Klaus Meyer's Blog
On Global Business and Economics in Volatile Times
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December 12, 2013
Two very different types of managers are bound to stumble and fail in international business:
Sadly both fallacies are very common. We encounter the universalism fallacy especially among US-American business persons, but I have also seen it among the English and Germans, but less so among people from smaller nations. I have observed exceptionalism especially among Russians and Chinese, but they exist in many places. Both tendencies, paradoxically, tend to be stronger among politicians than among business persons (at least those I personally know).
The skill of the international manager is not to push global practices at any cost, nor to adapt to every local objection. The skill of the international manager is to integrate the global and the local, to create locally effective practices while exploiting the best of global practices. Effective international managers have a deep understanding of both their global organization, and of the local context in which they are operating.
This sounds easier that it is in practice. Most people have very little experience of actually living in different countries, and thus find it hard to appreciate how and why countries and cultures are different. These differences often concern very tacit knowledge that can only be acquired through experience, not from reading textbook, or TV documentaries. Even managers who are successful in one location have a hard time appreciating that the practices that brought them fame at home won't work elsewhere. Likewise, local managers encountering a foreigners are bound to react with a not-invented-here attitude to practices introduced by a foreigner, and locally unproven. The skill of the international managers is to bridge between the worlds of universalists and exceptionalists, or in fact to recruit people who can "look beyond the horizon" without "loosing their local touch!".
October 26, 2013
I had an interesting dinner conversation today with a (female) international manager. Her organization has the smart idea that they need to enhance the international experience of their middle managers, and hence they send two female employees on separate work assignments to Europe. The idea was that such international experience would enhance their ability to engage with foreign clients and colleagues and thus better as serve as bridges between cultures.
The first consequence, however, was rather unexpected. Soon after their return both women filed for divorce. According to the international manager, they developed their personality and their view of themselves so much that they decided to take such a drastic change in their personal life. They discovered that as a women they could be so much more than what their husband would give them space for. Hence, they said, I can't change my husband, so better get a divorce. The international manager thus asked herself, "should I really arrange such international work experience programs for Chinese women if it has such a disruptive effect on their personal life?"
I would like to put this experience in a broader social phenomenon that I observe in Shanghai (but not necessarily elsewhere in China). Theoretically, there are more men than women in marriage-able age; yet there are many women over 30 in Shanghai who can't find an agreeable partner. Mostly these are educated women, including graduates from foreign universities such as I meet through Alumni associations of British universities. What explains this paradox? My theory is this. People under thirty mostly have grown up as only children, so don't have brothers and sisters, and hence have limited engagement with the opposite gender as they grow up. Thus, post-1980 men grew up as centre of the family, with their mother as their main female role model - typically a role subordinate to their husband. Post-1980s women also grow up as the centre of their family, and hence they develop very different personality than their mothers' generation: more focus on education and own achievements, and much more self-confident. So, the young men look for women who would support them like their mother supported their father - and can't find them. Young women look for men who are educationally their equal, and will respect them as a more or less equal partner in the relationship - and can't find them. It's quite a social challenge for unmarried people in their early 30s in Shanghai!
Will Myanmar Benefit from attracting Foreign Investors?
October 18, 2013
The Singaporean newspaper 'Today' carried an interview with me today, conducted by Htwe Htwe Thein of Curtin University, Australia. She is Burmese (i.e. originating from Myanmar), and her central concern was whether the rush of foreign investors to Myanmar after the recent opening would benefit or harm the country. This question is apparently hotly debated in the country after the country's spiritual leader, Aung San Suu Kyi, raised her doubts about the motives and contributions of multinational companies (MNCs).
In the interview, I tried to convey two messages,
September 16, 2013
Chinese companies have been investing heavily overseas, acquiring businesses and other assets overseas, including some very remote locations (from a Chinese perspective). Recently, this investment drive has taken them as far as Iceland, where Chinese state enterprises invested in oil and gas exploration. What takes them so far afield?
First, it is official
government policy to seek resources overseas to secure supplies deemed
essential for national economic development, including natural
resources, like energy, as well as technologies and advanced know how.
Alignment with policy objectives is important to Chinese firms,
especially SOEs, as it is critical for their ability to obtain
financial and other resources within China. This Chinese quest for
resources has taken Chinese MNEs into places like Angola and Sudan,
where they invested despite apparent political and economic risk.
Investing in the North Sea is a natural extension of that as it
diversifies the risk.
Shanghai Taxi Seatbelts, and Law Enforcement Chinese Style.
September 12, 2013
July 27, 2013
Last week, news hit the world that one of the world's largest pharmaceutical companies, GSK, is investigated for corruption in China. Its Chinese employees had, so the allegation, confessed to designed a sophisticated scheme to channel bribes to doctors using a large number of travel agents. While initially skeptical, soon even the British media acknowledged that something went amiss in this iconic British company.
I have no insider knowledge into GSK, or of this particular case. However, based on many conversations in China, including with local and foreign businessmen, people in the health care sector and last not least my own students who did projects on companies aiming to sell to hospitals. Based on these conversations, in my mind, I have a clear scenario how this might have happened, which highlights the operational and ethical challenges for multinational enterprises (MNEs) selling into markets that like the Chinese health care market are prone to illicit practices.
From the perspective of the MNE, the situation may look straight forward. Laws in their home countries (if it is an OECD country) fairly clearly state that corruption in overseas affiliates is not only illegal, but can be prosecuted in the home country. Senior executives probably also genuinely believe that the world would be a better place without corrupt practices, and by being sneaky clean they may gain a reputation advantage that may help sales both at home and in other advanced economies (notably the largest market for pharma, the USA). Hence, MNEs introduce sophisticated rules that tell every employee what is and is not permitted when dealing with clients or officials around the world. This nowadays is known as compliance management, an important aspect of modern international management practice. An MNE may, for example, have instituted an online training course and exam that every employee has to go through upon joining the company, and once a year thereafter. Such a program ensures that every employee knows the rules - or at least that the MNE can claim to have done everything reasonable they would. The question, however, is, do the employees genuinely believe in the values communicated by compliance management, or do they just seen it as some bureaucracy they need to do to keep heir job? On this score MNEs certainly vary.
From the perspective of a doctor in a local hospital in China, the situation looks also fairly clear. They spend many years attaining a specialist education, and they work really hard under difficult condition to help the sick. In return they get paid very little indeed as their (official) salary. So, to afford a decent lifestyle in a society where status and material goods are important, they have to find other ways to make ends meet. Sales rep from the pharma companies, who by comparison are immensely rich, want them to prescribe their medicines. So, some deal must be possible, or? Of course, some things are possible, and legal. For example, doctors need to learn about the merits of newly available treatments, and (like everywhere in the world) pharma companies organize conferences on topical issues, and pay participants' expenses. Often such events take place in beautiful hotels or resorts to motivate doctors to attend. How carefully organizers check attendance I don't know.
From the perspective of a local employee, the matter is much less clear. On the one hand, the MNE insists on their compliance management, but many see this just as folks up in headquarters just don't understand "how business is done here". Local competitors acting without the constraints of HQ compliance management are far more flexible. No need to organize conferences to attain favors, just employ them to provide some consulting services, or in some other way pay them directly. At least that's what the sales rep hears, and perhaps his clients, i.e. doctors or procurement managers, exaggerate a bit. So, the sales rep has to choose - loose the sale (and hence his/her bonus, and his/her promotion), or invent something that pleases the client, yet is permitted under compliance management rules. And if HQ are too much "a pain in the neck" with "all that fuzz about compliance", then why not just quit the job and work for a local company?
In the case of GSK, the local sales organization seems to have been rather creative to address this dilemma. HQ says conferences are OK, but clients rather prefer cash than a mini-holiday that comes with a work attached. So, why not generate invoices that HQ compliance managers will accept, but save the trouble of the conference and pay the money directly to the clients? Ingenious as the scheme is, all that is needed is a few helpful travel agents to issue the invoices. My best guess is that practices such as this are not unique to GSK. However, there is one flaw. Sooner or later, there is going to be an anti-corruption campaign...
So, if this and other practices are common place in Chinese health care sector, why did it hit GSK? Two possible answers come to mind. First, it is politically easier for authorities to target foreign companies for illegal or immoral practices, and the media will be most helpful in bringing down high profile foreigners. Such an ethnocentric bias is found in many countries! Second, the biggest fish will find it most difficult to stay 'below the radar' of the media or the authorities, and MNEs are almost by definition big fish.
So what are the lessons to be learned?
1. Compliance management practices are only as good as employees attitude to it. Successful compliance management is based on shared values, not only the enforcement of rules unappreciated by local staff.
2. If you are operating in a market where illegal practices are common, either stay out, or make sure you employ better practices the average of your industry.
3. If you are big (say, by sales), or if you are a foreigner, you need to be more careful in respecting the law than a mom-and-pop corner store.
Building a Brand in Traditional Chinese Medicine
June 23, 2013
Traditional Chinese Medicine (TCM) is different from modern Western medicine in two fundamental ways. First, TCM is a high degree preventive: patients would seek the doctors advice before they fall ill, and receive a combination of life-style advice, including exercises, nutrition advice, and (possibly) medicines or supplementary foods that aim to enhance the general 'balance' of the body. For example, my health insurance in China pays an annual health check up that generate a length report with lots of data that not only allows for routine checking of all kinds of illnesses, but tracing of indicators over time. In contract, European medicine - as I know it from the UK and Denmark - is by and large reactive: Unless you are seriously ill, the doctor will tell you "don't worry", and send you home.
Secondly, TCM builds to a high degree on experiential knowledge that has been passed down from one doctor to another over the centuries - many prescriptions trace their roots over a thousand years back. Pharmacies provide blends of (dried) herbs, insects, animal parts and sometimes minerals, and that gained a reputation for preventing or remedying physical ailments. Modern Western pharmaceuticals in contrast design their pills based on large scale tests of specific natural or artificial ingredients, that scientifically prove both the efficacy and safety of a medication (i.e. it helps against a names ailment, and does not cause undue side effects). TCM generally lack such scientific evidence of efficacy, though as I understood there is a licensing procedure aimed to ensure safety.
Without scientific proof that a medicine works, how can you build a business from it? The key factor for traditional medicine (Chinese or otherwise) is the trust of the consumer in both the traditional medication as such, and in the pharmacy's brand. I visited today one company that has made a success of TCM by building a brand based on the ancient values of TCM, Leiyunshang (上海雷允上药业西区有限公司). Entering their multi-story sales outlet in Shanghai, on the ground floor you find items like dried insects that set you back several hundred dollars a box, and pills made from such insects for an even steeper price tag. There strategy includes for example:
As TCM regains popularity in China, and is building a substantive niche market. Companies like Leiyunshang have to emphasize building trust in both their brand and the broader ideas of TCM, which is a challenge in a country where trust in local brands generally is not high. To start with, the company does not control its corporate brand - there are four companies using the name Leiyunshang that all trace their roots to the same 17th century pharmacist. So pity the consumers who get confused by bad press for a company with (almost) the same name up river in Suzhou. All of them are partially 'state-owned' but controlled but by disconnected entities.
Moreover, taking this business model beyond China may be an even bigger challenge because in other countries regulatory approval will require demonstrating efficacy and safety in large scale clinical trials. Hence, overseas opportunities may be limited to the segment of nutritional supplements rather than pharmaceuticals.
Eventually tried myself; what would the TCM doctor recommend for me? The doctor felt my pulse, looked at my tongue, played with my finger nails, looked in my eyes, and asked some simple questions. Then his verdict: nothing wrong with you, no need for any medicines. So, I am afraid I cannot report whether the medicine actually works.
EU Exports to China: Fascinating Trends
June 14, 2013
I recently did some analysis of EU exports to China: While lots of journalists are talking about Chinese exports, companies from some places are actually quite successful selling in China. Total exports from the EU to China have grown from in 2000 to in 2011, an increase of 427% (i.e. in 2011 EU firms exported more than 5 times as much as in the year 2000). I obtained the data from eurostat, where they are available for free download.
The first Figure, "EU Exports to China" shows the share of exports from different EU countries in the total exports from the EU, you can think of this as a market share (except that the actual market is of course much bigger). When I first obtained these numbers, I was surprised how dominant Germany is in EU exports to China: Almost every second RMB spend on imports from the EU is spend on good from Germany. The German share has grown continuously from 37% in the year 2000 to 47.5% in the year 2011. I cross-checked this by looking at the corresponding Chinese Import statistics and obtained the same pattern - Germany accounts for 44% rather than 47.5% in the Chinese statistics.
Of course, exports from all other countries have grown too - after all the total exports are of a much larger magnitude. But German firms have been more effective in taking advantage of market opportunities. The next biggest exporters to China are France and Italy and the UK with a 'market' share of 9.9%, 7.3% and 7.2% respectively. Switzerland is not contained in the EU database, but Chinese data suggests that Switzerland actually exports slightly more than France.
The next Figure "Exports to China" shows how important as an export market for different European countries. The data show that 6.1% of German exports went to China, which is almost twice as much as the weighted average across all EU countries of 3.1%. Hence, the large share of Germany in EU exports is a combination of both the size of the German economy and its exports AND the relative importance of China within those German exports.
Finland and Sweden also have a very strong China-orientation in their trade pattern, though as smaller countries they do not command a bg share in the total trade. In the year 2000 Finland in fact had the highest China-orientation of all EU countries in terms of , and accounted for 5.7% of the market share (Sweden 7.9%). The relative decline of Nokia as a driving force of Finish exports may be a reason for both the pattern of Finish exports.
Another country that I find remarkable in the Figure is Slovakia, which has the highest China-orientation of all Eastern European countries at 2.6% (next highest are Estonia at 1.7% and Hungary 1.5%). What distinguishes Slovakian trade? I am not an expert on Slovakia, and I welcome others' opinion. However, I believe Slovakia has over the past 20 years established a strong base in the automotive component industry, which is tightly integrated with the main brands made in, for example, Germany. So, when VW, BMW et al. manufacture cars in China, they may well draw on the same supplier base as they do in Europe, which strongly relies on Slovakian and Hungarian factories.
On the other end of the spectrum, it seems that Portugal is least China oriented in Western Europe, while Lithuania, Slovenia and Latvia have the lowest score overall. To some extend this reflect that for a smaller country a lot of trade with local neighbours is in fact international, which means the share of intra-EU trade is smaller. But they may miss opportunities (compare for example to Estonia).
The third Figure "Exports to Selected Emerging Economies" puts exports to China in a comparative perspective by reporting the relative share of exports to the ten most important export destinations from the EU among newly industrialized and emerging economies for the four largest EU economies. China is the most important emerging economies followed by the other BRICs (Russia, India and Brazil) as well as Turkey.
The data in this Figure show some clear proximity patterns (e.g. Germany in Russia, Italy in Turkey and Egypt) as well as historical relationships (UK in India, Hong Kong and South Africa). Some East European countries also have very strong trade ties with Russia and Ukraine grounded in their historical relationship. However, comparing data for 2000 with 2011 (which I did not create a Figure for), I observe that the importance of proximity and historical ties has been declining over time, leading to less idiosyncratic trade patterns.
I believe these data raise some interesting questions as to the determinants of international trade flows, and how these determinants have been changing over time.
Capital Intensive Goods in International Trade
June 12, 2013
Traditional models of international trade, especially in the field of development economics, have been based on the assumption that industrialized countries are rich in capital, whereas developing countries faced a shortage of capital. Hence, these textbook models predicted that industrialized countries had comparative advantage for goods produced in capital-intensive production, whereas developing countries had comparative advantage for goods produced in labour-intensive production. These comparative advantages, according to the factor endowment theorem drive international trade: countries export goods that require input of whatever factor of production a countries has in comparative abundance. The basic assumption then was that industrialized=capital intensive and developing=labour intensive, and hence the prediction that industrialized economies would export capital (and human capital) intensive products while developing countries would exported labour (and natural resource) intensive goods. from industriincluding the developing aid policy towards developing countries.
These simple assumptions were quite useful to explain trade patterns throughout the 20th century. But, they no longer apply today. The situation has changed fundamentally, only with respect to China but also parts of the Middle East. Based on two decades of trade surpluses, China, Saudi Arabia and others have accumulated huge international reserves. Moreover, domestic capital markets make capital available to firms, especially large state firms, at relatively low costs of capital. Even though the governance of state enterprises in China has changed in recent years such that persistently loss making enterprises longer receive seemingly unlimited subsidies, the state as owner (or SASAC as representative of the owner) only expects comparatively small payments of dividends.
In contrast, businesses in the traditional industrialized economies expect fairly high rates of profitability, especially those owned by outside financial investors. Their focus on short-term financial indicators encourages high-risk-high-return type investments, discourages long-term investments that only pay-off in the longer run. This financial system thus is not supportive capital-intensive industries with high that large large investment in fixed assets such as chemical plant or a steel mill, and hence high sunk costs and long pay back periods. At the same time, bank loans have become more difficult to obtain due to the consequences of the financial crisis, in particular the increased equity requirements that banks have to provide under Basel II and Basel III when they lend to industry.
As a consequence of these trends, capital intensive businesses in Europe no longer have a comparative advantage. Historically, the relative abundance of capital in Europe, the US and Japan provided the basis for exports of capital intensive products, for example in the chemical industry or the iron and steel industry. However, as China and a number of natural resource exporting countries become capital-rich, they will build comparative advantages in these industries. This effect is reinforced by a) the location of key customer industries in e.g. China, b) the availability of energy and petrochemical raw materials in the Middle East, and c) the lesser political opposition to large industrial projects in these countries. Since it takes several years to build a chemical plant or a steel mill, this effect takes a while to become fully visible. But investments in these sectors are up in emerging economies – and it is only a question of time until these industries will move out of Europe and North America. Steel is basically gone apart from small specialties, chemicals may well follow.
What can be done about that? On the policy side, enhancing the effectiveness of capital markets to provide long term capital will be essential. On the business side, focusing on products that are not only capital but human capital intensive will make it that the competitive advantage may be sustainable.
Understanding Post 1980s Chinese
May 13, 2013
The post 1980s generation in China is often seen as a major challenge for businesses. The new generation is different their elders, more so than in other countries, suggesting major social changes under way. They grew up in a very different environment that their parents and grandparents, including - among other features - youth in relative affluence, spoiled as single child, bearing the expectation of generations, and growing up with the internet as an integral part of their identity. The challenge of understanding this new generation often comes up in conversations with business people here (both local and foreign): they are eager consumers but they are apparently also difficult to please employees (and students).
Last Sunday, I wondered into a small art gallery near Fushing Park in Shanghai (named Longmen Art Projects) where they show pictures of an artist by the name of Luo Dan born in 1981 in Chongqing. Looking at these pictures, I immediately felt he is capturing the spirit of the post-1980s generation. Words that came to my mind include: fun-loving, aggressive, individual, proud to be Chinese (but selective what heritage to draw on), proud to be part of global pop culture (but putting your own twist into it).
Below are a few pictures that I took off the exhibition catalogue (click on them to enlarge) - the originals are about 1.5 meter squared. What do you see in these pictures?
Enhancing Relevance of Management Research in Asia
May 10, 2013
A long standing concern of mine has been the relevance of research conducted at leading universities in Asia that aim to be recognized as internationally leading universities, and aim to demonstrate that their research is of international quality. In consequence, Asian universities have adopted journal rankings used at leading universities in, for example, North America. The most popular of these lists is known as FT45, which in my opinion is better than others I know because it is more eclectic, but even this has mostly US-based journals with a small number of UK-based ones. Other good lists are those of the Australian Business Deans Council and the UK-based Association of Business Schools. Looking beyond the national borders is certainly important when it comes to research, and ought to be encouraged.
However, most universities in Asia also have a mission to do locally relevant research (at least their stakeholders - taxpayers and local businesses - would expect that). That also is very reasonable as it is more and more clear that we cannot simply take insights on how one society works, and assume lessons learned are relevant in another society.
However, the two objectives conflict with each other: The common journal lists tend to have ethnocentric biases, most notably US business schools hard ever recognize work published outside the US. No doubt, the most highly regarded journals are published in the US, with a small number published in Europe. However, to publish in those journals one has to write what is of interest to the journals editors and reviewers. Working with US data thus makes it easier to publish in those journals. Moreover, when working with non-US data, reviewers (and less so editors) are interested in generalizable insights that apply elsewhere, or of relevance to US businesses. This implies that research exploring local phenomena, or aspects of societies where generalization is not valid, does not get done, or at least is not recognized. Hence, many researchers in top Asian universities face strong incentives to work with, for example, US data, or - if they work with local data - to focus on generalizable effects, even if they are of limited explanatory power locally. Weather or not that is a problem varies across sub-fields. However, in all areas where culture, politics or institutions play a role, generalizations from one society to another are speculative at best!
I have argued about this issue several times (in: APJM 2006; APJM 2007, JIBS 2007, AIB Insights 2013), but the trend in the highest rated journals in the management field is if anything pushing even harder for "general theory", while discouraging careful discussion of the boundary conditions of theorizing. The obvious solution to this dilemma would be to enhance local relevance to creating an Asian list of journals that henceforth be used for promotion purposes in Asian business schools, and that adds to the lists used elsewhere a small number of high quality journals relevant in Asia. Ideally, this would be a joint initiative by the deans of several leading Asian schools to draw up a common list - and by encouraging more research to target these journals, they would soon rise to even higher standards. I have mentioned this idea to key people in the pertinent universities, but it is met with little enthusiasm among the deans who are surprisingly often US-educated because a) they are more concerned about how they are seen by their US-peers than by the local community and b) having rising by existing performance standards, they are not interested to change those standards.
However, I believe that in recent years the quality of locally relevant journals has risen such that the idea of a Asia list now is realistic. To move the discussion forward, I would like to hereby propose that Asia-based adopt an Asia-list of journals to the journal list they use for tenure and promotion purposes (perhaps giving them half the weight they give to FT45 publications), and this list to include the following five journals:
This list is based on many conversations with scholars in the field, and a review of their citation impact scores. Unfortunately, I did not find suitable journals in the finance and accounting fields. I hope you will share this list with the relevant committee in your university, so together we can enhance the relevance of management research in Asia!
Executive Study Tour
March 22, 2013
Waking up, opening the curtains, I thought I must be in the wrong place. I arrived late last night, being transferred from the airport from the hotel after dark. I am supposed to talk to a very caliber of EMBAs from one of the Europe's leading universities on a China study tour, sharing with them insights on global business, and China in particular. As my eyes wander through the early morning mist over the ocean at this beach resort, I praise the privilege of working in such fantastic environments with with such interesting people.
It has been a busy, informative week for these executives; in addition to lectures and case discussions led by professors, they visiting a good cross-section of leading local and foreign invested companies, and they had an impressive range of speakers. The discussions in the classroom reflect both the depth of experience of the participants, and the rich new insights gained during the week. A thoroughly horizon-widening educational experience!
And yet, as watch people in the hotel lobby, I feel something is missing. We are all part of a 'global jet set' - both the course participants and local guests here. But, the global perspectives and life styles we have in common is not shared by the majority of people who have much narrower experiential horizons. Will these executive really be able to appreciate when I tell them, "the biggest growth in China is in tier 3 and tier 4 cities", "winning in the good-enough market is not just about lower price, but about entirely different ways of engaging with clients", or "the people you may be leading one day are deeply embedded in their local communities"?
I wish I could take some of these executives for a little walk, just a few blocs down the road from where I live, to show them a different China, the China of people who are not leaders of their businesses, but who just life ordinary lives, rush to work on the metro, eat at street stalls, or dance in the park.
Note: C-numbers link to chapters in: M.W. Peng & K.E. Meyer, 2011 International Business, London: Cengage.
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