International Organizational Behavior 2e Chapter 1 Page 1
CHAPTER 1
INTERNATIONAL ORGANIZATIONAL BEHAVIOR:
CHALLENGES AND OPTIONS for MANAGEMENT
CHAPTER INTRODUCTION
People need to come first in the mix. As companies seek to build local operations in countries
such as Brazil, Russia, India, and China, identifying and tapping local talent pools becomes
increasingly important. Striking the right balance between standardization and localization
is always a work-in-progress, but the vast cultural and language gaps from country to
country demand it. The days of overseas operations run exclusively by expats are over.
Miles White, CEO of Abbott.
“The aspects that I see motivating in global work are the excitement of how we overcome
small misunderstandings and other common challenges [of cross-cultural collaboration],
witnessing the people from totally different cultural backgrounds getting together for a
common goal and succeeding together.”
—Oliver, an Italian employee working in a Finnish multinational corporation
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CHAPTER REVIEW OUTLINE
MANAGING PEOPLE IN A DYNAMIC GLOBAL CONTEXT
The interdependence that globalization produces ripple effects as rapidly growing nations such as
China and India are now producing home-grown firms that are challenging established
multinationals’ ability to keep up in everything from innovation to hiring the best talent. Several
I. Globalization: The Rise and Advance of Emerging Markets
The strongest growth in international business has been in developing countries rather
than in traditional economic heavyweights such as the European Union (E.U.), Japan,
and the United States. Between 1989 and 2015, China’s annual GDP growth rate
GDP is growing at a much faster pace in developing nations. By 2020, the rise of
developing nations may create over 700 million new members of the middle class.
Developing countries will have a more affluent citizenry with more disposable
income. Multinationals view developing nations as huge sources of new customers.
International firms now see these countries as more than sources of cheap labor,
rather as increasingly affluent populations eager for better products and services.
Developing countries are also producing world-class companies that are challenging
their more established developed country brethren. Developing countries had only
one firm among the 500 biggest companies in 1997. In 2016, over 100 of the 500
largest firms in the world were headquartered in China.
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II. International Challenges in Doing Business and Managing Talent
Companies now face a dynamic competitive environment when they venture abroad
and must cope with management challenges unique to international business. These
challenges include specific issues related to managing talent; however, international
managers must be able to grasp foreign cultures and adapt their own behavior
accordingly to be effective.
A. Emerging Market Complexity: The Case of China
Foreign firms in China face major regional differences in culture and languages as
B. Another headache: Currency Volatility
Challenges facing international managers include rapid changes in currency
values that produce havoc and have serious ripple effects across countries.
Currency swings can be a response to rapidly changing business dynamics or
merely whims of investors and traders. Consequently, international managers
must attend to currency swings to avoid sudden losses.
C. Offshoring and Onshoring: Recent Trends
1. Offshoring involves sending jobs abroad, often to places where labor is
cheap. Large and small firms have been engaging in offshoring for decades.
Traditionally, companies based in developed nations with expensive labor
have sent jobs to cheaper countries to cut personnel costs (up to 75% in some
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2. Onshoring – As a result of these challenges, some firms have shifted once-
offshored jobs back home. This trend, labeled onshoring, occurs when firms
conclude that the costs outweigh the benefits of offshoring (in a recent survey
of manufacturers, 55% were dissatisfied with offshoring). Firms are trying to
capitalize by offering themselves as alternatives to offshoring (see the boxed
feature: Global Innovations).
D. The Best Talent Wins
The quality of a nation’s workforce relates to how competitive that country is in
job creation and its ability to produce outstanding companies that can excel
globally. Training, educational quality, motivation, and cutting-edge skills are
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E. Rising Workforce Diversity
One consequence of the global hunt for talent is that workforces are an
increasingly complicated mix of cultures, backgrounds, and ethnic groups.
Demographic changes within countries are also contributing to greater workforce
diversity. Hispanics are expected to make up nearly 30% of the U.S. population in
III. International Organizational Behavior: A Skills Profile
How should international managers approach issues related to workforce diversity,
the global talent hunt, and employee motivation? Imagine the difficulty of managing
people in far-flung corporate operations that literally circle the globe. When
companies have such an extensive global footprint, everything they do has
To be effective across borders, executives need to have deep multicultural experience
and embrace diversity. They must be comfortable sharing information and teaming
with local employees to succeed in local markets. They also need to offer high-
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CONCEPTUAL BUILDING BLOCKS
Underpinning many of the issues discussed so far are a variety of management concepts,
including those related to how firms develop and grow internationally. This section
I. The Impact of Culture
Culture can impact just about everything associated with managing employees.
International management expert Geert Hofstede’s definition of culture is “the
collective programming of the mind which distinguishes one group or category of
people from another.” Complicating matters is that managers may not fully recognize
the impact of culture on their own views and behaviors, much less their subordinates’.
The impact of cultural differences depends, in part, on how managers respond, e.g.,
failing to understand how best to motivate foreign employees can result in bad
outcomes while successfully adapting management styles to match local values may
lead to outstanding performance. Even foreign subsidiaries perform better when they
manage employees in ways that are aligned with local culture.
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Perhaps an even more common oversimplification is when managers treat cultural
differences as broad-brush labels that can be slapped on to people with little or no
II. Multinationals: History and Strategic Options
This last section discusses the history and evolution of international corporations and
concludes with some of the basic strategic choices firms make in tackling global
markets. A general understanding of how companies approach international markets
should prove helpful with subsequent chapters.
Multinationals have evolved considerably over the past century. From 1900-1960,
multinationals typically did their innovating in the home country. Eventually, many
realized that good ideas could come from anywhere. In the 1970s and 1980s, firms
starting setting up research and development units overseas to capture ideas in key
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A. Stages in International Corporate Development
Many firms evolve through distinct stages as they expand international activities.
As firms gain experience overseas, their level of involvement in international
markets grows, allowing them to master more complicated foreign operations.
Small firms often step into international markets by exporting. Eventually, some
firms transition from exporting to building facilities overseas. Many firms
develop through distinct stages as they become more sophisticated internationally.
Table 1.3 examines the five broad stages of corporate internationalization.
1. Exporting: Domestic firms often begin their international experiences by
exporting. Firms usually rely on small internal staffs to handle exporting
activities or use consulting firms with the expertise in foreign contracts,
currency hassles, and letters of credit (e.g., L.L. Bean).
3. Contracting/subcontracting/franchising/licensing: Harley-Davidson has
licensed logos and its brand name to clothing manufacturers around the world.
Franchising is a more elaborate version of licensing. in which an agreement
allows a foreign entrepreneur or firm to operate a business using the methods,
procedures, products, trademarks, and marketing strategies created by another
4. Wholly owned foreign subsidiaries: While multinational firms understand that
while headquarters may make key strategic decisions, foreign operations often
perform best when run by local employees steeped in local market know-how.
Foreign subsidiaries in Stage 4 firms typically focus on supporting the
national or regional market where they are located (e.g., J.C. Penny, Ahold).
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B. The Path of Developing Country Multinationals
Not every company evolves through these stages. This is especially true for
multinationals in developing countries where many disadvantages exist, such as
political instability, inadequate infrastructures, and weak legal systems.
Multinationals based in developing countries are often quick to expand overseas,
aggressively building their capabilities in many cases by acquiring or forming
partnerships with more established multinationals from developed nations (e.g.,
Chinalco, China National Petroleum Corp, Cnooc, Sinopec).
III. Strategic Choices for International Business
A. Global Integration and Local Responsiveness
Multinationals face different levels of pressure for local responsiveness. In certain
industries, tailoring to meet market-specific customer preferences is critical. In
1. The international strategy
Multinationals that face little pressure to tailor products across markets or to
become highly efficient to combat competitors often pursue an international
strategy of selling similar products everywhere. In doing so, they usually
2. The multidomestic strategy
In some industries, multinationals face huge pressure to tailor products and
services to meet local preferences even while pressure for integration and
efficiency is relatively low. If so, the best approach is a multidomestic
strategy, aligning products and services to customer needs in specific foreign
3. The global strategy
Global integration can be critical for profitability in certain industries,
especially when the same products or services can be sold everywhere. With
the global strategy, corporate headquarters keeps control over worldwide
4. The transnational strategy
In some industries, multinationals must attempt to tailor products to local
preferences and improve efficiencies by integrating operations worldwide.
They may move key activities to wherever they can be done cheapest and
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most efficiently while maintaining quality and responsiveness to local
preferences. This strategy is a “best of both worlds” blend of global and
multidomestic approaches. It comes, however, with the potential for conflict
given the competing demands of local responsiveness (which undercuts
standardization) and global efficiency (which undercuts the ability to tailor
products for local markets).
5. The regional strategy
Sometimes customer preferences vary regionally instead of nationally. If so,
multinationals may opt for the regional strategy, which allows managers, e.g.,
Toyota, in a regional area, e.g., Europe, to make decisions, set goals, and
tweak products. It also means pursuing efficiencies and economies by
B. Creating Buy-In When Developing International Strategy
Multinationals should ensure that the ways they develop international strategies
are seen as fair by the people asked to carry them out—particularly when that
strategy is a departure from the status quo. Top executives should thoroughly
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By engaging foreign employees, explaining strategic options and clarifying
expectations, multinationals can improve trust and commitment. Committed
employees are more likely to take steps to ensure that the firm’s strategy is
implemented successfully.
CHAPTER SUMMARY
Challenges associated with managing organizational behavior in a dynamic international
business context were discussed. Developed nations such as the United States, France, and
Germany continue to attract considerable outside investment. Developing nations, which
includes BRIC countries, have been climbing the list of foreign direct investment (FDI)
recipients.
The chapter describes multinational enterprises and the common six stages in their development
and presented five international business strategies used by multinationals given industry
pressures for local responsiveness and global integration.
• International strategy may be best when relatively low pressures for global
integration and local responsiveness exist.
• Multidomestic strategy may be best when product preferences vary across nations and
integration pressures are low.
An analysis of international strategies was provided urging firms to develop strategies in a fair
manner if they want managers worldwide to embrace them. To create a fair process, managers
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DISCUSSION QUESTIONS
1. What are the implications of globalization and the rise of developing countries such
as China and India for managing organizational behavior effectively?
• Increased international competition
• Potential loss of key talent
2. What do you make of the debate around the issues of offshoring and onshoring? What
are the pros and cons of each? What decision factors should be considered?
• Offshoring
o Cheap labor so reduced labor costs
• Onshoring
o Costs of offshoring (listed above) outweigh benefits
o See also the boxed feature: Global Innovations
• Decision Factors
o Can the firm’s management bridge cultural and communication
3. What is culture? Why is it important for managing people around the world?
• Hofstede’s definition: “the collective programming of the mind which
distinguishes one group or category of people from another.”
• Recent research – cultural differences are embedded in a mosaic of dimensions
that should shape and inform strategies for managing employees across
• Culture is complex, rooted in language, history, geography, religion, and
economic developments. It is always evolving and changing and individuals
may not espouse the values of their cultural group.
4. What are the key differences between international, global, transnational,
multidomestic, and regional strategies?
• See III. B, C, D, and E in CONCEPTUAL BUILDING BLOCKS
• See Table 1.4.
CHAPTER ACTIVITIES
DEVELOPING YOUR INTERNATIONAL CAREER – Do You Have a “Global
Mindset”?
BOXED FEATURES
CULTURE CLASH – The New Economic Center: Tilting East toward China
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ADDITIONAL RESOURCES
Table 1.1 –
Table 1.2 –