Rivkin (1999) said, “Business Groups as legally independent group of firms.” Keiretsu Industrial Group in Japan is among the bank centered business group while in India, non-banking sector is the common example. Structure and form of business group These Business Groups are highly diversified and degree of diversification differs from country to country. Vertical integration among Business Group and trade volumes due to such integrations are high when legal and judicial environment is underdeveloped. These Business Groups remain involved in banking, insurance and other sector of financial system. Pyramidal groups are more common in underdeveloped countries where the equity market is not highly developed and investors are not protected. For purchasing share of companies with pyramidal structure, investors ask for discounts. Family owned groups are more common in those countries where legal rule are inadequate and transaction with outsider is costlier. Thus the bonding within family members influences formation of Business Group even when these groups are not economically efficient. In many countries Business Groups get good support from government and both together maintain strong tie up with each other. Role of government in formation of Business Group differ from country to country, like in Brazil state protects Business Groups through providing tariffs and non-tariffs barriers and make excessive state financing. Chinese government encourages formation of these groups and protects them from foreign competition as these groups are regarded necessary for development of nation. In Chile these group got benefited from consolidation policies which where formed after the crisis of 1970s and 1980s. In India few Business Groups where formed even during “License Raj” of 1960s and 1970s when government was tiring to follow anti-big company policy (Monopolies and Restrictive Trade Practices Act). Business Groups get high degree of support from Indonesian’ government as government has close involvement with Business Group in cement and other monopolies. Business Group get preferential credit and protection from Italian government for providing protection from foreign competition and especially political contract to General Park, these Business Groups get very low support from government in Argentina, but comparative origin of these Business Group took place in 19th century in Japan because many successful Business Groups like Mitsui, Mitsubishi, Sumitomo, Yasuda, Asano, Hyundai, Samsung, LG Fujita and few other developed in this phase (Khanna & Yafeh, 2007 pp. 353). Initially it was an assumption that government support to Business Group is harmful for the society, but in reality it has been found that government favoritism toward Business Groups created a push in many sectors and helps them to grow. Another reason for which government favored these groups was tax collection, as because it is easy to collect tax from them. In many countries these groups become quite powerful and they shaped the business environment of the country in which they where active. These groups got involved in development of market supporting infrastructure and industrial involvement. Claims are found that in Mexico, Business Group exerted influence for free trade along with USA and in South Korea these groups participated for liberalisation. Same thing was found in India as the Business Groups supported liberalisation of foreign entry in 1990s. Reason behind formation of business group in the ASEAN region Institutional environment, culture and business system of East and Southern Asian countries are getting attention from Multinational Companies of other countries as because of organisational principles followed from these ASEAN region is quite different from Western orthodox practice. (Carney & Gedajlovic, 2002, pp 1). In china, Family Business Groups (FBG) contributed the maximum during post World War II development phase and emerged as engine, where as multinational enterprise (MNEs) and state owned enterprises also made good amount of contribution. FBGs are controlled by ethic Chinese entrepreneurs and these were catalyst for economical development in many parts of East and Southern Asian countries. Table: Chinese Entrepreneurial Performance in South Asia (Source: Carney & Gedajlovic, 2002, pp 3) As per co-evaluation approach, a particular set of environment, social and political factors were responsible for development of these Family Business Groups. Environmental factors can be furthe4r segregated into endogenous and exogenous. The endogenous influences were institutional and market forces that develops within the society. Where as exogenous influences are non-local and derived from social, economic, political and economical influences from outside. Figure 1: The Co-Evaluation Of Organisations And Their Environment: A Generic Framework (Source: Carney & Gedajlovic, 2002, pp 5) Business groups of The Israeli and South Korean Business Groups In spite of distinctive institutional conditions, similar Business Groups emerged in Israel and in South Korea during 1960s and 1970s. It has been conclude by many researchers like Kim (1996) that these Business groups were outcome of policies and actions of state organisation. The Chaebol of South Korea and major business group of Israeli are outcome of state policies which laid down emphasis on such conditions which exerted pressure for economic development. During 1960s, in South Korea the government preferred large firms over middle and small one and by 1970s, Chaebol were preferred as compared to any other form of organisational structure. But the condition was different in Israel were no special preference was given to any form of entrepreneurs. The emerging groups took advantage of favourable economical environmental condition created by state. Thus one can find that South Korean government interfered directly as well as indirectly for promoting Chaebol where Israel’s government just gave indirect stimulus in for of development policies. The major similarity between these two countries is their self-sufficiency in required finance which helped them not to depend on Foreign Investment. As the time pass by these Business Group developed and became an intense economical part of their country (Maman, D. 2002. pp 753-755). Table 2: Comparison of Business Group structural Features (Source: Maman, D. 2002 pp 743) The economists, economic sociologists and development scholars after making an in-depth analysis have proposed three different ways to study and understand emergence of Business groups. These three approaches gave rise to three different hypothesis which are stated as follows: The greater the market imperfection, the greater the importance of business group in an economy The more vertical the pattern of relationship in a society, the greater the importance of business groups in its economy The greater the autonomy and the size of the state, the greater the importance of business group in its economy Then the “Resource Based View” was proposed to overcome limitation in previously given hypothesis. This approach explains that Business groups emerged only due to favourable political-economical conditions which allowed them to have access to both foreign and domestic resources (input resources, process, and markets) to continuously enter into different industries. But some of the recourses were domestic and some other was located outside the home country’s boundaries. Another reason was unbalanced outward and inward foreign trade effect access to the resources (pp 362 366). Table 3: Effect of Foreign trade and Investment Flows on Business Groups in Emerging Economy (Source: pp 366) International strategy The Business Groups has strong penetration in the foreign markets through export and import as these groups enjoys subsidies and tax benefit, and they also have affiliation to foreign countries. Business Groups frequently go for joint venture with overseas companies abroad to enter foreign markets. These groups owing to their strong political influences and tie-ups with government can protect their property right and can easily enter into contract which might be difficult for unaffiliated firm. One of the biggest opportunities for Business Group is their better access to capital market and labour market, thus the foreign firms who try to enter into foreign markets, first enter into partnership with Business Group. These groups also attract clients to have sister affiliated firm as they are more resource rich and have ability to attract foreign investment compared to unaffiliated firms. Hence it is very clear that these Business Groups plays major role in economic development and in improving GDP of a country. These Business Groups are strong market barrier for any new entrant, thus the firm who want to enter into a market dominated by Business Groups, should gather knowledge regarding functioning of these Business Groups before hand. On basis of the information gather, firm may decided their business strategies. To enter into the market, either new entrant can go for joint venture with the Business Groups or they can target niche market which in not dominated by Business Group and once they succeed in entering into the market, later they can expand their business. Appointing managers to overseas subsidiaries in China, South and South East Asian Many MNC while interring into South and South Easter Asian countries neglects the presence of business circles and competition given by them, thus such MNCs soon looses their market and have to move back. So to compete successfully and to establish themselves, MNCs’ manager should take into account following facts- First of all, historical reason behind formation of Business Groups, cultural difference between different Businesses Groups and business environment responsible for formation of such groups should be explored. Analysis of unique management and decision making style of these Business Groups has to be done carefully and on basis of the data collected, MNCs should carry out organisational restructuring in their Asian subsidies. It has been found that these business circles have strong informal networks and they maintain good relationship with public sectors. Their decision taking style differs from that of West as because of ethnic and cultural factors and also because of personality-type differences among managers. At present, Overseas Chinese & Overseas Indian forms a strong business force in Asian region. Whenever they have to make difficult business decision, they depend on their web friend and on government official for gathering information. The Indian network groups highly trust their managers’ skill for taking a new venture and running it successfully. Thus it can be said that availability of suitable managers has played a vital role in providing direction to diversification of Indian Business Groups. For funding their ventures, Indian Business Networks often borrow from their international contacts in for of Hoondies and Bill of Exchanges. Indian Overseas Networks culture & Chinese Overseas Networks culture, both differs from Japanese cultures in term of family focus & intensity, patriotism, trust related attribute, ethical focus and expectations of benefits. Keiretsu is an industrial group in Japan which often regarded as banking sector business group. The group’s working seems opaque from outside and difficult to integrate, thus high degree of uncertainty exists regarding groups functioning for an outsider. They can’t identify that that strategy is being used by them so they can’t set counter strategy. It has been found that this high degree of complexity results in reduces the effectiveness of large concerns. This group maintains interlinks in between cross shareholding, sharing business and with those who have same interest (Pettway, et al., pp 2-5, 2001). There are many family controlled businesses which are highly active in Singapore and in South Korea. These groups gained power after the Asian currency crisis which increased pressure on these groups and introduced corporate culture and reduced family rules. But are few family controlled groups which survived in China, chaebol is one among them. These are Korean groups. Not only the market factors, but many other factors such as cultural and institutional factors were responsible for bringing change in working of these groups. The economic boom of 1970s to mid 1990s attracted many researchers to take in-depth analysis of business groups of Japan (keiretsu) and of Korea (chaebol). The economic crisis of Asian economy helped to find out the dark side of these Business Groups. As per the report provided by IMF and other professional agencies it was concluded that these groups will face much problem in sustaining long term economical growth within new global environment. Dunning argued that these family governed businesses have to adopt professional management; otherwise these groups will suffer great losses. Among all other business groups who were controlled by family, Korea’s chaebol is of great importance because this group had closed family inter-relation network and this group was highly supported by government to grow and to sustain. This group has large, multidivisional, hierarchical, vertically co-related independent family owned firms which had their origin in 1940. At that time they acted as engine as economical growth. And even today these groups are vital for growth of economy (Tsui-Auch and Lee, pp 2-4, 2003). Haley and Tan (1996) and Haley and Haley (1997) pointed out certain characteristics which are common among Indian Overseas and Chinese Overseas Networks’ strategic management practices and style which are- Hands-on experience means, for quick decision making, top management collect data from hand-on line managers who know the firms work, process, product and market in more detail. Lateral transfers of knowledge indicate that whenever management has to make decision in new environment, they use their past experience which they have gathered from other industries. Reliance on qualitative information says that before making any decision, management carryout in-depth investigation to gather quantitative information. These business groups often conduct internal analysis and results are not made public. They prefer to visit the location personally to gather information rather than relying on secondary data. Holistic information processing refers that the management of Network Groups often use their experience and explore holistic approach for take decision instead of following conventional problem solving technique. Such decision making style often reduces risks related to market. Conclusion Business Groups are the common problem faced by Multinational companies when they try to enter China, South and Southeast Asian regions. These local groups which have their origin within the country are well acquainted with local market condition. They are part of the local culture, thus can fulfill need of local people in best possible way. The overseas Chinese and overseas Indian Business Groups are together known as “the networks”. Such Business Groups are also active in countries like Japan and Israel. In formation of business groups, many a time local government plays major role. For example, Chinese government always supported Chaebol formation and Japanese government provides such policies that keiretsu could bear the heavy trade pressure and show robust growth. The main aim was to overcome possibilities of hostile takeovers in Japan. In Japan two type of keiretsu exists; vertical keiretsu and horizontal keiretsu, depending on relation shared between different entities. Toyota is regarded as biggest among vertical keiretsu. The Chinese (South Korean) Business Groups Chaebol which means “Business family” or “monopoly” refers monopoly. It developed due to high support from government. Until 20s, Korean economy was agriculture based, but Chaebol enable them to flourish and come out as developed economy. Some of the big Chaaebol are Hyundai, Samsung, LG. On comparing keiretsu of Japan and Chaebol of South Korea, certain differences are clearly visible. Character Chaebol Keiretsu Controlling body Founder family Group of professional managers Ownership Contraries Decentralized Production of components for exports Through subsidiaries Through outside contractors Credit distribution Not allowed to own privet banks Worked with affiliated banks and provided unlimited credit to affiliated companies Indian Business Groups where also influenced by environmental condition which provided favourable condition for their formation and further development. These groups have unique decision making style which differs a lot from western origins’ Multinational Enterprises. Overseas Indian networks highly depend on the information which they themselves has derives after collecting and analysing data directly from the market before making any strategic decision. These Business Groups have internal source for attaining finance through traditional Indian financial tools like hoondies or bills of exchange which offers rate which are below bank rate. They carry out their activities in highly confidential manner, thus it is quite difficult to understand their working and decision making style. As per Granovetter, (2003), Business groups have attracted the interest of a wide range of scholars, including economic sociologists, socialized economists, and students of institutions. Business Groups are active in different part of world but have competitive advantage in Asian arena. The management of Multinational Enterprise should first determine that which market they want to serve, on the basis of their choice, they should carryout research to gather information regarding the prevailing Business Groups who are active in these markets. Then the MNEs should be selecting an appropriate business partner whom they find beneficiary for entering into these foreign markets. Such joint ventures have proved themselves quite efficient in long run. Sometime MNEs prefers to go for acquisitions so they their harassment of setting the business can be avoided. This helps them to enter into foreign market and to understand culture and value system of local people. Top management of MNC should have quick access to regional managers so that they can get all information as quick as possible. The MNCs must provide experience based training to their workforce. They can also employ local people who have good understanding of local market environment; MNCs should help their managers in understanding intellectual-property rights in Asia and should try to incorporate work climate of networks in their Asian subsidiaries. Thus by taking these factors into consideration, risk related to MNCs can be minimised and Multinational Enterprises will able to enter and develop in foreign countries in much more successfully (Haley & Haley, 1998pp 301-320). Thus it can be concluded that Business Groups are of high importance for Multinational Enterprises when they want to enter into Chinese, South and South Eastern Asian Nations. Before making any major initiative, the management of MNE should make a thorough analysis of these local Business Groups who acts as biggest barriers to capture and penetrate local market. If the MNE makes a strategy that how to handle business groups, the chances of their success increases many fold. Reference Carney, M. & Gedajlovic, E. 2002. The Co-evolution of Institutional Environments and Organizational Strategies: The Rise of Family Business Groups in the ASEAN Region. Organizational Studies. Vol.23(1). SAGE. Dewenter, K. Novaes, W. & Pettway. R. H. January 200. Visibility versus Complexity in Business Groups: Evidence from Japanese Keiretsu. Chicago journals. Guillen, M. F. 2000. Business Groups In Emerging Economies: A Resource-Based View. Academy of Management Journal. Vol.43(3). Haley, U. C.V., 1998. 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