Multinational enterprises (MNEs) like Bata must operate in countries with different political and legal conditions, so the political impact on the foreign investments is very important. This paper explains this issue based on the Bata case in three parts. The first part evaluates the different ways in which Bata has interacted with foreign political systems in its investments and operations aboard. In the second part, the advantages and disadvantages, which MNEs bring to their company and the host-country when doing foreign direct investment, are analyzed relating to the Bata case.
And the last part gives a detailed analysis of the complex political impact on international business with reference to the political environment in general; also supply the way of formulating effective political strategy.
With activities in 60 countries, Canada-based Bata Shoe Organization has much operational experience both in developed countries and developing countries and can deal with different political systems.
It has an effective organization structure, which consists of
By and large Bata’s operations are independent units established in each country where the firm does business.
As such, Bata is able to decentralize control of its political strategy–giving subsidiaries significant autonomy in managing relations with their respective government. For example, although Bata prefers not to export production, in the countries where the governments does not like it only imports raw materials but does not export, Bata adjusts to the local laws. Since important issues will vary from country to country, Bata must allow subsidiaries to identify the appropriate issues (step one of political strategy formulation) themselves. The strategies that are formulated to deal with those issues are likely to be subsidiary specific as well .
Bata’s presence in dozens of countries complicates its political strategy. For the company to succeed, its management must carefully analyze whether its corporate policies will fit a desirable political and legal environment. According to the different governments’ demand of organizational ownership, Bata opens the global possibilities through partnerships, licensing arrangements, consulting, technical assistance, franchising, or direct ownership and management of subsidiaries in different countries or even being nationalized .
Bata has showed its ability to operate in countries with different political systems. Besides its successful investments in democratic countries that have more freedom such as the United Kingdom and the U.S.A., Austria, Bata also operates under the totalitarianism countries. Its manufacturing units’ shifting to the communistic country China, where the economy has changed to market-driven is a good example. And Bata realizes that the wisest way is to remain silent in some totalitarian countries. When its local operation in Uganda was nationalized and denationalized reiteratively, Bata continued to operate as nothing has happened .
A mentionable issue is rebuilding the organization in Eastern European countries that have moved away from communism to various degree democracies. After the Second World War, communist dominated governments nationalized Bata’s operations not only in the former Czechoslovakia, but also in Poland, Yugoslavia and East Germany. But after that special period, Bata successfully proved to the Communists that they could rebuild organizations in the economic restructuring of countries that used to be behind the Iron Curtain .
Take the investment in Czech republic for example, during the Second World War, Bata had to leave the former Czechoslovakia where its operations started because the political situation had worsened. After many years communists took power in Czechoslovakia and confiscated Bata. However, following the “velvet divorce” of the former Czechoslovakia, the Czech Republic rushed into a market economy with entrepreneurs being agents of social change . After negotiating with the government over conditions surrounding the organization’s investment in Czech Republic, Bata successfully got the ownership of the company in Czech Republic again and operated profitably.
Opposite to its reinvestment in Czech Republic mentioned above, Bata faced considerably more government intervention in Slovakia. There is likely to be more political instability in Slovakia and Slovakia does not have a very positive attitude toward foreign investment (despite Bata’s roots in the region). Bata’s battle for restitution in Slovakia courts may be a long and expensive process .
However, apart from its successful foreign investments in some countries, Bata should be also censured for critical operations under the authoritarian totalitarianism like Chile under Pinochet and South Africa during the apartheid period .
Apartheid was a system of laws and measures designed to oppress the rights of blacks while maintaining white supremacy within the ranks of the government as well as society. African Black labors that lost their jobs would not simply join the ranks of the unemployed; they could lose their residential rights as well, and be removed from the urban labor market to the underdeveloped homelands . In the latter case, while some foreign companies and governments supported the political reforms such as the United States Congress involved itself in the South African on-goings by supporting the abolishment of the apartheid, encouraging peace and establishing a democracy in South Africa , whereas Canada showed negative attitude. Canada’s government issued very conservative voluntary guidelines on new investments in South Africa. AndBata fallaciously accorded with its home-government ‘tacitly supporting the white minority political regime.’ Finally, Bata gave up their investment in South Africa .
After the ownership was returned to Bata, which has been a Canada-based company, its investment in Czech Republic has both positive and negative effects on the host country. At the same time, the host country has reactions to Bata, both beneficial and adverse.
Because it is a Czech-originated company, from a nostalgic point of view, Bata will be able to return to the home country. Besides this, there are other advantages:
Companies may undertake foreign direct investment (FDI) to expand foreign markets, to gain access to suppliers of resources or finished products, and to reduce their operation risks . By taking over the manufacturing operations in Czech Republic, Bata can gain access to large facilities and a huge market in Eastern Europe and the former Soviet Union where FDI from the developed market economies is perceived as a key part of the reconstruction of the economies .
Wholly owning foreign operations assures the most extensive management control . The parent and subsidiary usually share a common corporate culture; Bata can use its own managers, who understand its objectives and the nature of the sometimes difficult-to-teach processes that it wishes to transfer. The company can also avoid protracted negotiations with another cooperative company or even the Czech government and can avoid problems of enforcing an agreement .
The control inherent in Bata may also lower the company’s operations costs and increase its rate of technological transfer. Furthermore, it is beneficial to build the whole organization culture.
The prices of some products increase too much if they are exported. Therefore, foreign production is often necessary to tap foreign markets because it skirts import barriers and reduces transportation costs , so is Bata. By wholly owning the operations in Czech, Bata can use local production to serve local market instead of exporting shoes to Czech.
The disadvantages to Bata are reflected as facing more risks, confronting more difficulties in cross-cultural management, and relatively higher capital requirement and start-up costs.
Compared with other entry strategies, wholly owning subsidiary in Czech brings Bata more risks. After separating from the former Czechoslovakia, Infrastructure availability, insufficient openness to trade and instability politics of Czech Republic all have negative impact on the Bata’s operations, even recently the Czech Republic has only removed controls on capital outflows . Besides these, hostility generating from host-country citizens and politicians also increase Bata’s investment risksthere may be a tendency for people to be protectionist and to ‘buy local’.
Although Bata was initiated in the former Czechoslovakia, after migrating Canada for more than fifty years, the organizational cooperative culture has merged with Canadian culture. The cultures of host country and home country are very different. So Bata has more difficulties in dealing with the cross-cultural management.
Bata’s direct investment provides the Czech Republic with capital, technology, employment and managerial skills, and therefore accelerates its economic growth and development.
International companies like Bata, by virtue of their large size and financial strength, have access to financial resources not available to host-country firms . The Czech Republic might be able to get Bata to invest significant capital into the plant to get it up to world-class standards.
Less developed nations lack the research and development resource and skills required to develop their own indigenous product and process technology. Such countries must rely on foreign direct investments for much of the manufacturing technologies and marketing expertise required to stimulate economic growth . Related to the case, by Bata taking over the operations, the Czech Republic can gain access to Bata’s global design, advanced production technology, and marketing expertise. They will be able to design better, more fashionable, and more reasonably priced shoes.
The Bata ‘s advanced managerial skills may also produce important benefits for the host country–Czech. Beneficial spin-off effects arise when local personnel who are trained to occupy managerial, financial, and technical posts in the Czech subsidiary. Similar benefits may arise if the superior management skills of Bata stimulate local suppliers, distributors, and competitors to improve their own management skills .
Bata will create new jobs for Czech workers both directly and indirectly. Direct effects arise when Bata employs a number of host-country citizens. Indirect effects arise when jobs are created in its local suppliers and other support departments .
Bata can help to increase the level of competition in the Czech markets by increasing the consumer choices of shoes. Increased competition can stimulate both Bata and its rivals to increase productivity, innovate product and process, and finally achieve the greater economic growth .
While recognizing the benefits that Bata brings to the host country-Czech, it must be realized that the socio-economic impact of Bata is not always be positive. Bata also has potential dangers for Czech, as it may create problems for technological dependence, cultural change or even thwarting the passage of laws that constrain socially undesirable practice such as pollution regulation .
However, there are more criticisms that focus on the disadvantages to the economy of Czech Republic, such as it may lead to the creation of monopolies in the shoe market of Czech; it may impact on the balance of payments of Czech and even on the ability of the government of Czech to manage the local economy . Take the adverse effort on competition for example, although we have just outlined in the previous section how Bata can boost competition, there is worry about the subsidiary of Bata may have greater economic power than the Czech indigenous competitors. It could drive indigenous companies out of business and monopolize the market. Once the market was monopolized, Bata could raise prices above those productions that would prevail in shoe markets, with harmful effects on the economic welfare of the Czech Republic .
‘The political impact on international business activities is relatively complex because the domestic political process is subject to various influences and managers must deal with different political process in different countries.’ Discuss this statement with reference to the political environment in general.
Multinational enterprises (MNEs) must operate in countries with different political conditions. For the company to succeed, the managers must carefully analyze whether the company’s corporate policies will fit a desirable political and legal environment .
A country’s political system influences how business is conducted domestically and internationally. In the extreme, there are two types of country’s political systems: democracy and totalitarianism. Good examples of democratic government include the US, Canada, England, and Australia. While the representative totalitarianism countries are China, Iran and Iraq. MNEs may be able to operate equally effectively in democratic and totalitarian systems, but they prefer democracies because democracies usually have economic freedom and legal rules that safeguard individual and corporate rights .
The political process is the way governments practice their democracy or totalitarianism. To become reality, political systems’ values must be incorporated into a political process, a set of arrangements for making decisions and managing the public’s business . It affects international business through regulation of cross-border transactions and laws that regulate business activity at both the domestic and international levels .
Country risk is primarily concerned with macro issues. There are wars, revolutions, and coups. Less dramatic, but nevertheless important for business, are government changes by election of a socialist or nationalist government, which may be hostile to private business and particularly to foreign-owned business .
The risks may be also economic or financial. There may be persistent balance-of-payments deficits or high inflation rates. Repayment of loans may be questionable. Moreover, It also can be arisen by other factors such as low labor productivity, changed laws and terrorism .
Compared with country risk, political risk is associated specifically with commercial interests of companies involved in international investment . Applied to international management, political risk is the likelihood that a multinational corporation’s foreign investment will be constrained by a host government’s policies . It refers to the probabilities that political decisions, civil disruption, social problems, monetary problems, or trade issues will affect the business environments .
Because the domestic political process is subject to various influences, causes of political risk are relatively complex. Daniels summarized the reasons as opinions of political leadership, civil disorder, and external relations . A number of sources of political risk were concluded by Alan, such as political philosophies that are changing or are in competition with each other; changing economic conditions; social unrest; armed conflict or terrorism; rising nationalism; impending or recent political independence; vested interests of local business groups; competing religious groups; newly created international alliance .
Political risk may take different forms. Policies may change after elections. A new leadership with different ideology may emerge with the same political party and reverse earlier policies. More extreme events are civil strife and war. Even issues such as kidnapping, sudden tax hikes, hyperinflation and currency crises come under the broad category of political risk .
A macro political risk is the one that affects all foreign enterprises in the same general way. For example, communist governments in Eastern Europe and China expropriated private firms following the Second World War. While the micro political risk is one that affects selected sectors of the economy or specific foreign business. The US decision to tax textile imports is an example . Although political risks can occur in democratic as well as in totalitarian regimes, they tend to be more prevalent in totalitarian regimes .
Apart from risks, governments also complete among themselves to attract foreign investment, offering attractive incentives to foreign companies that thrust them into interventionist roles. Their efforts to create domestic commercial environments conductive to multinational interests amount to a direct and positive form of intervention . As companies invested abroad, managers of MNEs must learn to cope with varying degrees of governmental intervention in economic decisions, depending on the countries in which a company is doing business.
Democratic countries support foreign investment by providing an economically free marketplace and a fair environment of competition. In democratic states the governments will handle market defects but they will not intervene too much. The government is essentially separate from business. The Unite sate is a typical example. While in communitarian paradigm, government tends to be prestigious, authoritative, and sometimes authoritarian . But things have changed in recent years. For example, the government of Eastern European countries, such as Poland, Hungary, and the Czech Republic in the Bata case, now welcome foreign investments and give a lot of supports. In Asia, China entered WTO in 2001 and the government encourages foreign investment by giving a free-market .
To managing political risk, there are either defensive strategies or integrative strategies. However, a multinational seldom chooses between them, but it selects according to each country and to how it can structure its activities in each location. Each foreign environment requires independent consideration .
A good example is IBM uses different approaches to manage political risks in different countries. On one hands, IBM has been successfully in dealing with some foreign governments by using integrative techniques, which are designed to help the company become a part of the host country’s infrastructure. It has consistently attempted to immerse itself into the host country’s environment and to serve as a major export arm. On the other hand, IBM ‘s European strategy is the use of joint ventures and partnerships. It teams up with European firms and using these alliances and joint ventures to help maintain market share.
When establishing a political strategy, managers must notice that democracies deal with foreign companies differently than do totalitarian system. For example, in general, foreign companies use lobbying dealing with political risk in democratic countries. In a representative democracy, lobbyists represent on constituencies and perform the important role of aggregating ideas and communicating them to decision makers. Without the freedom of expression —such as lobbying —democracy could not exist . While in totalitarian countries, other methods work. Besides lobbying, other political behaviors also can be used, such as public and government alliance, industry alliances, and inducements and contributions .
Bata shoe organization, as a multinational enterprise, has many experiences of investing abroad. By using different ways, it has succeeded in doing business in many countries with different political systems. However, it is also criticized for some abortive operations, such as the investment in South Africa during the apartheid. When reinvesting in Czech Republic, Bata as a Canada -based company bring benefits both to the company and the host-countries. In the meantime, there are also some disadvantages. Because of the complex political impact on international business, for the MNE to be successful, its manager must carefully analyze the interaction between corporate policies and the political environments and formulate different strategies interacting with different political environments in order to maximize efficiency.