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Global Management Studies
GMS 691
Shavin Malhotra

QUIZ 1 NOTES LECTURE 1:  AVG GROWTH OF ASIAN ECONOMIES 2005-2011: 8.54%  NUMBER 1: QATAR: 18.7%  NUMBER 5: CHINA: 9.5%  NUMBER 13: INDIA: 7.8%  NUMBER 132: CANADA: 2.2%  NUMBER 149: U.S.: 1.7% LECTURE 2: What makes East Asia Different: 1)Rapid Growth 2)Large Population 3)Different Business environment - Rapid growth over the 30-40 years from Singapore and South Korea to China and India -South and East Asia grown rapidly over Latin America -Largest population: Japan, South Korea, Pakistan, India, China -Densest populations: South Korea, India, China -Different business environment than in North America RAPID GROWTH -ASEAN (Association of South East Asian Nations, (Indonesia, Malaysia, Philippines, Thailand) -1999-2004, growth starting to fall off: 6.2-4.9% - CHINA (Including Hong Kong): DOING WELL: 8.2% -Japan doing tremendously in the 80’s but lost footing in the 90’s -Some of the blame goes to the Keiretsus -Growth has just fallen off since 1990 -Depreciation of the Japanese currency, exports hit badly-7.8%-0.5% -NIEs (Newly Industrialized Economies) -Singapore, South Korea, Taiwan-11.1%-2.7% COMPARISON TO EUROPEAN UNION & US -EU has been growing at a very slow pace compared to the Asian nations (1.5%) -US has been growing at a very slow pace too (1.1%) -Enormous diversity -1.3 Billion people: China -1.17 Billion people: India - 4 million people: Singapore Singapore per capita GDP is 48 times that of Myanmar CITIES BY POP. 1) Mumbai: 13, 922, 135 2) Shanghai: 13, 831, 900 3) Karachi: 12, 991, 000 4) Delhi: 12, 259, 230 EARLY CIVILIZATIONS: -Many early Chinese civilizations started early in the Yellow River -Indus valley civilization REASONS FOR RAPID GROWTH 1)High Savings Rate: China: 25% of GDP vs. US: .5% of GDP Influence of high savings rate: -Lack of credit market -Interest Rates are high -High amount of savings promote consumption of durable goods (LESS DEBT) -More stable growth -Bank uses these savings to promote capital intensive projects 2)Demographic Situation - Population of working age is high - Not a lot of burden to support retirees as most of pop. is young -Starting a business in India, there will not be a problem in finding workers 3) Investment in Education -Large skilled and educated population -Many parents invest a lot of time in their children’s education -Engineering and Business schools in India An important element in Asian business is...... BUSINESS GROUPS A collection of diversified firms that are formally and informally linked to each other and are under a central control For instance: Business houses in India: ex. Aditya Birla, Reliance Ambani Group, Tata Company Chaebol in South Korea ex. Samsung, Hyundai, LG (Lucky Goldstar), Hyundai-largest one Keiretsu in Japan ex. Matsushita Toyota Mitsubishi Motors Market capitalization: Share Price * Share Volume BUSINESS GROUPS ORIGNIATED: -Japan -Originally known as Zaibatsu (1850’s-1860’s) -Owned by a single family Three main Zaibatsus pre WW2: 1) Mitsubishi 2) Mitsui 3) Sumitomo -Predominantly trading companies -Strong political connections -Became stronger and bigger when Japan decided to expand and capture international companies CHARACTERISTICS OF JAPAN: -Historically isolated -Environment of resource scarcity -70% of Japan is mountains -Located on a geologically and tectonically landscape prone to earthquakes -Houses hundred of active volcanoes -Led to a homogenous group with strong attitudes towards themselves and others -Strong ethnocentrism in Japan, strong preference for their own things -Have an acute awareness of their vulnerability AS A RESULT.... -To catch up with the West, the best thing to do was to capture other countries -Building their own empire -Defeated China in 1895, Russia in 1905 -Expanded to Korea, Taiwan, and Southeast Asia -By end of WW1, Japan was a world power -Zaibatsu’s enjoyed tremendous political clout -Controlled most of Japan’s economy AFTER WW2: -It was shrunk back to its main landmass -US had taken control of Japan -Dismantle Zaibatsus -Japanese government followed suit and started restrictions -Taxing business groups dramatically -Zaibatsus tremendously shrinking -Tremendous fear of takeovers by other firms and governments CROSS SHAREHOLDING: -Zaibatsu fear lead to cross shareholding -20% of ownership owned by each firm allowing NOBODY to have majority ownership -Allowing each firm to be a separate legal entity DIFFERENCE BETWEEN KEIRETSUS AND ZAIBATSUS -Keiretsus are cross shareholding groups and not majority ownership groups TWO TYPES OF KEIRETSUS: 1) Horizontal Keiretsus 2) Vertical Keiretsus Horizontal Keiretsus: Affiliated firms in cross shareholdings are into multiple businesses and multiple firms -Central nervous system is a CENTRAL BANK -That is why in Japan, banks are very powerful (ex. Sanwa Bank) President’s council meeting-Shacho Kai -Sit together and strategize plans how to take the next group forward -Groups assist to help each other out -Helps run the keiretsus in Japan VERTICAL KEIRETSU: ex. Toyota Suppliers--TOYOTA--Distributors/Retailers (Flip 90 degrees clockwise) -Extremely difficult to break into retail outlets in Japan ADVANTAGES OF KEIRETSUS FORMED: -Helps reduce competition -Control market -Lower production and costs lowering economies of scale 1) Risk sharing -Like a group insurance plan (today if somebody is not doing well, you help them out, if you are not doing well today, somebody will help you out) ex. Sumitomo Bank -Mazda motors beginning of 1980’s was going bankrupt -Sumioto bank stepped in to help out -They asked top management of other banks to help Mazda motors by spending time -They asked the other banks not to sell shares of Mazda -They asked their employees and other employees to buy when they did need one, a Mazda car Mitsubishi Motors helping Akai 2)Transaction Costs -Costs associated in relation to transaction -Made famous by Oliver Williamson - Before transaction has happened what are the costs (Exantake costs) ex. Finding a supplier, negotiating with the supplier, writing up the contract, -After transaction has gone through (Exposed costs) ex. Monitoring supplier, enforcement costs, legal issues Other advantages: -Quasi-internal capital markets (Capital markets are institutions providing capital) -Keiretsus work as capital markets with all the central banks -Firms had an incentive to join these groups because the Keiretsus were efficient -Source of scarce capital human capital -Keiretsus can transfer top management between each group -Business group reputation signals quality -Keiretsus represent quality (providing good quality products) LEADERSHIP DISCUSSIONS LEADERSHIP DISCUSSION 1: The Rise of Asian Business Groups-Group 1 -A firm, company, or family with interlocking relationships or business ties -Multiple industries/sectors -Products -Vertical and Horizontal integration -Leverage of resources, control markets, and prosperity GROWTH OF BUSINESS ASIAN GROUPS IN ASIA: -Market imperfection -Reorganization of state-owned enterprises into formal business groups -Qiye Jituan business groups worth 1.12 trillion Yuan by 95’ -Rapid growth causing a need for government intervention EXAMPLES OF CURRENT CHINESE BUSINESS GROUP DEALINGS: -Increasing interest from multiple countries to engage with Asian investors -France -Singapore -Ex. INEOS (Petro China) REAL LIFE EXAMPLES: VW GROUP OWNERSHIP -Audi -Bugatti -Skoda -Lamborghini -Volkswagen BUSINESS GROUPS: -Procter & Gamble -PepsiCo. -Kraft -Nestle -Johnson & Johnson -Unilever JAPAN BUSINESS GROUP: -MITSUBISHI (Kireutsu) MITSUBISHI: -Banking -Trust Banking -Life insurance (Meji mutual life) -Marine and fire insurance -Steel (Mistubishi Steel Manufacturing) -Chemicals (Mitsubishi gas chemicals) 1) The negative aspects of business groups? -Putting downwards pressure on smaller companies -Influencing politics causing corruption and exploitation of government officials -Newer management in different firms of specific business groups 2) How do you think Chinese business groups will affect the North American Business Environment? -Putting pressure on Western companies to cut costs LEADERSHIP DISCUSSION 2: JAPAN KEIRETSU Business Group: -Also known as a conglomerate -Helps firm financially -Provide firms with a reputation to operate -Three types of business groups: 1) Family owned 2) Widely-Held 3) State-Owned -History of Keiretsu -Zaibatsu were predecessors of current keiretsu groups dominating Japan -Six major horizontal keiretsu -Mitsui, Mitsubishi, Sumitomo, Dai Ichi Kango, Fuyo, Suyo -Access to stable financing, -Insulation from market pressures -Risk reduction -Mutual assistance VERTICAL KEIRETSU -Better performance -Lower cost -Encourages co-ordination -Reduces governance problems HISTORY OF MITSUBISHI GROUP -Yataro Iwasaki a shipping firm in 1870 -Carried Japanese troops to Taiwan and earned government funding -Virtual monopoly onoverseas routes -Government sponsored competitor establishment -Bought a copper and coal mine -Set up business in banking, real estate, marketing and administration -Developed automobiles, aircraft, tanks, and buses -Successors had more Westerly influence, so business expanded -Many smaller companies (139 companies) MITSUBISH AUTOMOTIVE INDUSTRIES -Financial turmoil in the 90’s -Yr: 2000 cover up scandal covering cases of faulty vehicle components -0-0-0 strategy, 0 down payment, 0 interest, 0 payments for 12 months -Not a lot of capital investors -2009: 200 yen per share 2013: 100 yen per share -Net income only above break even GENERAL TRADE INDUSTRY -Sogososha (General trade groups) 1) Is a keiretsu like system essential having a fighting chance in future world markets -Shows the ability of one aspect of the business failing but the rest of it to hold it up -Most Keiretsu groups are based on a bank -Inefficient business groups (Keiretsu) 2) Do business groups put the free market economy at risk, or do they help it thrive? LEADERHIP DISCUSSION 3: Key Facts about Google…  Educates  Entertains  Connects  Multiple Platforms (Gmail, Google Drive, Google Plus, YouTube, Google Wallet, Nexus Phone and Tablet)  Google and the Business World  In the Western world Google is a life source  Accessible in 181 Countries, 146 Languages  Facilitator for Business Interactions  Strong Influence on our decisions  China and Censorship Laws  Chinese people were able to access Google.com, but every search had to go through a government filter  China can delete posts that contain “illegal” information  Service providers must hand over information  Human Rights  Google In China  Google had the choice of either complying with the Chinese government, or exiting the market  Developed Google.cn, which is filtered by Google's own servers to remove any banned content  Google Entered  Criticism  ‘‘Google’s statements about respecting online privacy are the height of hypocrisy in view of its strategy in China.’’ -Reporters without Borders  ‘‘When a search engine collaborates with the government like this, it makes it much easier for the Chinese government to control what is being said on the Internet" - Reporters without Borders  Defence  ‘‘While removing search results is inconsistent with Google’s mission, providing no information – or a heavily degraded user experience that amounts to no information – is more inconsistent with our mission’’ (Yang, 2006). -Andrew McLaughlin, Senior Policy Council  They argued that, "the Chinese market is simply too important for any major search engine to miss out on, regardless of the cost, and US companies point out that if they withhold their expertise, then firms from other countries will just step in“ (McLaughlin, 2006a).  Pros of Google's Decision to Stay in China  Helps them to grow  Penetrating a new market  Increased Profits and Company Value  Pros for the consumer, free  Cons of Google's Decision to Stay in China  Went against their mission statement  Government officials try to remove information from Google  Hurt reputation in the Western World  Ethical Issue  Should Google remain in China, abide by the government's censorship laws and attempt to gain market share? OR Should Google publicly not accept China's censorship policies and exit the market?  Reflect and Discuss  What would you do if you were in Google's position? FIRST ARTICLE: THE MANY FUTURES OF BUSINESS GROUPS  Discusses three rival hypotheses  1) Life cycle hypotheses  2) State-led industrialization hypotheses  3) Crony capitalist hypotheses  Business group are “collection of firms bound together in some formal or informal ways”  Typically high degree of ownership or concentration in hands of the family, state or financial institution  Keiretsu of Japan, Chaebol of Korea, Business houses of India, The Hongs of Hong Kong, Ethinic Chinese business groups in Thailand, Malaysia, Indonesia  Business groups seen as
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