Pura Healthcare – An Overview of Medical Tourism in Costa Rica and the Impact of the Affordable Care Act

Author: Nicholas Jaros

Abstract

This paper begins by defining what medical tourism is and how expansive the industry has become due to all of the benefits, especially that of cost savings, that it provides to healthcare recipients. This is exemplified through a successful medical tourism story of two individuals receiving insurance reimbursement due to their decision to go abroad for medical care and the associated cost savings. The paper will then move into an explanation of the Affordable Care Act in the United States and why uninsured citizens may choose to travel to Costa Rica in comparison to staying in the United States or traveling to other countries for medical care. The paper concludes with an in depth look at how the Affordable Care Act is going to affect the future of health tourism from the United States to Costa Rica by drawing parallels to other healthcare systems and looking at the details of the affordable care act such as procedures that may not be covered.

What is medical tourism?

A 2013 article from Pitts and Battiste of ABC News tells the story of two North Carolina work colleagues’ travel experience to Costa Rica; however neither of them were going for the purpose of surfing or deep sea fishing. Joy Guion was going to receive a weight loss procedure and Gary Harwell went for a knee replacement from the private hospital Clinica Biblica. Both Guion and Harwell were going to Costa Rica for their procedures, would stay in a four-star hotel, have a personal driver and concierge, and not pay a dime for the medical or travel expenses. As an additional benefit, they would receive a bonus check from their employer when they returned due to the cost savings in insurance from deciding to go abroad. Guion and Harwell had the option to receive their procedures in the United States but would have had to pay large co pays due to the price differential. In the end, HSM, the company Guion and Harwell work for, saved money, the recipients saved money, and the Costa Rican economy benefited from the dollars spent within their borders (Pitts & Battiste, 2013).

While medical and tourism are two words that may not be commonly associated with one another, there is a large and growing industry for individuals traveling across borders to receive medical procedures. Medicine typically implies something viewed as un-pleasurable, and tourism has a perception of the opposite. However these two words together create something in the range of a USD 24-40 billion market based on approximately eight million patients worldwide spending anywhere from USD 3,000-5,000 per visit (Medical Tourism Statistics & Facts, 2014).  Popular destinations for medical tourism include India, Brazil, Singapore, Mexico, Thailand, and Costa Rica.

Affordable Care Act Coverage

With the number of nonelderly uninsured Americans over 47 million during 2012 not having access to affordable plans to cover the needed and sometimes desired procedures, it is clear why many are looking across borders to receive medical attention (Key Facts, 2013). Even though over 7 million have signed up for the Affordable Care Act (ACA) which is providing them access to affordable health care insurance they may have not had before, dental insurance, one of the most sought after procedures in Costa Rica, will for the most part still not be covered by the Affordable Care Act (Epstein & Kenen, 2014). And only about 57 percent of the U.S population has dental coverage according to Delta Dental leaving a large population looking to save some money on their dental care (n.d).

Why Costa Rica?

Individuals seek medical care abroad for many reasons. Generally the most popular reason is that of significant cost savings. For example, the cost of a knee replacement in the United States is in the USD 45,000-60,000 range whereas in Costa Rica the price range is USD 11,700-12,500 (Companion Global Healthcare, Inc., n.d.). While one would think that clearly they will receive better treatment and have better doctors with the hefty price tag in the United States, this is not necessarily true. The World Health Organization has ranked Costa Rica as one of the top three healthcare systems in Latin American, ranking consistently higher than that of the United States and Canada. The life expectancy in Costa Rica is 78.7 years, also higher than that of the United States (Costa Rica, n.d.). Costa Rica only holds two hospitals that are JCI certified, however there exist many more hospitals and dental clinics that hold high accolades in client care (JCI-Accredited Organizations, n.d). JCI stands for the Joint Commission International and is the international arm of the same organization that accredits hospitals in the United States. Holding this accreditation signifies that a health clinic is up to at least the same standards as health clinics in the United States in terms of the quality of patient care.

Costa Rica, recognizing the opportunity to not only show the world its high quality health care, but to display its national parks with spectacular views and volcanoes all encompassed in a tropical climate has invested in the industry. Costa Rican government declared the national interest of the activities and initiatives related to medical tourism. “Also, it launched the “Council for the International Promotion of Costa Rica Medicine” as the first official private instance of promotion and regulation of health tourism industry of the country.”(Turismo Medico, n.d.).

Impact on Costa Rican economy

According to an article found in The Tico Times, a Costa Rica based journal, in 2010 medical tourism generated about USD 288 million and in 2014 the country is expected to generate USD 800 million and attract 100,000 visitors to the country (Norman, C., 2012). Edgar Salazar, manager of Nova Dental Advanced Dental Center mentioned that in 2012, 95 percent of Nova’s patients were foreigners with a vast majority coming from the United States or Canada and he believes that that the market of travelers coming to Costa Rica for medical procedures is only going to grow. Nova Dental Advanced Dental Center is a full service dental clinic located in San Jose, the capital of Costa Rica. They offer services including transportation to and from recovery facilities and hotels (Cosmetic Dentistry, n.d.). Salazar also believed that within the next seven years that the medical tourism industry will soon overtake in size the eco-tourism, and adventure travelers in Costa Rica. With tourism as a whole generating more than USD 1.7 billion per year in Costa Rica with 80 percent of that consisting of eco-tourism, medical tourism has a long way to go before reaching that mark (About Costa Rica, n.d.). Total contribution of travel and tourism to GDP in Costa Rica was 12.1 percent of GDP in 2013 and is forecasted to reach 13.7 percent of GDP by 2024. Travel Tourism also generated 95,500 jobs or 4.6 percent of total employment and is expected to reach 7.2 percent in 2014 (Turner, R., n.d.). With these numbers, medical tourism has accounted for about 17 percent of the tourism industry but is expected to grow at a rapid pace (Tourism Statistical, n.d.). Rapid growth in a new area of tourism to Costa Rica will be stimulating for an already successful tourism economy.

Will the ACA slow medical tourism to Costa Rica?

According to the Canadian Institute for Health Information, roughly 46,000 Canadians in 2011 and 42,000 in 2012 left the country to seek medical treatment. This is likely due to the fact that Canada, has a monopolistic government-run healthcare system that does not give individuals access to health care that they demand in a timely manner unless it is considered an emergency operation. For example, Canadians will wait on average 26 weeks for a hip and knee replacement and more than 16 weeks for cataract surgery (Canadians Still, n.d.). This is because the demand for healthcare in Canada far outstretches its capacity. According to obamacarefacts.com, in the United States, “Doctors and hospitals will be moved to a system where they are rewarded for providing quality care, instead of being rewarded for quantity” (Obamacare, n.d.). While this has only positive intentions, I believe we may also see wait times for medical care specialist appointments begin to increase in the United States, similar to that of Canada.

In a 2013 survey conducted by Merritt Hawkins, only 45.7 percent of physicians in the 15 markets over five specialties were accepting Medicaid as a form of payment with the highest acceptance rate being in Massachusetts with a 73 percent acceptance rate (Miller, P., n.d.). The low acceptance is explained by the fact that physicians are only paid a fraction for serving Medicaid patients, about 59 percent of the amount that Medicare pays for primary services. With a low acceptance rate and the addition of millions of citizens under Medicaid coverage, a shortage of physicians is easy to predict. Authors of the ACA foresaw this shortage and as of January 2014 included a provision and incentive for physicians to accept new patients. The provision raises the Medicaid fees paid to doctors in primary care to the same level of Medicare with the Federal government chipping in the difference. This led to an average 73 percent increase in Medicaid fees paid to doctors, the largest increase in Medicaid history. However the provision is set for only two years and after that states no longer have to pay the increased Medicaid rate leaving many physicians wary to accept new patients. Reid Blackwelder, a Tennessee family practitioner and incoming president of the American Academy of Family Physicians said, “If I choose to increase the number of Medicaid patients, and two years down the road that payment drops back to two-thirds, all of a sudden I’m going to have an awful lot of trouble keeping my doors open.” (Ollove, M., 2013). Being that many doctors do not see the pay from Medicare necessarily generous, I believe most will be reluctant to accept Medicaid patients in the next two years due the possibility that they may have a new book of patients in which they are receiving smaller fees in comparison to others on better health care coverage plans.

Boston Massachusetts with the highest Medicaid acceptance rates consequently has the hospitals with the highest average wait times among the 15 markets surveyed. As displayed in Figure 1, when performing a regression and correlation analysis between the cities surveyed we see a moderate to weak strength correlation between Medicaid acceptance rate and average time wait. However, the simple regression analysis found in Table 1 suggests that the data points are not significant and therefore should not be used. While the statistical analysis suggests the data is too weak to draw conclusions, it is noteworthy that Massachusetts, the state in which the ACA was modeled after sees the highest average wait times. Therefore I predict that as other doctors and hospitals begin to accept Medicaid as a form of payment, we will see a rise in wait times to see physicians which may lead to patients looking elsewhere for affordable care.

Another signal pointing toward a continued rise in medical tourism is the variety of procedures not covered under ACA health plans. Procedures such as cosmetic surgery, plastic surgery, in-vitro fertilization, and dentistry are all not covered under ACA plans leaving people to search for the more affordable options than what is offered within their own borders. With its proximity to the United States in comparison to other medial tourism countries such as Thailand and Singapore, Costa Rica will be a viable option for those looking to receive procedures at a lower cost than domestic procedures.

Conclusion

Medical tourism is a rapidly growing industry that allows individuals to travel across borders in order to receive a health care procedure which usually leads to considerable cost savings. This industry’s success and continued growth has come into question as the healthcare system in the United States is going through a major overhaul leading to more individuals with affordable insurance coverage. For those who are still uncovered after the implementation of the ACA, don’t want to wait to see a specialist, or simply want to save some money and see a new country, Costa Rica makes a practical option. Not only is Costa Rica a tropical country in close proximity to the United States, the country boasts a prestigious healthcare system with some of the area’s finest doctors. Costa Rica already has a large and distinguished tourism industry and some experts have expectations that medical tourism will overtake ecotourism in size, the current largest tourism style in Costa Rica. After reviewing the details of the ACA and drawing comparisons to unsuccessful characteristics of other healthcare systems, such as that of Canada, there is no evidence that shows the ACA will slow the pace of medical tourism growth.

I predict that more health insurance companies will begin to cover procedures across borders. The cost savings from a procedure in Costa Rica are significant for an employer providing insurance as well as the insurance company. The pressure to expand coverage will likely come from employers and their employees seeking substitutes to the well known high co pays and premiums. As insurance companies expand coverage into international markets, we will see prices drop for both the consumers and insurance providers which will force U.S. health care organizations to become competitive to survive. If a healthcare plan only covered up to 60 percent of costs in the US, such as the case with an ACA bronze metal implant, then a knee replacement in Costa Rica would cost the recipient roughly USD 4,800 out of pocket. Whereas 10 percent out of pocket expenses, such as the case for an ACA platinum metal implant, for a knee replacement in the U.S would be as high as $6,000 with the recipient paying higher premiums to have the higher coverage. Knowing this, heading to a country such as Costa Rica where the quality of patient care is as high if not better, and the prices are much more competitive seems to make sense for those looking for an arbitrage opportunity. Having the procedure when you want the procedure and having the opportunity to navigate a new culture and country are just the extra perks of the industry.

References

About Costa Rica. (n.d.). Embajada de Costa Rica en Washington DC. Retrieved April 29, 2014, from http://www.costarica-embassy.org/?q=node/19

America’s Oral Health – The Role of Dental Benefits. (n.d.). Delta Dental. Retrieved April 29, 2014, from http://www.deltadental.com/AmericaOralHealthRoleDentalBenefits.pdf

Canadians still waiting too long for health care. (n.d.). Newfoundland Labrador Canada. Retrieved April 29, 2014, from http://www.gov.nl.ca/HaveYouHeard/wta.pdf

Companion Global Healthcare, Inc. (n.d.). Why Medical Tourism? Retrieved April 29, 2014, from http://www.companionglobalhealthcare.com/patients/whymedicaltourism.aspx

Cosmetic Dentistry & Dental Implants “Nova Dental Clinic Costa Rica. (n.d.). NovaDentalCR. Retrieved April 29, 2014, from http://www.novadentalcr.com/

Costa Rica. (n.d.). Patients Beyond Borders. Retrieved April 29, 2014, from

http://www.patientsbeyondborders.com/costa-rica

Dental Insurance. (n.d.). ObamaCare Facts. Retrieved April 29, 2014, from http://obamacarefacts.com/dental-insurance/dental-insurance.php

Epstein, J., & Kenen, J. (2014, March 28). Obamacare enrollments: White House says 6 million signed up for coverage. POLITICO. Retrieved April 29, 2014, from http://www.politico.com/story/2014/03/obamacare-enrollment-6-million-105111.html

JCI-Accredited Organizations. (n.d.). Joint Commission International. Retrieved April 29, 2014, from http://www.jointcommissioninternational.org/about-jci/jci-accredited-organizations/?c=CR)

Key Facts about the Uninsured Population. (2013, September 26). Kaiser Family Foundation. Retrieved April 30, 2014, from http://kff.org/uninsured/fact-sheet/key-facts-about-the-uninsured-population/

Medical Tourism Statistics & Facts. (2014, April 7). Patients Beyond Borders. Retrieved April 29, 2014, from http://www.patientsbeyondborders.com/medical-tourism-statistics-facts

Miller, P. (n.d.). Physician Appointment Wait Times and Medicaid and Medicare Acceptance Rates. Merrit Hawkins. Retrieved April 29, 2014, from http://www.merritthawkins.com/uploadedFiles/MerrittHawkings/Surveys/mha2014waitsurvPDF.pdf

Norman, C. (2012, March 26). Medical tourism businesses expect growth. The Tico Times. Retrieved April 29, 2014, from http://www.ticotimes.net/2012/04/27/medical-tourism-businesses-expect-growth

ObamaCare: Pros and Cons of ObamaCare. (n.d.). ObamaCare Facts. Retrieved April 28, 2014, from http://obamacarefacts.com/obamacare-pros-and-cons.php

Ollove, M. (2013, February 14). KHN: Kaiser Health News. Medicaid Expansion Puts Spotlight On Access To Primary Care. Retrieved April 29, 2014, from http://www.kaiserhealthnews.org/stories/2013/february/14/medicaid-primary-care-doctor-payment.aspx

Pitts, B., & Battiste, N. (2013, September 30). As More Americans Have Surgeries Overseas, US Companies Consider ‘Medical Tourism’ a Health Care Option.ABC News. Retrieved May 2, 2014, from http://abcnews.go.com/Health/americans-surgeries-overseas-us-companies-medical-tourism-health/story?id=20423011

Tourism Statistical Yearly Report 2011. (n.d.). Visit Costa Rica. Retrieved April 29, 2014, from http://www.visitcostarica.com/ict/pdf/anuario/Statistical_Yearly_Report_2011.pdf

Turismo Medico. (n.d.). Promed Resources. Retrieved April 29, 2014, from http://promedresources.org/turismo-medico

Turner, R. (n.d.). Travel & Tourism Economic Impact 2014 – Costa Rica. World Travel and Tourism Council. Retrieved April 29, 2014, from http://www.wttc.org/site_media/uploads/downloads/costa_rica2014.pdf

 

APA formatting by BibMe.org.


 

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AirAsia’s Application of the ‘Thirty-Six Stratagems’

Author: Wong Wei Mei

Abstract

Based on the ‘36 Stratagems’ (三十六计) – a compilation of strategies from the China Warring States Era, this paper analyzes the transfer of military strategies into the corporate setting of AirAsia. The ‘36 Stratagems’ offers new perspectives about how to form creative strategies in today’s dynamic business landscape with similar characteristics to ancient Chinese warfare, particularly the aviation industry surrounding AirAsia in South-East Asia. The article illuminates the different ways AirAsia utilized one of the stratagems during the global economic crisis in 2008 and how the low-cost carrier adapted the stratagem to the business model and market conditions.

Strategy: ‘The 36 Stratagems’

Introduction

Corporate Strategy is defined as a long-term plan of action designed to achieve a certain goal for the whole organization (Stimpson and Farquharson, 2010). The ’36 Stratagems’ though unconventional, is the perfect guide to executing unique and aggressive corporate strategies. The ’36 Stratagems’ is an ageless compilation of Chinese strategies from hundreds of years of experience. The ’36 Stratagems’ is a unique collection of lessons, proverbs and aphorisms that captures the fundamentals of Chinese strategies (Sengar, 2006). In the West, Sun Tzu’s ‘Art of War’ is more popular compared to the ’36 Stratagems.’ It is a complete playbook compiled from more than twenty generations and yet it is as short as only one hundred and thirty-eight Chinese characters. It is compact and can be interpreted creatively to fit into any business landscape (Krippendorff, 2003).

Sun Tzu’s Art of War is a military text more focused on the philosophy and set of rules surrounding military organization battlefield tactics. It was the work of only one man while many created the ‘36 Stratagems’. In fact, they are stories passed down from generation to generation, refined to a point where only the bare fundamentals remain. The ’36 Stratagems’ is usually applied subtly in politics and diplomacy, it also targets psychological warfare (Verstappen, 1999).

Brief History

The ’36 Stratagems’is hugely influenced by a turbulent time in China’s history known as the China Warring States Era (403-221 BC). This period of time was characterized by war and taking over territories. The seven states: Qin, Han, Wei, Zhao, Qi, Chu and Yan dominated the smaller separate states as all of them battled each other to surge to power. The Seven Warring States and the smaller states engaged in brilliantly planned battles, shifting alliances and political manipulation (Krippendorff, 2003). Brilliant scholars and generals have used geographical, political and most importantly psychological warfare to achieve their numerous goals. The various states fielded massive armies of infantry, cavalry, and chariots. Complex logistical systems maintained by efficient government bureaucracies were needed to supply, train, and control such large forces. The size of the armies ranged from tens of thousands to several hundred thousand men. (Ebrey et al, 2006). Consequently, the leaders and scholars of this period work under extreme circumstances to come up with workable strategies and for the western readers, these strategies show ageless representation of the mechanics of human nature under severely stressful situations. Many of the proverbs in the ’36 Stratagems’ stemmed from events occurring in this era (Verstappen, 1999).

Content’s Overview

There are 6 strategies in the book and each of the 6 strategies is comprised of 6 stratagems. They are: Stratagems when in a superior position; Stratagems for confrontation; Stratagems for attack; Stratagems for confused situations; Stratagems for gaining ground; and Stratagems for desperate situations (Sengar, 2006). There is an afterword that is incomplete. Generally, the first three strategies are used when facing more advantageous situations while the last three is usually executed in a more disadvantageous environment. Classical Chinese is characterized by briefness. Every proverb in the strategy has a short and concise explanation attached to it. Battle scenarios and folklore usually accompany the strategies to further explain the source and history behind it. This also gives a better understanding as to how to execute them.

While at first glance, the ’36 Stratagems’ looks like it is primarily used for military purposes. But in reality, the ’36 Stratagems’ has been used as an aggressive and comprehensive bible for the business world. In fact, many global companies like Nintendo, British Airways, Epson etc (Krippendorff, 2003) have been utilizing the ’36 Stratagems,’ some unknowingly. The ’36 Stratagems’ contains strategies that are very different from the more direct business strategies developed in the West and requires a little bit of creativity in execution. It offers and expands options where other strategies limit you to stringent concepts (Krippendorff & Rivera, 2004). Even if one is not comfortable with using the ’36 Stratagems,’ we still have to be aware of such stratagems in case rival businesses use it against us.

AirAsia Overview

Low-cost Carriers

The aviation industry has been rapidly changing for the past 15 years. Flying has been revolutionized and it has been established as a staple method of travelling long distances over a short amount of time. A spike in emergence of low cost, no-frill carrier accompanied this development. The low-cost carrier runs on a very different business model compared to the mainstream air-carrier businesses. It is increasingly imperative for air-carrier businesses to distinguish themselves in their markets pools. Deyes’ (2008) research revealed that a significant 30 percent of passengers and customers pick an airline based on pricing.

A common feature of low-cost carriers is they avoid providing hub-and-spoke networks and usually offer point-to point services (Tretheway, 2004). Their price structure also greatly differentiates them from conventional airlines. Low-cost carriers mostly start by offering services at the lowest cost possible while providing only basic services. Their low fares and services can be reflected by Porter’s generic business strategy to set low-cost carriers apart (Hooper, 2004).  Minimal services to customer help low-cost carriers reduce costs dramatically.

AirAsia Introduction

AirAsia is a highly successful low-cost airline in South East Asia. Initially, AirAsia was a sister airliner to the national carrier Malaysian Airlines (MAS). Both of them were government-owned. The Malaysian government was more focused on Malaysian Airlines and this affected the performance of AirAsia. At the time, AirAsia did not fare well (Shari, 2003) and was having difficulty retaining profits even though AirAsia flew domestic routes not covered by Malaysian Airlines.

Dato’ Tony Fernandes wanted to run a low-cost carrier in South-East Asia. He arranged for a meeting with Conor McCarthy, Ryanair’s former operations director (Conor McCarthy later became Dato’ Tony Fernandes adviser). Both of them developed a plan for a low-cost airline based in South-East Asia (Grant, 2010). Fernandes registered a company in Malaysia called TuneAir in May 2001. Fernandes wanted government support and arranged for a meeting with Prime Minister Mahathir Mohammad. Fernandes wanted to get an official endorsement from the prime minister to be operating in the aviation industry but Prime Minister Mahathir Mohammad suggested that Fernandes acquire AirAsia, which was then a shell of a company with a massive debt of USD $37 million instead of issuing a new license (Economist, 2009). Pesek (2003) and Ranawana (2001) stipulated that the Prime Minister used this meeting as an opportunity to offload this struggling government-owned airline, an ongoing attempt for the past two years.

Fernandes agreed and they drew up an agreement. For a token sum of MYR 1, AirAsia was bought by TuneAir (Prystay, 2001). AirAsia was in a lot of debt so Fernandes remodeled it into a short-haul low-cost carrier.  Today, AirAsia is the single largest low-cost carrier in Asia. This award winning airline now flies both domestic and international routes and has plans to continue expanding their routes and the company itself.

Stratagem: Seize the Opportunity to Lead the Sheep Away ()

Polarity阴阳and Wu Wei ()

Polarity.  The Stratagem ‘Seize the Opportunity to Lead the Sheep Away’ stems from two very important ideas, one of them is polarity. In Taoist teachings, there is no concept of good or bad but merely two sides of the same coin. This correlates with a strong advocation of Yin and Yang, otherwise known as polarity. Chinese philosophy places a lot of emphasis on polarity (Miller, 2003; Watts, 1999). Contrary to the Eastern belief, the West has cultivated an environment that encourages us to pursue the good without the bad that we have to overcome our competitors instead of maintaining the harmony between adversaries, to turn in a profit without making losses. Giving leeway reflects weakness, letting other companies survive is a sign of cowardice.

Ironically, all these Western lessons are far from the scenarios in reality. While running a business, there are bound to be profits, as there are losses. There will always be competitors and there will almost be inevitably ups and downs. To actively seek for only the good seems folly. Understanding and utilizing Polarity can benefit businesses in striving to strike a balance, this can be more beneficial for a company compared to completely destroying your competitors. This way, a business can learn from another company. At the same time, this scenario motivates employees and prevents the entry of more competitors. The classic case example is of the ongoing war between Coca-Cola and Pepsi (Krippendorff & Rivera, 2004).

When companies accept the complexity of their situation, they will have a better control of the environment. The environment can include market, consumers, competitors etc. With such understanding, companies can gain more clarity and form more interdependent plans. New strategic possibilities often surface as a result of such clarity.

2500 years ago, Lao Tzu introduced Taoism. He advocated the study of the pattern of nature such as markings of shells, patterns of running water in order to understand and better influence our environment. Once one identifies a system’s pattern, it will be easier to manipulate the system. Successful companies such as Microsoft, Virgin and Sony have implemented polarity as part of their corporate strategy and this is because they have a holistic understanding of their surrounding and have a firm belief that both yin and yang have to coexist (Jaeger, 2012).

Wu Wei (Go with the grain).  Wu Wei is very closely related to polarity and many of the concepts involved intertwine. Lao Tzu introduced the concept of Wu Wei. A very easy way to look at this is the common phrase, ‘Going with the flow’.  In the West, people tend to look at things in a more rigid, orderly manner. Most scenarios already come with a supposedly tried and tested measure to handle them and those that act against this system are considered reckless and bound for failure. In Taoism, the Chinese believe that learning the pattern of nature means being able to manipulate the pattern while going with the flow of matters. Forcing an action against the situation requires too much effort. Thus, we should strive to exert our influence efficiently with minimal effort, molding it after the flow of events. Sun Tzu from the Art of War believed that a proficient fighter does not only win, but is skilled at winning with ease (Krippendorff, 2003).

Seize the Opportunity to Lead the Sheep Away ()

This is the 12th stratagem of the ‘36 stratagems’. It is the stratagem for confrontation. This stratagem is derived from two general concepts-Polarity and Wu Wei (Go with the grain). This stratagem came from an old Chinese folk tale about a bereft traveler that wandered and came upon a flock of sheep. The shepherd was distracted so the traveler used this opportunity to snatch a sheep. He then strutted away so calmly that the shepherd did not notice the loss of one of his sheep until it was too late. This stratagem fundamentally means to take advantage of opportunities no matter how negligible to attain profit (Verstappen, 1999). There is no definite definition to the stratagem and it is largely up to interpretation. It is important for a business to focus on current goals while keeping a keen eye out for any threats or opportunities, as these are the times to take full advantage of them.

Opportunities are often only available for a limited amount of time, so flexibility is key. This way, one can immerse and utilize the possibilities at any moment’s notice. The best time to move in and act is when your enemy or competitor fail to react or retreat. Most companies retreat due to structural reasons or a lack of keenness to the situation around them. A good businessman will be able to dive in when others pull out. It is also important to create opportunities or value especially undetected by an unsuspecting or unlikely competitor. In ancient times, a good general often wait for enemies to make a mistake. The general also observes weather and geometrical standing as well; treating all of these as opportunities while others may dismiss or cower from them.

Being attentive and understanding of one’s surrounding as mentioned in the explanation of polarity help us to take even small opportunities and small gains. This is because small opportunities and gains often lead to a long-term and more solid return. Actively searching and seizing opportunities is a basic requirement for the continuum of a successful company. As such, many established businesses like Microsoft or Home Depot follow this strategy. A good example is when Home Depot unsuspecting to contractors swooped in to encourage consumers to do their own home renovation and projects instead of hiring independent contractors (Kim & Mauborgne, 1999). This was because contractors had a hard time viewing a parts supplier as a direct competitor and Home Depot did not hesitate to take this opportunity to lure customers away from professional contractors.

Application for ‘Seize the Opportunity to Lead the Sheep Away’ () on AirAsia

Low-cost carriers are having trouble to sustain themselves. This is largely due to the decrease in profit margins, regulated markets, increase in fuel price, economic condition, difficulty in establishing unique business image and bankruptcy (Hardy, 2009). Despite that, AirAsia, a low-cost airline based in Malaysia (Alloway, 2008) grew steadily while combatting the above factors. When fuel prices soar, most airlines clamored to cut back on flights, employees and purchases. During the global economic downturn in 2008, several budget carrier struggled during the worst of the downturn and an estimated of two dozen airlines worldwide have declared bankruptcy. Despite the industry slump, AirAsia increased flights, added routes, and boosted capital investments.

AirAsia increased efforts during the global economic downturn as AirAsia’s fellow competitors shrank back and cut down on flight routes. As the stratagem of ‘Seize the Opportunity to Lead the Sheep Away’ (顺手牵羊) implies, AirAsia seized the opportunity of further promoting itself while others cowered in face of the economic crisis. AirAsia gave way a million free seats and increased advertising. While others are wary of AirAsia’s seemingly reckless move, AirAsia planned to fill up the vacuum left in the industry and use this as an opportunity to poach customers from other airlines. The decrease in flights from fellow competitors meant a huge amount of passengers were scrambling for alternate flights.  One huge untapped market in the budget aviation industry is the business travelers or travelers previously flying on conventional airlines. AirAsia responded by increasing flights and flight routes. In light of the struggling economy, many travelers do not hesitate to switch down to AirAsia. Some might see this as a short-term plan but in reality, AirAsia used this opportunity to casually lead regular customers from other network carriers to AirAsia. This plan was executed without much resistance as other airlines had failed to cater to their existing customers due to their company’s rigid policy of dealing with the economic crisis. The free seats giveaways and increase in flights might make a slight dent on AirAsia in terms of losses, but in exchange they tapped onto a market that they could not before – the conventional flight regular customers. This encouraged and convinced many conventional flight regular customers after trying out AirAsia to continue frequenting AirAsia even after the economy improved. While other airlines are struggling to keep their companies alive, AirAsia took an aggressive move and captured more market share, causing AirAsia’s competitors to struggle to catch up and regain their losses even after the economy improved.

The travelling industry took a big setback but to everyone’s disbelieve, AirAsia increased advertising. AirAsia was attentive to the opportunity that was presented, an opportunity that was oblivious to AirAsia’s competitors. The marketing and advertisement cost which were cheaper in light of the global economic downturn were fully utilised by AirAsia while others pulled out, this in turn brought more attention to AirAsia and helped AirAsia stood out among fellow competitors. Another example is when AirAsia utilized the cheaper advertising cost to exchange for more brand recognition, taking the chance to monopolize when others hid was during the SARS outbreak in 2003. During the SARS scare, AirAsia tripled spending on advertising while other airlines cut back (Economist, 2009). In fact, there was a surge of 400 percent growth in passenger volume compared to the corresponding period the year before. The increase in marketing ensured that people remember AirAsia, building a brand following. Branding is a vital source of competitive advantage and shows the authentic value a company represents (Fombrun, 1996) and AirAsia used the economic slump to build its brand into a stronger one, and strong brands will help with higher long-term and short-term results for AirAsia This became a crucial goal of AirAsia’s management (Keller, 2002). AirAsia’s pursuit of branding during a time where the industry took a back seat magnified AirAsia’s ability to set the company apart from the rest. It reflected the strengths of AirAsia glaringly, especially when AirAsia showed commitment beyond the task of moving a passenger from one point to another. AirAsia exploited the competitors’ lapses and seized the advantages to the company’s side. The negligence of the competitor was turned into a benefit to AirAsia. Thus, AirAsia managed to innovate and improve based on the dire situation to stay relevant to the market at 2008. A good example was the sponsorship of the English Premier League Referees. Despite the decrease in business in the industry, AirAsia experienced a spike in passengers. In the long run, this builds consumer loyalty. In this case, it is clear how AirAsia used the stratagem wisely and made the most out of the economic crisis.

Usually, convincing consumers to switch brands is an expensive feat but in a situation where almost all of AirAsia’s competitors pulled out and focused on sustaining operations and reducing loss, AirAsia did not follow the incumbents and did the opposite. With the increase of marketing, increase of availability and the attractive low fare, many frequent travelers tried or switched to AirAsia, building trust that even in a global economic downturn, AirAsia is still reliable. Reliability in flight industry is very important and can distinguish a company from the others. Trust of a brand by consumer is hard to obtain and is very valuable. Many businesses don’t recognize the value of the trust of a consumer simply because there is no number attached to it, but consumers’ trust benefit a company in the long run. A good review or word of mouth is more convincing than a commercial. It is vital to retain existing customers but it is equally important to attract new customers (Westcott, 2005). With trust, AirAsia built a pool of loyal followers that attract more and more passengers to switch to AirAsia till today, all of these without any aggressive response or comeback from AirAsia’s struggling competitors.

AirAsia also took this opportunity to showcase the volatility and aggressiveness of the aviation industry. This prevented others from entering the market, preventing further competition (Global Travel Industry News, 2008). AirAsia also bought 25 of the A330-300 aircraft from Airbus. Airbus delivered three A330-300 in 2009, they also fast-forwarded an aircraft scheduled to be bought in 2011. As fuel prices rise, other airline companies opted to lease planes or use existing planes of an older model. Aviation companies like UK-Canadian carrier Zoom and Hong Kong-based Oasis (Oprea, 2010) declared bankruptcy mainly because they were still using old planes. Being a low-cost airline, maintaining a low cost of operations is imperative. Using the new ordered planes will not only reduce fuel consumption but also reduce maintenance and personnel costs (Ringbeck & Franke, 2003). The bulk aircraft order also resulted in lower capital costs (Vidović, Štimac & Vince, 2013). In short, AirAsia strongly utilized the stratagem ‘Seize the Opportunity to Lead the Sheep Away’ (顺手牵羊) and came out strong during and after the global economic crisis.

Conclusion

The ’36 Stratagems’ is used by successful businesses all around us. Most of them did not even realize they were utilizing the ’36 Stratagems.’ This is because the ‘36 Stratagems’ are the fundamental basics when it comes to strategies. Up to interpretation, they could be used in the most basic manner or even a more complex version of them. AirAsia is one of the companies that had successfully executed the ’36 Stratagems.’ Other than using ‘Seize the Opportunity to Lead the Sheep Away’ (顺手牵羊), AirAsia also used ‘Exchange a Brick for a Jade’ (抛砖引玉), ‘Befriend the Distant Enemy to Attack One Nearby’ (远交近攻) and ‘Feign Madness But Keep Your Balance’ (假痴不颠).  AirAsia is able to achieve success over competitors despite being a relatively young aviation company due to AirAsia’s ability to utilize the surrounding situation to benefit it. AirAsia will continue to thrive as long as the company continues to believe in conquering the market and competitors with strategic implementation of the ‘36 Stratagems.’

References

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Ebrey, Walthall, Palais. (2006). Pre-Modern East Asia: A Cultural, Social, and Political History. Boston: Houghton-Mifflin Company.

Economist. (2009). Cheap but not nasty. Economist, Vol. 390.

Fombrun. (1996). Reputation: Realising Value from the Corporate Image. Boston: Harvard Business School Press.

Franke. (2004). Competition Between Network Carriers and Low Cost Carriers—retreat battle or breakthrough to a new level of efficiency? Journal of Air Transport Management.

 

Global Travel Industry News. (2008). Budget airline AirAsia can stay profitable even if oil hits $200 a barrel, CEO says. Retrieved 25 Dec 2013 from: http://www.eturbonews.com/3109/budget-airline-airasia-can-stay-profitable-ev

Grant. (2010). Contemporary Strategy Analysis: Text and Cases. John Wiley & Sons Ltd.

Hooper. (2004). The Competitive Positioning of Southeast Asia’s New and Evolving Airlines, Paper No. 54, presented at the Air Transport Research Society Conference, Istanbul, 1–3 July.

Jaeger. (2012). A Geomedical Approach to Chinese Medicine: The Origin of the Yin-Yang Symbol, Recent Advances in Theories and Practice of Chinese Medicine, Prof. Haixue Kuang (Ed.).

Keller. (2002). Strategic Brand Management (2nd ed.). New Jersey: Pearson Education.

Kim, Mauborgne. (1999). Creating New Market Space. Harvard Business Review, Jan-Feb 1999.

Krippendorff. (2003). The Art of the Advantage: 36 Strategies to Seize the Competitive Edge. TEXERE, Thompson.

Krippendorff, Rivera. (2004). Building creative strategies with patterns. Harvard Business Review.

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Oprea. (2010). The Effects of Global Economic Crisis on the Air Transport of Passengers in Europe and in Romania. GeoJournal of Tourism and Geosites.

Pesek. (2003). The Richard Branson of Asia Shakes Things Up. The Manila Times, July 9, 2003.

Prystay. (2001). Tune Air Founder Goes Against the Odds To Establish a Low-Cost Asian Airline. Wall Street Journal, Dec 10, 2001.

Ranawana. (2001). No Fear Of Flying. AsiaWeek, Nov 30, 2001.

Ringbeck, Franke. (2003). Flight for Survival: a new business model for the airline industry. Strategy + Business.

 

Sengar. (2006). The ’36 Stratagems’ for Business: Achieve Your Objectives Through Hidden and Unconventional Strategies and Tactics. Cyan Communications.

Shari. (2003). A Discount Carrier Spreads its Wings; AirAsia is Going International, and Rivals are Scrambling. Business Week, i3847 Sept 1, 2003.

 

Stimpson, Farquharson (2010). Cambridge International AS and A Level Business Studies: Second Edition. Cambridge University Press.

 

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Vidović, Štimac, Vince. (2013). Development of Business Models of Low-Cost Airlines. International Journal for Traffic and Transport Engineering.

 

The Sustainable Advantage

Author: Carl Thylen

Introduction

A new age is dawning within the world of business and many companies still fail to recognize the true meaning and importance of its defining concept: environmental sustainability. Experts from The Harvard Business Review have indicated that sustainability is the “key driver of innovation” within today’s business world (Hudson and Rogers 3). Experts make the distinction that smart companies recognize it as the newest innovational frontier (Nidumolu, Prahalad, and Rangaswami 4). They also show that it is one of the most important new challenges that face businesses today and will require commitment from companies at every level (Hudson and Rogers 3). Companies who have devoted their attention and investments wholeheartedly to this new frontier have conclusively and substantially lowered input costs, increased revenues, enhanced competitive advantage, and created entirely new avenues of business (Nidumolu, Prahalad, and Rangaswami 3).  Companies should not focus on environmental sustainability as a concept that is separate from their economic bottom line. Instead companies must recognize that environmentally sustainable business is simply one of the most effective ways to reduce input costs, enhance profitability and create tremendous competitive advantage. Therefore, top management must voluntarily implement initiatives that aim to make their company more sustainable in order to harness the tremendous potential that environmental sustainability has for enhancing their economic bottom line.

Defining the Role of Environmental Sustainability in today’s Business World

The director of the Center for Business and the Environment at Yale University, Daniel Esty, has classified environmental sustainability as the new megatrend within today’s business world. He defines a megatrend as “incipient societal and economic shifts such as globalization, the rise of the information society, and the move from hierarchical organizations to networks” (Lubin and Esty 2). Now, they suggest that environmental sustainability is on par with globalization and the information age is an exaggeration; however, Esty along with his co-author Dr. David Lubin, formerly of Harvard University, explain themselves in the following manner:

          Over the past 10 years, environmental issues have steadily           encroached on businesses’ capacity to create value for           customers, shareholders, and other stakeholders.           Globalized workforces and supply chains have created           environmental pressures and attendant business liabilities…           “Externalities” such as carbon dioxide emissions and water           use are fast becoming material—meaning that investors           consider them central to a firm’s performance and           stakeholders expect companies to share information about           them. (3)

This quote clearly demonstrates that environmental sustainability is becoming a major factor within the business world and certainly has the potential to become as paradigm-altering as globalization. However, the two most important factors described above that are directly related to the profitability of a business are negative externalities, such as carbon dioxide emissions, and their effect on how investors and other stakeholders view businesses. The negative externalities mentioned above can serve as indicators of how seriously and accurately companies have embraced and understood environmental sustainability. Poor waste management and a significant negative impact on the surrounding environment are indicators that a company has not taken environmental sustainability to heart, and failing to do so is not only harming the surrounding environment, but is also harming its own ability to stay competitive in today’s business environment. Additionally, negative externalities affecting the environment are becoming a major concern for investors and informed customers alike. Needless to say, enhancing and maintaining investor and consumer confidence needs to be of the utmost importance to any company.

As shown above, environmental sustainability has rooted itself as a fundamental issue within today’s business world. The question of whether companies address it in the correct manner still remains to be answered. According to a survey conducted by MIT in 2011, to which 3,000 executives from the commercial sector spanning 114 different countries responded, 70% of companies have placed sustainability on their management agendas (Haanaes et al. 3). However, the survey indicates that on average, sustainability is ranked only eighth in importance (Haanaes et al. 3). This indicates that while companies are recognizing that sustainability is important, they are still vastly underestimating it. The survey also indicates that two thirds of executives recognize that sustainability is necessary to “being competitive in today’s market place” (Haanaes et al. 3). On the other hand, less than one third of companies say that their sustainability initiatives contribute to their profitability (Haanaes et al. 4). This indicates that while a good amount of companies are aware that sustainability can also mean profitability, far less have realized how they can utilize environmentally sustainable tactics effectively enough or on a large enough scale to enhance their profitability. As the data indicates, this is likely due to sustainability not being viewed as a top priority and is being neglected by concerns related to their economic bottom line. This indicates a significant problem in the way companies view sustainability. Companies should not focus on environmental sustainability as a concept that is separate from their economic bottom line as it is just as much of an economic concern if implemented correctly. In accordance with the arguments presented in this research paper, the smart and correct way that companies should define sustainability is: a strategic aspect by which there are both short-term and long-term ways to make money through reduced input costs as well as both simple and more complicated methods of implementation that also lead to reduced input costs as well as other economic gains in the form of increased revenues. Poorly informed companies, conversely, only reluctantly accept it as a necessary concession made to aspects that aren’t directly related to its business goals as they are defined today, and treats the relationship between environmental sustainability and the economic bottom line as largely zero-sum. The latter view is incorrect, and the next section of this research paper will provide tactics and strategies for implementing sustainability that will demonstrate that the former view is superior.

Suggestions and Strategies for Implementation

The simplest and most readily available method of achieving sustainability within virtually any company is best introduced by the following facts referenced by Dr. David Bechtold, a professor of strategic management and sustainability at the University of Tampa, during an interview conducted by the author. Studies have shown that for any given product, 98% of the materials used to produce it are thrown away (Bechtold). Furthermore, 96% of the inputs (be they energy or material) used to make a product end up as waste (Janine Benyus). While this may seem like a depressing scenario to any businessperson, one should realize the tremendous opportunity for savings should any percentage of these inputs be recaptured and reused (Bechtold). The reason why savings within the production process itself are so very valuable comes down to the mathematical nature of savings (Bechtold). Since these savings are bottom line, very little, if anything, gets detracted from it before it gets added to a company’s net income. Demonstrably, savings of 1 dollar in your production process is equivalent to a 20 dollar sale, since the average sale has various operating and tax expenses associated with it (Bechtold). Research has also found that savings such as these are easily achieved through rudimentary “housekeeping measures” such as monitoring air conditioning and equipment energy expenditures or even measures as simple as turning off the lights in unoccupied facilities (Bansal and Roth 724). These types of savings are best exemplified by the endeavors of Ray Anderson, former CEO of the carpet tile company Interface Flor and an environmental visionary of sorts, whose innovations are readily accessible to anyone and are definitely achievable by those willing to try. Through taking a closer look at the expenses generated throughout his company’s manufacturing processes, he was able to identify and eliminate more obvious forms of wasteful practices and ultimately drove 450 million dollars of savings annually directly to Interface Flor’s bottom line (Bechtold). These bottom-line savings were hugely valuable for the company since they were equivalent to roughly 8 billion dollars of sales revenue which would normally have taken Interface Flor 5 years to generate (Bechtold).

Businesses have to redesign their business model around the notion that when they sell products that will serve as long term assets for the purchaser, they are not selling the actual product, but the service that product provides. How this relates to sustainability will soon become apparent. The best way to go about this is to provide long term assets through leasing. While this is done for a myriad of products, the concept is to extend leasing services to products that are not typically leased. This is best exemplified by Ray Anderson’s business model for Interface Flor, where he leases carpet to his customers. Typically, when full-room carpeting is replaced, the whole preexisting carpet is removed and disposed of, even if the only parts of the carpets that are worn out are the areas that are exposed to activity. Interface Flor, on the other hand, replaces only the worn out segments of carpet at the request of the customer. In return, the customer pays a monthly fee to Interface Flor in the form of a leasing agreement, instead of just paying a one-time fee for the carpet and its installation. This is very appealing to the customer first and foremost because the monthly fees are much lower and manageable in comparison to the substantial lump-sum charged by other companies. Additionally, the customer never has to worry about their carpet appearing worn-out as it is continuously renewed. Both these aspects have given Interface Flor a significant competitive advantage, as customers are far more interested in leasing carpet in the aforementioned fashion than they are in the old way of investing in carpeting (Bechtold).  However, the most important aspect that makes this type of business plan sustainable is that Interface Flor is now willingly and directly responsible for dealing with their used and discarded products. This opens up tremendous opportunity for savings, as the company itself has now recaptured all potential waste generated by their expended product and can now recycle and reuse a significant percentage of their original inputs (Hawken 64). In this way, Interface Flor has created a largely closed production cycle, where their original inputs are recaptured and reused in the production of new products and have in this way reduced their dependence on outside vendors for materials. Ultimately, this concept of leasing long-term assets and focusing on providing a service rather than a product, has allowed the company to repurpose its waste resulting in massive bottom-line savings. In addition, this process has also indirectly benefited the environment seeing as waste has been recaptured and has now become a resource instead of discarded dead weight that pollutes the environment (Hawken 64). By making the company directly responsible for its own discarded products, waste management is no longer a responsibility on the part of the customers or society, who have little economic incentive to responsibly or efficiently dispose of their waste. Additionally, the entire concept of waste management becomes obsolete, as discarded products are not waste to a company that can reuse materials (Hawken 64). In this way, companies can positively affect the environment by focusing entirely on their own economic bottom line.

While many of these arguments are viable for larger companies, they may not be for smaller companies that don’t have the resources to invest in research and development. Concerns such as these can be properly addressed through taking into account the fundamental concept of trickle-down economics. Whilst this concept deals strictly with investments in their monetary form, it applies just as readily to knowledge capital. The large firms have the money and ability to invest in researching sustainable production methods and materials, and have the incentive to do so since they, as industry leaders, set larger goals when it comes to remaining competitive in the big-leagues and thereby need to strive for innovation in the largest sense possible. The investments of the major players will in turn “trickle down” to the small business arena, as large corporations have a significant business incentive to sell their innovatory ideas and technologies as is demonstrated in the following example.

In the days before lead was banned as an anti-corrosive agent used in the manufacturing of various electronic devices, Hewlett Packard developed a new anti-corrosive agent that replaced lead before it was banned, and then sold this concept to a variety of vendors (Nidumolu, Prahalad, and Rangaswami 4). HP profited considerably from this venture, not only because they were able to continue manufacturing without the use of lead, but also because their distribution of knowledge to a variety of vendors led to increased competition, which drove down the price of the new anti-corrosive agent thereby reducing HP’s input costs significantly (Nidumolu, Prahalad, and Rangaswami 4). This is a prime example of how the distribution of knowledge capital obtained by an industry leader not only led to a significant profit for the developers when this knowledge capital was initially sold, but also of how it reduced input costs on a long-term basis for an entire industry. Additionally it shows how a single industry leader can bring about massive change within its industry through investment in sustainable business practices.

Not only can industry leaders actively bring about more sustainable business through direct research investments, but they can also indirectly do so by setting sustainability requirements for their vendors to follow. As industry leaders comprise the most significant contracts for their vendors, there’s plenty of incentive for these vendors to comply. While a harsher approach would be to respond to non-compliance with these requirements by declining to enter into further contracts with the offending parties, there are more relationship-fostering approaches to be considered. The most straightforward example of such an approach would be to offer more lucrative contracts to vendors who best meet the assigned requirements. Such a method would lead to healthy competition among vendors, and the market would root out the inefficient and ineffective alternatives. Increased competition also leads to decreased costs on the part of the consumer (meaning the requirement-setting company as well as other companies within the same sector), which would further serve to prove the viability and lucrativeness of this methodology. Industry leaders such as Walmart, Unilever, and Staples have already issued requirements to their vendors (Nidumolu, Prahalad, and Rangaswami 5). Unilever has taken a stricter approach to these requirements by announcing that it will only buy from sustainable vendors and sources by 2015 (Nidumolu, Prahalad, and Rangaswami 5). Staples has taken a more competition friendly approach, as they have announced that they will prioritize business with sustainable vendors, and implement a phased approach where change is achieved through a gradual process of co-operation with their vendors (Staples). Walmart has taken a similar approach, stating that by 2017 it will buy 70% of its products from vendors practicing environmentally sustainable business (Walmart).

Misconceptions and Misrepresentations of Environmental Sustainability

How the business world views sustainability is the fundamental determinant of whether companies will be able to implement it successfully enough to enjoy the significant monetary value that it is so very capable of adding to a company’s economic bottom line. As there are a plethora of misconceptions and misguided arguments regarding sustainability out there, it becomes important to address these misconceptions in order to alleviate some of the confusion surrounding this topic.

The concept of environmental sustainability has been linked to what has become known as the triple bottom line (or TBL). The concept of the TBL stipulates that the goals of businesses are no longer as single-minded as to focus only on financial responsibilities, but instead are equally focused on social and environmental responsibilities (Hudson and Rogers 4). This concept, while both noble and arguably prudent, creates much confusion within the business world and prevents many from realizing that environmental responsibility should not only be viewed as an additional concern that businesses now have to worry about. By presenting environmental sustainability as a responsibility (and a rather heavy one at that), it causes businesses to only meet the minimum requirements set by the regulatory environment (Bansal and Roth 7). This is only natural, seeing as no business advantages are readily observed when sustainability is introduced as entirely separate from the economic bottom line. Instead sustainability should be viewed as an opportunity that greatly aids a business’ efforts in achieving the goals of the original economic bottom line. Terms such as environmental profitability should replace terms like environmental responsibility and environmental protection in order to more effectively reflect the profit-building potential of such practices. The terminology and definitions used to introduce environmental sustainability are imperative in combating the vast misconceptions attributed to sustainability in today’s business world. Introducing a concept poorly leads to the proverbial “poisoning of the well” concept, which is a very likely cause of the widespread confusion surrounding sustainability.

As mentioned earlier in this section, many misconceptions cloud the perceptions of companies and prevent them from realizing the true nature of sustainability and the opportunities it creates. As a result, a multitude of companies are intent on believing that becoming eco-friendly will have the opposite effect on their profitability, and believe that it will dampen their ability to remain competitive (Nidumolu, Prahalad, and Rangaswami 3). In fact, most CEOs in Europe and the United States recognize environmental sustainability only as a corporate social responsibility completely separate from other fundamental objectives of a business, and thereby fail to recognize its concrete applicability to the realms of cutting costs, enhancing competitiveness, and enhancing the overall profitability of a business (Nidumolu, Prahalad, and Rangaswami 3). They voice concerns such as a supposed lack in immediate financial benefits, customer’s unwillingness to pay a price premium for green products during a recession, increased investment costs for new equipment and production processes among many other concerns; concerns that according to researchers Nimolu, Prahalad, and Rangaswami are entirely unfounded. They write that after a long-term study of 30 large corporations, environmental sustainability proved to be a “mother lode of organizational and technological innovations that yielded both bottom-line and top-line returns” (Nidumolu, Prahalad, and Rangaswami 3). They continue to reaffirm the fact that environmentally sustainable business practices help to lower costs through reducing inputs and increase revenues through the creation of better products (Nidumolu, Prahalad, and Rangaswami 3).

Furthermore, many misconceptions are focused on the ability of companies to reuse and recycle waste in a profitable manner which is the determining factor of whether or not a company is able to create a closed production cycle. Many argue that certain industries simply can’t recycle their waste profitably, and that investment costs drastically outweigh potential savings. These critics of “green” or sustainable production methods often point out that the “ecology/economy trade-off” is often too steep within certain industrial sectors, and that recapturing and repurposing waste would prove very costly indeed (Hudson and Rogers 5). However, a study conducted within the industrial chemical sector, where the aforementioned trade-offs are viewed to be particularly steep and waste is supposedly too cumbersome (not to mention highly toxic) to recapture and recycle, found that sustainable production methods based on various methods of reducing waste emissions and recapturing various chemical by-products during the production process increased chemical yields (Porter and van der Linde 103). The study surveyed 29 chemical plants and looked into their efforts to offset waste generation (Hudson and Rogers 5). It found that of the 181 different waste reduction and recapturing processes “only one resulted in a net cost increase” (Hudson and Rogers 5). In fact, for the 27 processes that had sufficient accompanying financial data to allow for savings calculations, for every dollar invested in the sustainable production processes the return in the form of savings was 3.49 dollars (Hudson and Rogers 5). In other words, companies more than tripled their money spent on investments.

Additional criticism of investments in sustainable production methods centers on the notion that these investments are very long-term and companies won’t see returns quickly enough to be able to justify them to shareholders (CSR Pays). However, continuing with the study on the industrial chemical sector introduced in the previous paragraph, it is clear that even in a sector viewed as largely incompatible with sustainable production methods that yield profits, returns can be seen far sooner than expected. Of the 38 above-mentioned sustainability initiatives that provided detailed data on payback periods, two thirds covered their initial investment costs in six months or less (Hudson and Rogers 5). Thus, it stands to reason that had any of these initiatives been implemented near the beginning of the corresponding fiscal year, share-holders would have seen returns above and beyond the initial investments by the end of the fiscal year.

Conclusion

Environmental sustainability is a concept which is responsible for a major shift in the way businesses approach and interact with the environment. This change in approach is defined by smart and well-informed businesses as an economic concern that will greatly benefit their economic bottom line and is no way a separate concern that is detrimental to their economic bottom line. As such, environmental sustainability has been appropriately referred to as the new innovational frontier within the world of business and has been linked to an enormous potential for enhancing competitive advantage. Therefore, businesses that do not approach it with the correct mindset will lose out on a great deal of this competitive advantage and will quickly fall behind those companies that are well-informed and pro-active. Top management of companies that hope to harness the great potential for economic gain that environmental sustainability promises need to institute voluntary business initiatives that continuously strive to make their companies more competitive through deep introspection and persistent innovation. Companies that pursue the goal of environmental sustainability in the aforementioned manner can significantly reduce their input costs, increase their revenues, create largely closed production cycles, expand into new markets and drive massive economic gain to their bottom lines. Thus, the evidence presented in this research paper strongly suggests that companies simply cannot afford to undervalue and deprioritize environmental sustainability any longer.

References

Bansal, Pratima, and Kendall Roth. “Why Companies Go Green: A Model of Ecological Responsiveness.” The Academy of Management Journal 43.4 (2000): 717-736. JSTOR. Web. 21 Feb. 2013.

Bechtold, David. Personal Interview. Apr. 19 2013.

Haanaes, Knut et al. “Sustainability Nears a Tipping Point.” MIT Sloan Management Review 53.2 (2012): 69-74. International Society of Sustainability Professionals. Web. 20 Apr. 2013.

Hawken, Paul. The Ecology of Commerce: A Declaration of Sustainability. New York: HarperBusiness, 2010. Print.

Hudson, Barclay, and Katarina Rogers. “The Triple Bottom Line: The Synergies Of Transformative Perceptions And Practices For Sustainability.” OD Practitioner 43.4 (2011): 3-9. Academic Search Complete. Web. 31 Mar. 2013.

”Janine Benyus: Biomimicry in Action.” TED Talks. Dir. Michael Glass. Prof. Janine Benyus. TED.com. TED Conferences, LLC, 1 Aug. 2009. Web. 30 Apr. 2013.

Lubin, David, and Daniel C. Esty. “The Sustainability Imperative.” HBR.org. Harvard Business Publishing, 1 May 2010. Web. 14 Apr. 2013.

Nidumolu, Ram, C.K. Prahalad, and M.R. Rangaswami. “Why Sustainability is Now the Key Driver of Innovation.” HBR.org. Harvard Business Publishing, 1 Sep. 2009. Web. 14 Apr. 2013.

Porter, Michael E., and Claas van der Linde. “Toward a New Concept of the Environment-Competitiveness Relationship.” The Journal of Economic Perspectives 9.4 (1995): 97-118. JSTOR. Web. 21 Apr. 2013.

Richmond, Lisa. “CSR Pays When You Bake it in or Ignore it Completely.” NBS.net. Western University, 18 Jan. 2013. Web. 14 Apr. 2013.

“Staples Inc. Sustainable Paper Procurement Policy.” Staples, 2010. PDF.

“Walmart Announces New Commitments to Drive Sustainability Deeper into the Company’s Global Supply Chain.” Walmart.com. Wal-Mart Stores, Inc., 25 Oct. 2012. Web. 14 Apr. 2013.

 

 

 

 

 

 

Aliserra Air & Landing – Maintenance and Repair

Author: Elisabeth Sanchez

Executive Summary

Aliserra Air & Landing, LLC will be established at the beginning of 2015 in order to fill a specific need for a maintenance, repair, and overhaul station certified to repair landing gear in Santiago, Chile. The aviation industry in South America has experienced exceptional growth in the last decade, and is currently the third fastest growing region in the world. Industry experts expect the region to continue to grow for at least the next two decades making this the opportune time for a company such as Aliserra Air & Landing to establish firm roots in the market and exploit the prime conditions. The company will be located in a 10,000 square meter hanger facility on the grounds of the Comodoro Arturo Merino Benitez International Airport in Santiago, Chile.

To read more – Click here

Is Latin America Competitive Enough for the Commercial Satellite Services Industry?

Author: Elan Keene

Abstract

As a result of slowed growth in developed countries, such as Europe and North America, commercial satellite service providers are seeking opportunities in developing regions such as Asia and Latin America. This paper seeks to examine the competitiveness of Latin America for commercial satellite service multinationals to expand their business and create competitive advantage for their respective corporations in the region.

When assessing foreign direct investment opportunities, many organizations look to five distinct factors: Gross Domestic Product (GDP), Employment Indicators, Consumer Price Index (CPI), Central Bank Minutes, and Purchasing Manager’s Index (PMI) for both manufacturing & services. This paper will evaluate these five statistics to gather a rounded view of region’s economic standing. Following the economic statistics evaluation, this paper will also identify specific countries that offer the most opportunity in the region. Their respective competitiveness as it pertains to government policies, infrastructure, and service demand will be explored.

Economic Environment

GDP

Between 2008 and 2012, Latin America experienced a steady growth in GDP.[1] During the past few years, growth has slowed; GDP growth projection for 2014 is expected to be around 2.3%. At the current rate, the region will experience a slight decline in growth compared to the 2.6% increase in GDP that was estimated for 2013.[2] However, while many emerging markets have been volatile during this period, Latin America as an aggregate has consistently provided a positive return on investment, and the region’s GDP is expected to rise to 3.0% in 2015 due to a stronger global demand and key structural reforms that some countries are implementing. Currently GDP per capita is $9,499 compared to the North American GDP per capita at approximately $50,000[3].

keene1

(GDP chart courtesy Economic Commission for Latin America and the Caribbean)

Employment Indicators

According to the Economic Commission for Latin America and the Caribbean (ECLAC), unemployment is the lowest it has been in the region for the last twenty years.[4] However, the recent drops in unemployment have not coincided with an expansion in jobs, although the proportion of wage employment did increase.[5]

 

Many South Europeans are immigrating to Latin America, a role reversal from just a few years ago. The emigrants are typically “young single people aged between 25 and 35, with a high level of education and professional objectives.”[6]

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(Unemployment chart courtesy Economic Commission for Latin America and the Caribbean)

 

Consumer Price Index

The CPI for Latin America and the Caribbean region (LAC) has remained within a 1% differential within the past five years, between 5.7% and 6.7%.[7] The relatively low and steady CPI correlates with the increasing foreign direct investment (FDI) in the region. The FDI has increased from 68.8 million to 149.4 million during this time.

Recently, regional inflation expectations have risen. Inflation is projected as a regional average to close 2014 at 10.7%. At this forecast rate, inflation will close the year in double-digits for the first time since 2002. For 2015, forecasters also raised their inflation projections from March’s 8.5% to 9.3%.”[8]

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(CPI table for LAC Courtesy Economic Commission for Latin America and the Caribbean)

Inter-American Development Bank Minutes

The 2014 Latin American and Caribbean Macroeconomic Report released by the Inter-American Development Bank (IADB) states that with the anticipated recovery of the global economy, assuming monetary normalization runs nominally, LAC growth rates will stabilize to normal rates. These forthcoming rates are predicted to be insufficient to meet social demand in the region and accompany low productivity that will not provide enough growth to advance or maintain relative income levels.[9]

Current high levels of credit bring enhanced opportunities, while the region remains under-banked. Standard & Poor’s financial organization expects 2014 to show stronger growth in the region amid the financial market volatility. Even with capital inflows falling and the normalization of monetary policy by the Federal Reserve, Latin American regional retail, branded consumer products, media, and telecom sectors will still benefit from the current economic situation.[10]

PMI

Manufacturing production expanded approximately 2% in Latin America in 2013. The Manufacturers Alliance for Productivity and Innovation (MAPI) predicts a faster and slightly larger manufacturing growth in 2014. The expansion is expected to top at 3.1 %.

Specific industries either drive or slow down the manufacturing growth. While automotive manufacturing led growth in 2013 and continues to lead in 2014, Medical supplies manufacturing finds itself in the new last place, falling to a negative growth percentage. Communication equipment, although slowed significantly, finds itself still growing in the upcoming year.

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(PMI table for Latin America, courtesy The Manufacturers Alliance for Productivity and Innovation)

 

Some of the more prominent countries in Latin America, such as Mexico and Brazil have seen a stagnation and decline of PMI services over the past year.[11] However, these and similar countries are rebounding and staying near 50%.[12]

 

Country Competitiveness

In Latin America, the average composite Global Competitive Index is approximately 4, with Chile ranking at 34 and leading the regional numbers with a score of 4.61. Mexico, Brazil and Panama, follow closely with respective scores of, 4.34, 4.33 and 4.5. The lowest scores in the region belonged to Venezuela, Paraguay, Honduras and Argentina with respective scores of 3.35, 3.61, 3.7, and 3.76. [13]

Latin America is expected to outpace advanced economies in projected growth for 2014. However, due to low levels of productivity, the Global Competitiveness Report suggests that a series of reforms need to be put in place along with “significant and sustained” investments to support recent rapid growth.

Brazil

According to the World Economic Forum, Brazil comes in at 56th place on the GCI scale this year, falling seven places from last year’s ranking. Macroeconomic indicator deterioration, fiscal policy uncertainty and concerns over corruption have contributed to the drop. In early 2014, Standard & Poor’s downgraded Brazil’s long-term credit rating of BBB to BBB- as a reflection of the previously mentioned issues. As of 2013, Brazil’s corruption perception index rank was 72 out of 177, and as of 2012, the population count was 198.7 million.

Mexico

Mexico is ranked 55th overall, according to the World Economic Forum; two down from its spot last year. The country continues to experience a stable macroeconomic environment, a sound financial system, an internal market that continues to allow for economies of scale, good transport infrastructure, and a number of sophisticated businesses that have expanded within the market. Moreover, reforms to fight corruption, increase competition and grow the domestic education and the labor supply are underway. As of 2013, Mexico’s corruption perception index rank was 107 out of 177, and as of 2012, the population count was 120.8 million.

Chile

Chile remains the most competitive country in Latin America, ranking 34th, one position down from last year. Traditional strengths such as: low levels of corruption, an efficient government, along with macroeconomic stability and stable financial institutions have allowed for its market to thrive.[14] As of 2013, Chile’s corruption perception index rank was 22 out of 177, only three positions behind the United States. As of 2012, the population count was 17.46 million.

The Chilean government also publicizes programs that are in place to grant subsidies to companies willing to offer their services in the farther rural areas of the country, which are hard to access through methods such as fiber infrastructure.

Panama

Panama has sharply increased in rankings over the past three years. It currently holds steady at the 40th position. It is the most competitive country in Central America and the second in Latin America, following closely behind Chile. [15]This is in part because the country has actively been focused on making itself more accessible to foreign investors. Panama hosts one of the best port and airport networks in the region and with an influx of foreign multinational corporations setting up operations in the country, its financial markets and technological adoption are thriving. As of 2013, Panama’s corruption perception index rank was 102 out of 177, and as of 2012, the population count was 3.8 million.

 

Opportunities

The highest demand in Latin America is for video and broadband, with OTT and IPTV seeing the fastest growth. OTT and IPTV are not typically satellite based technologies.

SmartLNB and SAT>IP are two technology market disrupters that allow satellite operators to enter the OTT and IPTV market within their own ecosystem.

Partnering with established companies in the area, such as DirecTV, or acquiring smaller ones creates an easier access to market. In Chile, the Swedish Space Corporation (SSC) is ground equipment operator and a key to joint ventures as they own most of the gateway ground stations in the country and can easily access the content providers; companies can also go through the government for ground station access.

Invest in HTS (high throughput satellites) Expanding services to the lesser served markets in rural areas of Chile will help saturate the brand outside of highly populated areas. Although a new business model may have to be implemented to scale to this market or a cheaper service may have to be created, the subsidies that the Chilean government continues to offer for underprivileged area growth will help fund the expansion. Courting the Chilean government and content providers with cost-effective and innovative technology will trigger brand saturation and increased sales

 

Conclusion on Most Competitive Location

Latin America’s landscape for FDI is still ripe for investing. The steady growth in GDP, the low GDP per capita and relatively low CPI are all indicators of a substantial investment opportunity. Some countries stand out more than others for FDI. Considering Chile’s rank in competitiveness and the corruption index, it takes lead as an investment location for multinationals. Even though it has less than 10% of the population of Brazil, Chile’s stable market means an investor will have less to worry about when it comes to fiscal reforms as they pertain to foreign multinational companies.

Chile offers a stable operating environment and is one of the most advanced telecommunications markets in Latin America, with a strong demand for new technologies.[16] Chile has one of the highest Internet penetration rates in Latin America and is only expected to grow.  Despite an earthquake in early 2010, the telecoms sector is performing better than other sectors of the Chilean economy; more-positive government policies are encouraging investment in communication services and infrastructure. [17]

Macroeconomic stability and growing integration with international capital markets has earned Chile an A+ credit rating, the highest in Latin America. Chile remains one of the most stable and prosperous developing nations and consistently ranks high on international indices relating to economic freedom, transparency and competitiveness.[18]

As of 2012, the population count in Chile was 17.46 million. By 2050 the population is expected to reach approximately 20.2 million people.  About 85% of the country’s population lives in urban areas.[19] Chile is the seventh most populated country in Latin America.

Though the market is not as large as Brazil, Chile has the same percentage of middle class as Brazil, though it is slightly less than Mexico.  Brazil has high taxes, increasing prospect of regulations that will put pressure on large market share holders and currently insufficient infrastructure for its country’s needs.[20]

The Chilean government has many subsidies for the telecommunications industry, one being for expansion into more rural areas. By using these subsidiaries, the satellite services companies can work in low-income markets and still make a profit. One example is a satellite hub that allows villagers to use one central location for broadband services, making it cost-effective for the village.

Establishing wireless backhaul and trucking with mobile service providers, allows for increased opportunity in the market. Working with fiber providers to provide services to hard to reach areas may make cost-effective sense to the consumer and the government.

 

Summation

Chile is a prime market for commercial satellite service providers to focus on. Partnering with local content providers will help the commercial satellite service providers stay ahead of the market and keep their existence crucial for commercial use in television and broadband.  In addition, by expanding reach to the lower class market in a upside down pyramid business model, providers can use the profits to create more jobs in Chile and expand the middle class, their main customer base.

References

Business Monitor International, Latin America Investment Opportunities in Telecommunications: Risk/Reward Analysis, 2014

http://www.businessmonitor.com/sites/default/files/whitepaper/Latin%20America%20Telecommunications.pdf

 

Economic Commission for Latin America and the Caribbean, Regional Economic Profile

http://estadisticas.cepal.org/cepalstat/WEB_CEPALSTAT/Portada.asp?idioma=i

 

FocusEconomics, Latin America – Economic Outlook, April 2014

http://www.focus-economics.com/en/economy/region-outlook/Latin_America

 

IBTimes, United Nations Reports Falling Unemployment In Latin America, November 2013

http://www.ibtimes.com/united-nations-reports-falling-unemployment-latin-america-1450748

 

Index Mundi, North America – GDP per capita

http://www.indexmundi.com/facts/north-america/gdp-per-capita

 

Inter-American Development Bank, 2014 Latin American and Caribbean Macroeconomic Report: Global Recovery and Monetary Normalization: Escaping a Chronicle Foretold?

http://publications.iadb.org/bitstream/handle/11319/6417/Global%20Recovery%20and%20Monetary%20Normalization%3a%20Escaping%20a%20Chronicle%20Foretold%3f.pdf;jsessionid=FF844A896337BA5525BD3B362ED2AC75?sequence=1

 

Itaú BBA, Scenario Review – Mexico, April 2014

https://www.itau.com.br/itaubba-en/economic-analysis/publications/scenario-review-mexico/emerging-signs-of-recovery

 

The Portugal News, Crisis reversing migration between Europe and South America, November 2012

http://www.theportugalnews.com/news/crisis-reversing-migration-between-europe-and-south-america/26956

 

PWC, Communications Review: Exploring telecom markets in Latin America, Volume 16, No.2, 2011

https://www.pwc.com/en_GX/gx/communications/pdf/communications-review-latin-america-vol16-no2.pdf

 

Reuters, Brazil Services Recover in February as costs spike –PMI, March 2014

http://www.reuters.com/article/2014/03/05/brazil-economy-services-idUSS8N0M100220140305

 

Standard & Poor’s, Credit Conditions: Growth in Latin America Expected to Pick up In 2014 Amid Continuing Financial Market Volatility, December 2013

http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245361728398

 

US Commercial Service, Doing Business in Chile: 2012 Commercial Guide for US Companies, 2012

http://export.gov/chile/static/CCG%20Chile%202012_Latest_eg_cl_050006.pdf

 

Wikipedia, Demographics of Chile,

http://en.wikipedia.org/wiki/Demographics_of_Chile

 

World Economic Forum, The Global Competitiveness Report, 2013-2014

http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf

 

 

 

Chile’s Exports/Imports 2000–2011 Is having a free trade market helping Chile’s economy?

Author: Anais Baez

Introduction

Chile was able to fight for their independence from Spain in 1818. After their independency they opted for a democracy that was later an oligarchy regime. Salvador Allende was able to earn the trust of its people to become president for three years.  His presidency was overthrown by a coup de’etat led by Augusto Pinochet in 1973. Pinochet placed a dictatorship for 17 years. In these 17 years he privatized many of the public companies and allowed free market in Chile. He stayed in power until Chileans was able to elect a democratic president Patricio Aylwin from the Concertacion Democratica Party. He continued the economic policies of president Pinochet but slow down the privatization. (Thomas White-Global Investing) A growth of 8% GDP was shown from 1991-1997 while Aylwin was in power in Chile. (Trading Economics) Due to global recession in 1998 trading decreased and economic policies were too fixed from trade. Chile learned from the global crisis that they needed to rearrange its economic policies. During 2004-2007 GDP grew to a 5.2% with President Ricardo Lagos. (Economist Intelligence Unit) Nonetheless due to another recession Chile’s real GDP decreased and fiscal balance decreased in 2008, having a rapid recovery in 2010 due to its new economic policies. Quickly the government and economic expertise started to rearrange their economic policies and pulled up from their recession in the beginning of 2008. (Trading Economics) Suddenly after the global recession Chile suddenly was hit by an 8.8 earthquake 70 miles from Concepcion and about 2000 miles southwest of Santiago. The government had to rearrange its policies implementing a $4 billion program to continue domestic consumption taken away from the $22 billion. It harmed one-eighth of Chile’s population, destroying $30 billion worth of property and placing a reconstruction plan of $8.4 billion in which many machinery imports have increased. (Economist Intelligence Union)

A South American country, Chile, has overcome many obstacles and earned many accomplishments. Chile was the first South American country to join the Organization for Economic Cooperation and Development (OECD) in 2010. Another achievement was having the highest nominal GDP in Latin America in 2006. The 2011 Index of Economic Freedom Chile is the 11th freest economy in the world. It is 21st among 178 countries for its transparency in the Corruption Index, 28th among 139 Global Competitiveness Index World Economic Forum, and 25th in 2011 in the world competitiveness yearbook. (KPMG)

Chile is the slimmest country in the world with a land of 2650 miles long and 221 miles wide in the corner of South America. Its land is shared with the driest desert of the world, glaciers, fjords, beaches, volcanoes, spouting geysers, (Thomas White-Global Investment) and 265,000 hectares for agriculture. It is also in the middle of the Atlantic and Pacific Ocean. The temperature of Chile varies depending on their location. In the central region it has a Mediterranean style climate where fruits and vegetables exporting to 70 markets. In the south they have the off-season production which exports to the north when it is winter in north. Chile is also benefitted from natural barriers that do not permit their animals to contain any parasites or diseases. These barriers are ocean, high mountains, deserts, and glaciers. (Doing Business in Chile)

  

Economy

Chile’s economy is one of the best is Latin American and the Caribbean. It also has one of the most open free trade economies in the world. 2.8% growth 2001 and 3.3% in 2002 increasing each year after that. (The Heritage Foundation)Ever since then Chile was receiving an increase in their GDP by 4%.However, due to the global recession the economy took a reverse and its imports and exports decreased in 2008. In 2010 Chile’s GDP went up to $203.44 billion US dollar. Its GDP is equivalent to .33% of the world economy. Copper accounts for 40% of its GDP. (KPMG) 5.1% GDP came from agriculture, 41.8% from industry and 53.1% from service composed 2011 GDP. (Central Intelligence Agency)

As Chile’s GDP increased so has the government budget. In 2011 the government budget had a surplus of 1.40% of its GDP. From 2000 to 2011 the government’s budget had an average of 1.8000% of GDP. Its highest point was in 2007 with an 8.8200% and its lowest was in 2009 with a -4.500%. The U.S. dollar is weak compared to Chilean pesos US$1 is equivalent to $500.75 in 2012. Inflation rate is of 3.50% in April 2012. Its lowest inflation rate was in 2010 with -1.3000% and its rate is of 5.00%. (Trading Economics)

Human Resource

Chile population on July 2011 is of 17,067,369 people made up of 95% European, and 5% others in which 80% of the 5% is composed by Mapuches. In the year 2011, 8,099 million people were working 13.2% in agriculture, 23% in industrial sector, and 63.4% in the service. Education in Chile is one of the highest qualities in Latin America. Its literacy rate for adults is 95.7%.  Poverty is below 11.5% (Central Intelligence Agency), universities have increased a 40%, and the country has no debt to service or social programs which is 70% of the countries expenses. (Thomas White-Global Investment)

Industrial Production has increased 0.20% in March, 2012. The industrial production includes manufacturing mining, and utilities. From 1997 to 2012 the average of productivity is 2.2400%. The industrial production shows the country inflation rate which is currently in 3.50%. The highest in 2011 with 30.9000% and the lowest being -17.4100% in 2010. (Trading Economics) Companies must provide some training for their employees through its companies, local, or abroad. Training is deducted in their corporate tax of 1%. Working hours for commercial is 45 hours and for non-commercial employees is 44 hours. (Economist Intelligence Agency) During the recessions of 2008-2009 unemployment peaked to a 9%-11% which was not Chile’s accustomed unemployment rate. (Economic Intelligence Agency) Although unemployment rate is low 6.6% in 2012 and the working sector seems high, there is 11.5% of people under the poverty line. In 2012 Chile’s consumer confidence went up to 46.5 in April from 31.6 in July, 2008.  The highest consumer confidence was in March 2006 with 59.3. (Trading Economics)

Job opening was due to Chile’s policy which enabled 487,000 jobs in 2010. They have also increased the minimum wage amount from 171,000 Chilean pesos to 182,000 Chilean pesos in July 2011. The government gave a subsidy to companies to recruit and retain their employees. Other policies are three program that are created to help the poverty percentage to decrease. Other program that will help the Chilean have a better life are three different bonuses. One is given as a bonus to qualified female workers of 15% in their monthly salaries. Second is given as a bonus to students in middle school and high school who are 15% highest in their class of 50,000 Chilean pesos. Third is a bonus of 10,000 Chilean pesos to each member of qualified family each month. (Economist Intelligence Agency)

Incentives

Chile has two programs that promote investors to import, export, or invest in foreign direct investment. These programs are called ProChile and InvestChile. ProChile is in 43 different countries mainly in those Chile has a free trade agreement with. It helps local and foreign companies by matching partners, market analysis, export markets and clients, and supply chains. (KPMG)

An incentive for investors to invest in Chile is that their government debt to GDP is relatively low, 11.20% of GDP. (Trading Economics) The government also incites investors to do business in Chile. They will give subsidies, financing, or tax credits are given for certain exports to international business that offshore business functions from Latin America, the United States, or Europe. Investors are able to enter the official foreign exchange market in Chile as soon as they enter the country. For fossil fuels the government gives companies tax breaks of 10-100% on machines, materials, and spare parts imported for operational needs. (Economist Intelligence Agency)

Exporters are benefitted from many incentives in order to export their goods. For example, local insurance companies provide them with insurance. Commercial banks offer many types of foreign currency and peso credit. Law 18,645 of 1987 states a loan of 50% “with a cap” to non-traditional exporters that are harder to obtain loans. The Corporacion de Fomento de la Produccion (Corfo), a state development agency, gives out long-term export credits for new good capital that acquire “at least 25% Chilean value added”. (EIU) Maturities of ten years or less is financed in dollars. These maturities are located towards 85% of the value of goods and services through fixed and floating rates. Chilean banks and Corfo repays the exporters in cash. There are no limits to investments and 20% of the exporter’s expenses can be refunded. (EIU)

Free Trade

In 1970 Chile mainly performed unilateral trade liberalization. It has free trade 57 countries in just 15 years through bilateral, association, partial, and complementation. In 1991 Chile began its free trade agreements with Mexico (1991), Colombia (1994), Australia, and others. (Economic Intelligence Agency) Chile also has an associate free trade which includes products except service with Mercosur which is consisted of Argentina, Brazil, Paraguay, and Uruguay signed in October 1996. Also that year Chile signed a bilateral free trade agreement with Canada. Other regional free trade is with CACM-Chile. It was signed in 1999 between Costa Rica, El Salvador, Honduras, Guatemala, and Nicaragua is the established Central American country, which included Chile after on. Republic of Korea and Chile signed a free trade agreement in 1998 facilitating Korea to be one of the top export partners for Chile. Another important free trade agreement for Chile was that of the United States and China. In 2003 Chile signed an important bilateral free trade agreement with the European Union. The European-Free-Trade Association (Iceland, Liechtenstein, Norway, and Switzerland) The US-Chile Free Trade Agreement was signed in 2004. (APEC) Other free trades are those complementation agreements which are products except services with Bolivia, Ecuador (1994), and Venezuela (1991). New Zealand, Singapore, and Brunei signed a free trade denominated by P4 with Chile. Also Chile signed partial trade preference agreements with Cuba and India. Currently there are negotiation with Thailand, signature with Vietnam, and ratifications with Malaysia. (Economic Intelligence Agency)

Exports

Their ocean level is low temperature which calls the attention of 1,016 different fish species such as the Chilean sea bass. (KPMG) It holds 34% of the world’s copper, has the largest copper mine, Chuquicamata. The largest copper mining company, CODELCO, in the world also produces rhenium and molybdenum. (Thomas White-Global Investment)Its major production in agriculture is grapes, apples, pears, onions, wheat, corn, peaches, garlic, asparagus, beans, beef, poultry, sheep, wool, fish, and wine. (Central Intelligence Agency) Exporter and it’s the fourth exporter for wine after Italy, France, and Australia.  (Thomas White-Global Investors) They have about 1, 061 species of fish whereas the most popular fishes are rainbow trout, Atlantic and Pacific Salmons, turbots, and mollusks, red abalone and Chilean oysters, jack mackerel, scallops, mussels, southern hake, and Chilean Sea Bass. Chile is also the biggest salmon producer, 187,000 tons of salmon in 2011. (KPMG) Fish production is equivalent to 45% of all their exports to 93 countries. Frozen seafood product is 45% of all their fish exports. Chile has a low demand for their wine so they are able to export 70% of their wine production. In 2011 Chile produce 1,046 million liters of wine. (Thomas White-Global Investment) Food production makes up for 24% of its GDP and over the past ten years it has increased a 10%. In 2010 Chile exported $11.6 billion from their food production. Their largest food production came from fresh grapes (29%), plums (23%), fresh fillets (22%), frozen pacific salmon (30%), avocados (16%), other frozen fish (10%), wine (5%), and frozen pork meats (5%). (KPMG)

In their industry they have an abundance of copper, lithium, gold, silver, iron, steel, ore, molybdenum, nitrates mining, 360 different types of wood and wood products like timber (KPMG), lumber, foodstuffs, fish processing, transport equipment, cement, textiles, paper and pulp, chemicals,.  (Central Intelligence Agency) Copper is accounted for one third of the world’s production and its main exportation commodity. (KPMG)

Imports

Chile has the highest prices for energy in South America, US$130, the double of Brazil. Its demand continues to grow 5.3% per year. (KPMG) Their imports are petroleum and petroleum products, chemicals, electrical and telecommunications equipment, industrial machinery, vehicles, natural gas. (Central Intelligence Agency) Chile has a strong production but is in need of a vital resource to continue their function which is their lack of energy. In 1995 Argentina settled with Chile to import natural gas. However, due to Argentina’s economic downfall their agreement was abolish in 2004. Ever since then Chile has imported much more commodity that would produce energy. The government was forced to change to diesel for its energy. It also helped the country to exploit their natural resource to get energy such as its geysers and steam fields. In 2010 nine companies were allocated to seventeen geothermal areas. (Thomas White-Global Investment)

Even though Chile has a good GPA standard its dependency on international trade is shown in its current account to GDP deficit of 1.30% in 2011. Its highest current account to GDP percentage was in 2006 with a 4.6000 from 1980-2011. Therefore Chile has a higher importation and personal consumption rate and low savings. Their current account deficit is of 1275 million US dollars in 2011. Its highest was in 2007 with a surplus of 3393.6000 million US dollar. Chile consumer confidence is based on 5 questions for the citizens of Chile. That explains how the citizens view the economy in the future. (Trading Economics)

Since Chile exports are mainly industrial and agriculture, they import many of their machinery for them to perform their work. Another machinery import function is for their food processing equipment. The country’s construction sector has increased because of the earthquake. For the construction Chile imports high-tech building materials and capital equipment. For energy usage non-traditional renewable energy sources are imported, biofuels being the most important. (U.S. Commercial Service) Other commodities imported is television, radio, parts for vehicles. (ECLAC)

Trade Balance

Trade balance changed from 2003 with US$2,341,795.638 to US$7,726,847.870 in 2004. This might have been caused by its U.S – Chile free trade agreement in 2004. In 2008 Chile trade balance went from US$20,816,904.40 thousand in 2007 to US$5,710,384.80 thousand.  Chile made a comeback in 2009 with US$12,529,639.071 from the recession in just one year. This was caused by the price of copper; the demand increased and so did the coppers price enabling more countries to increase its purchase. Both exports and imports increased in 2011 decreasing the trade balance of that year by US$6,504,054.525. Import increased because of the earthquake that damaged many of the infrastructures of the country. (ECLAC)

Partners

Chile’s top five export partners are China, the United States, Japan, Brazil, and Republic of Korea, consecutively. They are all countries that have a bilateral free trade agreement with Chile. Chile has been increasing their exports each year from 2002-2011. Being as it may 2002 was the lowest trade exports with all of its partners. The least exported to from the five was Brazil from 2002-2004, 2006, 2007, 2009 with US$694.00 million, US$838.89 million, US$1,402.60 million, US$2,758.36 million, US$3,356.24, and US$2,734.40 million, respectively. Currently, in 2011 Chile exports to Brazil US$4386.25 million value of products. Their 10 most exported commodities for Brazil were copper products such as alloys, ore, matte and cement; fresh or chilled fish excluding fillets; acyclic alcohols, mineral or chemical fertilizer, potassium, wine, parts and accessories for vehicles; ores and concentrates of other non-ferrous base metals. In 2005 Japan was the lowest exporting country with US$4,535.82 becoming the third largest partner in 2011 with US$8,825.61. Japan’s receiving commodity in 2011 were copper ores, concentrates, anodes, alloys, frozen fish, molybdenum, wood chips, particles, swine meat, iron ore agglomerates, and wine. In 2008, 2010 and 2011 the lowest partner was Republic of Korea with $3,601.7, US$4,086.34 and US$4,329.78 and in 2011 their import value from Chile was US$4329.78. Korea’s was copper, anodes, alloys, ores and concentrates; wood, chemical wood, pulp, soda; swine meat; fresh or dried grapes; ore, molybdenum, frozen fish except fillets; carbonates, per carbonates. The two highest exporting partners are China and the United States. From 2002-2006 the United States was its top partner ranging from US$3,484.40 to US$8,940.19 growing a small percentage each year. After Chile and China had their free trade agreement, China became Chile’s top importer from 2007-2011. In 2006 its exports was of US$4,933.15 jumping to a US$9,980.44. Its growth was continuously apart from a downfall in 2007. Even with the recession in 2009 China was able to purchase US$12,490.75 of commodities due to the increase of copper prices during that period. Last year China stayed as the top importer of Chile’s commodity with US$17,922.78. Chile imports to the United States and China the same commodities as the previous countries, adding tires, gold, and pneumatic to China as their top commodities. (ECLAC)

Although China is currently Chile’s top exporter, the United States is the top exporter to Chile. The United States has been Chile’s top exporter since 2002 excluding 2010. The US-Chile free trade agreement have greatly favored both countries by being Chile’s top exporter and importer. Argentina has continued to grow their imports to Chile with some minor exceptions from the yeas of 2006, 2007 and the recession year 2009. The growth has continued even though Argentina removed Chile’s most important and largest importation commodity in 2003. Chile has gradually increased their import decreasing all of their imports in 2009 when the recession hit. Be that as it may in 2010 their imports picked up rapidly for all their partners. Japan was the lowest importation partner from 2002-2011. From the preceding years the lowest years was 2002 with US$539.80 million. Chile procures US$2,731.02 in which the most goods bought were different types of vehicles and machinery. In 2011 Chile imported crude petroleum from Brazil and Argentina. Vehicles for public and private usage as well as machinery for production from Brazil, the United States, China, and Japan were imported to Chile. Bovine meat, polyethylene, irons, and paper is imported from Brazil. The United States exports coal, propane, airplanes, ether, alcohol peroxide, and polyethylene to Chile. Chile buys TV, radios, digital automatic data processing machines, children’s toys, clothes, and footwear. Other imports of Argentina are margarine, propane, food waste, animal feeds, grain sorghum, bovine meat, maize, butanes, and cereal grains. (ECLAC)

Trade Policy

Chile has one of the most transparent trading policies. Their tariffs are about 6% from countries that do not have a free trade agreement with them. Due to so many countries with free trade their tax is accounted by 1% of all imports in 2010. They do not have tariffs for exports. Chile trades, exports and imports losses of more than 20% in 2009. Although imports have low tariffs and some countries have no tax they are still charged 19% value-added tax on the cost-insurance freight (cif). CIF for capital goods, spare part or accessory should be and equivalent of US$3,813, transport vehicles a minimum of US$4,830.   Government can charge surcharges to dumping, minimum customs values, countervailing duties and import price bands. Import price bands are placed for sugar, vegetable oils, wheat, and wheat flour which aligns the prices of imports with the local ones. Capital goods such as machinery, vehicles, equipment and tools with a depreciation of three years are able to avoid customs duties for seven years. After paying the cif the custom duties should be paid in three equal period the third, fifth, and seventh years from the date of the good imports or in seven payments for passenger or cargo transport vehicles. Interest rate is included in every payment by the Executive Committee of the central bank. (Economist Intelligence Agency)

Institutions that are in charge of import regulations are the ComisionNacional de Distorsiones (CND), Dario Oficial (official gazette), Banco Central de Chile (central bank), and Customs Department. The central bank delivers the license for importers. Import report (informe de importacion) should be written for any import with the value of US$3,000. Imports is opened to all goods except used cars, used motorcycle and used re-treaded. A license from the central bank and a pro forma from the supplier of their purchase are required to import any good. For a foreign-exchange transfer must have a stamped declaration for the Customs Department and presented at a local commercial bank with original shipping documents. “Import permits are valid for 120 days.” (EIU)  The CND examines complaints about dumping. (Economist Intelligence Agency)

Requirements to enter the ports are license, commercial invoice and bill of lading or airway bill. Commercial invoice, free-on-board, and cost-insurance-freight, unit prices, license, are needed in freights, air cargos, or parcel-post shipments. For the shipments insurance coverage is wanted. Monitoring exports are the customs official duty. Companies wanting to export need to register before exporting, provide supply balance sheet, fill in the inscription card, and export form. 90 days for shipment after filling is necessary. Endangered species and historical relics are prohibited to export. Explosives, hazardous chemicals and weapons need to have permission from the government to be exported. (Economist Intelligence Agency)

Iquique and Punta Arenas are regions where there are free zones and Arica is a “free-zone extension privileges”. (EIU) Iquique and Arica are only able to export manufacturing, assembly and finishing of imported material yet Punta Arenas is involved in trade. Investors are able to place a 20% subsidy in the cif cost of the machinery and construction for setting up a project in Iquique. A 3% ad valorem tax is placed in the free ports instead of the tariffs. Companies around the zone are spare from the first-category income tax. Operations, Chilean exports and its components are discharged from the value-added tax (VAT). Tariffs are placed in other ports of the country. (Economist Intelligence Agency)

Laws regarding importation to Chile are the Ley de Salvaguardias (Safeguards Law) gives the CND the power to place import surtaxes if they find that the importers are harming the local production through dumping or subsidies. As part of the World Trade Organization (WTO)Chile is given the authority to Chile to increase their tariff by 25% if found guilty by their standards. Also the results of findings are published in the Diario fOficial (official gazette) by the commission’s technical secretary. The WTO gives 90 days to the accuser to show evidence. While in process the CND might ask for import deposits through the Ministry of Finance. If accuser is not able to pledge innocent they are obligated by the WTO to deliver a compensating duty. (Economist Intelligence Agency)

Conclusion

Chile has a great technique for trading. It learned to exploit what it is good on such as fishery, minerals, and fruits. They have also learned to gain more by importing what they have less comparative cost on. The country was able to come back after an earthquake and a recession in these couple of years which many countries still have not been able to do so. Chile is a country to learn from. It is still in the third world but it upfront from many of its neighbors in Latin America.

Appendix

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Chile: trade balance with World, All years. (Thousands of dollars)
n year exports imports Balance

1

2011

81411129.303

74907074.778

6504054.525

2

2010

70631510.506

56220807.815

14410702.691

3

2009

53592172.262

41062533.191

12529639.071

4

2008

65664087.905

59953703.103

5710384.802

5

2007

67970692.694

47153788.294

20816904.400

6

2006

58679097.386

38406036.070

20273061.316

7

2005

41265945.087

32735070.975

8530874.112

8

2004

32520322.756

24793474.886

7726847.870

9

2003

21664187.379

19322391.741

2341795.638

10

2002

17423088.183

15383398.153

2039690.030

11

2001

18745414.508

16136155.354

2609259.154

12

2000

18214503.759

16619725.987

1594777.772

Chile: Export products to World, 2011. (Thousands of dollars and percentages)

n commodity name trade value % trade quantity unit

1

All Commodities

81411129.3

100

No Quantity

2

Copper;anodes;alloys

29231976.72

35.90661

3386483700

Weight in kilograms

3

Copper ores and concentrates

14304495.2

17.570688

1774763037

Weight in kilograms

4

Chem.woodpulp,soda,blch

2600178.876

3.1938863

3662837309

Weight in kilograms

5

Fruit,fresh,dried, nes

1790163.828

2.1989178

831769230

Weight in kilograms

6

Wine of fresh grapes

1704581.968

2.0937948

667404803

Volume in liters

7

Grapes, fresh or dried

1673375.67

2.055463

923578798

Weight in kilograms

8

Oreetc.molybdn.niob.etc

1472074.948

1.8081987

73935117

Weight in kilograms

9

Gold,nonmontryexcl ores

1450213.005

1.7813449

30830

Weight in kilograms

10

Fish,frozenex.fillets

1440764.283

1.7697387

285917069

Weight in kilograms

Chile: Import products from World, 2011. (Thousands of dollars and percentages)

n commodity name trade value % trade quantity unit

1

All Commodities

74907074.78

100

No Quantity

2

Special transactions, commodity not classified according to class

8835680.892

11.795523

No Quantity

3

Crude petroleum and oils obtained from bituminous materials

6497994.773

8.6747411

8743133632

Weight in kilograms

4

Passenger motor vehicles (excluding buses)

3782778.618

5.0499617

16161836

Number of items

5

Motor vehicles for the transport of goods or materials

2657286.197

3.5474436

3156824

Number of items

6

Petroleum gases and other gaseous hydrocarbons, nes, liquefied

2308462.679

3.0817686

4344130125

Weight in kilograms

7

Construction and mining machinery, nes

1442372.604

1.9255492

3394098

Number of items

8

Television, radio-broadcasting; transmitters, etc

1253561.702

1.6734891

16929351

Number of items

9

Other parts and accessories, for vehicles of headings 722, 781-783

1153615.642

1.5400623

59333500

Weight in kilograms

10

Other coal, not agglomerated

1139936.047

1.5218002

9134966008

Weight in kilograms

Exports 2011)

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References

(1)   Central Intelligence Agency. 2012. The World Factbook. June 8, 2012. <https://www.cia.gov/library/publications/the-world-factbook/geos/ci.html&gt;

(2)   KPMG International Cooperative.  2012 Edition. Doing Business in Chile. <http://www.kpmg.com/CL/es/IssuesAndInsights/ArticlesPublications/Documents/2012-01-kpmg-doing-business-in-chile.pdf&gt;

(3)   Economic Commission of Latin America and the Carribbean. Interactive graphic system of international economic trends. <http://www.eclac.org/comercio/ecdata2/index.html&gt;

(4)   Economist Intelligence Unit: EIU Country Commerce. 2012. Chile. January 1st 2012. <http://0-country.eiu.com.library.law.suffolk.edu/article.aspx?articleid=1058782290&Country=Chile&topic=Regulation&subtopic=Trade+policy&subsubtopic=Trade+policy%3a+Overview&gt;

(5)   International Monetary Fund. 2012. IMF eLibrary – Data. 2011. Chile. <http://0-elibrary-data.imf.org.library.law.suffolk.edu/FindDataReports.aspx?d=33060&e=141553&gt;

(6)   Trading Economics. 2012. Chile-National Statistics Data. April 2012. <http://www.tradingeconomics.com/chile/indicators&gt;

(7)   Thomas White-Global Investing: Capture Value Worldwide. 2010. Country Profile: Chile. June 2010. <http://www.thomaswhite.com/pdf/chile-country-june-2010.pdf&gt;

(8)   The Australian APEC Study Centre. 2009. A Complete Guide To The Regional Trade Agreements of the Asia-Pacific. Tim Martyn. March 2001. <http://www.apec.org.au/docs/martyn.PDF&gt;

(9)   The Heritage Foundation: Leadership for America. 2012. 2012 Index of Economic Freedom. #7 Chile.  <http://www.heritage.org/index/country/chile&gt;

U.S. Commercial Service: United States of America Department of Commerce. 2010. Doing Business in Chile. 2012. <http://export.gov/chile/static/CCG%20Chile%

Corporations’ Internationalization and the Adoption of CSR Practices

Author: Andrew Kovtun

INTRODUCTION

The contraction in communication and shipping times due to increased availability of information technology and transportation links has improved the viability of a global industrial process and has shifted labor and production bases away from the home country of a corporation’s headquarters towards locales that offer reduced labor costs and government regulation. However, as firms expand globally, they vary in the approaches they take to branch out into new markets during the internationalization process based on their size, industry, and corporate stakeholders. Different modes of foreign market entry can have important implications for a firm’s decision to adopt Corporate Social Responsibility (CSR) practices as several studies in this area indicate (Strike et al., 853). For example, a firm that owns and operates subsidiaries in a foreign country is more likely to be intensely exposed to local CSR practices than a firm that only engages in arm’s length transactions with foreign business partners. This is because foreign direct investment (FDI) through wholly owned subsidiaries requires that the MNC engages in more intense exchange relationships with local businesses and societal stakeholders, which tend to facilitate knowledge exchange and the absorption of local norms, including those concerning CSR. However, local norms and practices can also negatively influence foreign operations and may lead to delays in global CSR strategy implementation.

During the internationalization process, firms are faced with the choice of adapting to local customs and to “do as the Romans do”, even if the customs are not considered legitimate in the firms’ home countries, or to apply the same corporate standards worldwide, and risk appearing foreign and incompatible to local culture. In the foreign investment-intensive emerging economies, particularly the so-called BRIC nations (i.e., Brazil, Russia, India and China), foreign companies following internal policies or home-country laws forbidding tactics such as bribing officials or hiring relatives (nepotism) or friends can place themselves at a competitive disadvantage. It is sometimes the case that those companies that use local practices, even if at times unethical ones, such as gift-giving to local politicians in a given country, will be more likely to receive development grants, construction projects, and other competitive business permits.

Nevertheless, some large foreign MNCs are actively exporting their home country’s CSR practices throughout their global operations. Consequently, these firms frequently see a positive halo effect in the sale of products and services when the consumer markets perceive them as socially responsible.  The current concern, however, is that other firms lag behind the larger corporations in CSR implementation due to small size and a lack of resources (Greening and Gray 1994; Russo and Fouts 1997). In other cases, firms might choose to avoid CSR activities in their international operations because global expansion occurred for the sole purpose of utilizing countries as pollution havens (Rugman and Verbeke 1998). For example, firms such as Nike (Connor, 2001) or Apple (New York Times, 2012) can only remain price-competitive, market-leading corporations by continuing to take advantage of the lower labor costs of their international product manufacturers and suppliers, which have been found to be often associated with questionable labor practices in developing countries. Thus, it is evident that a variety of factors including size, industry, and varying stakeholder pressures influence MNCs’ internationalization and their adoption of CSR practices; it is necessary to review these factors to understand the processes that shape such important global trends today.

In this article, the relationship between a firm’s internationalization and its decision to adopt CSR practices are reviewed. In the remainder of the paper, a brief review of the key construct of interest (i.e., CSR and internationalization) is presented. Then some of the key articles that examine the relationship between internationalization and adoption of CSR practices are reviewed. Next, a few examples of how this relationship is important to improve our understanding of the benefits and challenges associated with a firm’s exposure to global markets is presented.

DEFINING THE KEY CONSTRUCTS: CSR AND INTERNATIONALIZATION

 This section defines and discusses the key concepts of CSR, its reverse CSiR, internationalization, environmental responsibility, and corporate competitiveness.

CSR is defined as “the set of corporate actions that positively affect an identifiable social stakeholder’s interests and does not violate the legitimate claims of another identifiable social stakeholder (in the long run)”(Strike et al.2006, 852).In his seminal work on the stakeholder approach to the firm, R. Edward Freeman defines a firm’s stakeholder “any group or individual who can affect or is affected by the achievement of the organization objectives” (2010,46).Firms’ stakeholder groups include, among the others, consumers, shareholders, local communities, governmental bodies, political groups, trade unions, employees, financiers, and suppliers.

The three domains that represent the most commonly measured dimensions of CSR are environmental performance, community relations and labor relations (Muller and Kolk 2010, 10).

Environmental responsibility is a key component of CSR and Dan Etsy, a well-known Yale scholar in green business circles, has even labeled it a business ‘megatrend’ (Reid 2010). “Consumers, shareholders, and supply chains [are placing increasing pressure] on organizations to operate responsibly” concurrently as escalated competition for natural resources in the 21st century has positioned environmental conservancy as a critical priority for governments and citizens internationally (Reid 2010, 1). According to Ralph Reid, VP of Corporate Responsibility at Sprint Nextel Communications, “a company’s commitment to environmental responsibility – bolstered by transparent goals and routine monitoring – is vital to the long- and short-term profitability of an organization”. For example, when a company, such as General Motors today, voluntarily purchases carbon offset credits in an effort to go “green”, it positively affects global communities and the environment by paying for clean energy initiatives and pollution cleanup efforts through environmentally responsible actions without inflicting harm towards any other entity (Kennedy 2012). Sprint Nextel Communications allows its customers to participate in mobile device ‘take-back’ and recycling programs that “dispose of electronics safely and responsibly” by eliminating potential e-waste while the company is able to generate cost-savings by re-selling and refurbishing certain devices and parts (Reid 2010, 1). Nevertheless, it is necessary to note that environmental stewardship is not the only area in which firms can prove themselves as leaders in CSR implementation.

Another example of CSR practices is a novel, innovative project of New Belgium Brewing Company, the brewer of famous Fat Tire craft beers. Recently, the company announced that its Employee Stock Ownership Program (ESOP) “has purchased the balance of company shares, making it 100% employee-owned”, meaning that a key stakeholder group, employees, now has direct involvement in corporate affairs and strategy as well as the opportunity to directly benefit from sustainable corporate success and growth (New Belgium 2013, 1).

An additional example of responsible corporate behavior is Quicken Loans’ recent initiative to buy delinquent mortgages and real estate in the urban decay areas of Cleveland, Ohio and Detroit, Michigan (Carey 2013). Quicken Loans’ initiative focuses on projects where real estate in inner-city neighborhoods can be transformed to accommodate educational centers, incubators for technology start-ups, and chic retail space in order to spark a gentrification movement to the urban cores where Quicken Loans has its roots (Carey 2013). Thus, local communities in the chosen urban areas are positively affected by the profit-generating corporate strategy of the company, while the company itself benefits from a positive corporate image and goodwill from city authorities during its business transactions.

One can even argue to an extent that there is no net negative impact to shareholders and investors of a corporation if the firm’s CSR initiatives are properly positioned and marketed to consumers, resulting in higher sales and income even if profit margins are slightly reduced by the initiative.

There is also a great deal of companies that negatively affect their stakeholders. Researchers have labeled this behavior as “Corporate Social irresponsibility”, or CSiR. Strike et al. (2006) define CSiR as “the set of corporate actions that negatively affects an identifiable social stakeholder’s legitimate claims (in the long run)” (852).

Stakeholders and society at large often pay a high price for corporations’ irresponsible behavior. Even where laws exist to prevent certain forms of CSiR, it is sometimes impossible to prevent accidents which may occur due to improper conduct of a corporations’ employees and/or overall weak corporate supervision, as was the case in the 2010 BP-Deepwater Horizon oil spill in the Gulf of Mexico (National Commission on the BP Deepwater Horizon oil spill and offshore drilling 2011). As a result of the accident, BP and its project partner Halliburton were forced to pay extensive legal settlement costs. BP was also required to allocate $20 billion for a collective cleanup fine after it was found that the drilling and oil firms did not properly inspect the drilling equipment used on the Deepwater Horizon oil rig (National Commission on the BP Deepwater Horizon oil spill and offshore drilling 2011). Reflecting on such incidents, it is evident that a lack of corporate responsibility, particularly in the area of environmental affairs, can lead to a loss in corporate profitability and competitiveness. However, there are situations where irresponsible firms have operations in countries with lenient safety and labor laws. Consequently, MNCs can dodge responsibility to stakeholders by simply replacing a single cheap supplier from a global supply chain- international retailer Wal-Mart chose to do this after a fire in a Bangladeshi factory with relaxed safety measures used by its supplier killed 112 workers (New York Times 2012). Thus, it is evident that as firms expand to become MNCs, incongruent international laws and regulations allow for irresponsible corporate actions to be taken where there is little risk involved.

Fortunately, the 21st century and the coinciding global economic integration have sparked a rise in support by many stakeholders to establish international CSR guidelines. “In 2005, the United Nations Secretary General invited a group of the world’s largest institutional investors to join a process in developing the Principles for Responsible Investment.” As of April 2012, over 1000 investment institutions have become signatories, with assets under management considered to be approximately $30 trillion. (United Nations)

Unfortunately, there has also been a rise in special interest groups that seek to avoid or navigate around established guidelines. A recent push for local products by consumers in the United States, Europe, and the developed world aligns with the societal concept that regional businesses are far more intertwined with local communities than diversified international conglomerates and thus will work to benefit their home market more than a MNC expanding in search of more profit (Palpacuer and Tozanli 2008). Lobbyist groups exist that work on behalf of regional coal-burning utilities and mine corporations that manipulate these rising consumer sentiments; they use evidence of their corporate clients’ benefit to the communities of the impoverished Appalachia region of the United States as a tool to strike down regulations and initiatives concerning the reduction of atmospheric emissions (American Coalition for Clean Coal).

The definition of internationalization has evolved from being considered a “process by which firms increase their involvement in international operations in an incremental fashion rather than in large spectacular strides” (Johanson and Vahlne 1977; Cavusgill 1980; Cavusgill and Nevin 1984) to a broader and more inclusive “expansion across the borders of global regions and countries into different geographic locations or markets” (Hitt et al., 1997).The former definition, labeled the ‘product cycle model’ (Vernon 1966) involves introduction, growth, maturity, and decline stages. During the introduction stage, a firm is domestic-focused, only exporting to other industrial countries in order to achieve economies of scale. The growth stage involves increased export activity and foreign direct investment (FDI) into international manufacturing sites by a firm experiencing significant demand for its product. In the time of maturity, a firm searches for low labor cost locations as the firm’s product is standardized and consumer markets are saturated. Finally, during the decline stage, a firm completely exits its manufacturing operations from its home country as it definitively establishes its low cost operations in a foreign market (Vernon 1966; Melin 1992). This internationalization model is far too specific to a single internationalization process and widely ignores the new realities of growing service industry MNCs. The latter definition, labeled the ‘internationalization process model’ (Johanson and Vahlne 1977), states that firms make a series of logical international moves based on the gradual attainment, integration, and implementation of knowledge and expertise of foreign markets and operations. Some firms form joint ventures in order to gain knowledge of local markets and share the burden of investment with a local business. Other companies partner with foreign suppliers to take advantage of reduced costs without direct liability or capital investment in foreign production. The remaining large corporations invest in and operate wholly owned foreign subsidiaries which they manage using significant capital holdings and in-house corporate expertise in an aim to maximize profit to the global operations of the Multinational Corporation (MNC). As discussed later in this paper, firms often commit to markets with similar customs, languages, and cultures to their home country before comfortably making the decision to expand elsewhere. This model of internationalization is more appropriate in describing current globalization developments and applies to the modern shift in global economic activity from the culturally homogenous ‘western world’ to the culturally distinct developing countries.

Internationalization is now more feasible than ever thanks to corporations’ ability to tap in to easily accessible financial and capital markets, existing global supply chains for product manufacturing and distribution, and product brand-generated premiums (China Labor Watch 2011). However, as one can see by the fall of once mighty corporate technology giants such as Palm, Inc. and Commodore International Ltd., a growing global market place also means that companies must remain flexible to ever-changing consumer tastes and act quickly to position products and services effectively in new markets.

 

LITERATURE REVIEW

 This section seeks to apply the previously defined constructs to a balanced review of academic literature studying the effects of various internationalization approaches on CSR strategies, comparing and contrasting companies of diverse size, origin, and industry, and identifying long-term trends during corporate internationalization.

Some CSR studies have found that the whole economics of globalization is likely to lead to many opportunities for a firm to act irresponsibly, because firms often seek out countries with lax social and environmental standards and weak governance (Strike et al., 2006; Low and Yeats, 1992; Lucas et al., 1992). For example, Connor (2001) reports that the watchdog NGO Global Exchange had collected evidence about some of Nike’s suppliers in developing countries forcing their employees to work excessive hours with very low pay and often intimidating them in order to suppress protests on labor abuses (Connor, 2001).Such anecdotal evidence ties directly into the phenomena previously outlined where MNCs are incentivized to pursue a CSiR strategy when incongruent international laws provide an opportunity to cut costs. However, other studies have found that the “globalization/ internationalization of companies did in fact improve CSR relative to domestic fiowe” (Chapple and Moon 2007, 184). For example, Chapple et al. (2006) used CSR penetration data statistics to show that international firms in seven newly developing countries (India, South Korea, Philippines, Malaysia, Thailand, Singapore, and Indonesia) have greater rates of CSR adoption when compared to domestic firms in the same industrial sectors.

Other studies emphasize the notion that cross-national studies bring different stakeholder expectations of business and different historical business roles in society (Chapple and Moon 2007) and can thus lead to discrepancies in the way we perceive the role that internationalization plays in responsible corporate behavior. Businesses are not evaluated relative to the foreign local stakeholders that are involved but rather to limiting Western criteria of proper CSR implementation; this limited evaluation method then designates companies as either successful or unsuccessful in taking responsible corporate actions. However, the focus should be not on polarizing the issue at hand, but on examining the factors influencing the decisions of MNCs’ different results in CSR strategy adoption and defining similarities amongst the stakeholder characteristics of MNCs with similar end results. As a result, it is necessary to examine the differences between Western and non-Western approaches to international diversification of corporate activity.

A study conducted by Erramilli et al. shows that our perception of the process of internationalization itself has been too focused on US-based MNCs and those in Nordic countries, while simultaneously ignoring the pattern of growth and expansion in Asian countries and developing economies. When empirical evidence is used from South Korean MNCs from 1973-1990 and compared using a longitudinal approach rather than a cross-sectional one, it is found that the theory of internationalization is supported when it comes to South Korean MNCs investing in psychically close countries and gradually increasing in the aggressiveness of the investments made- at first minor investments are made into foreign firms and then escalated into the creation of wholly-owned subsidiaries over time. (Erramilli et al. 1999) However, it is important to note that it was discovered that South Korean MNCs were more willing to enter markets with low populations before expanding into high population countries. Likewise, high-income markets were found to be more appealing for initial investments than low-income counterparts due to the potential for faster returns on investment and lower risk of market penetration; the economically attractive areas of the world were targeted with foreign direct investment first until reaching market saturation before moving to less attractive alternatives. (Erramilli et al. 1999) It is interesting that South Korean MNCs chose to operate wholly-owned subsidiaries in physically distant countries while investing in minority ventures in closer markets; this is unsurprising when examined from the South Korean perspective and compared to the classical approach to internationalization because the areas of lowest psychical distance to South Korea happened to be the most culturally similar and cheapest to invest into in the beginning of the internationalization process, but were not the high-income, low-population markets that MNCs sought out for high-margin sales and aggressive investment.

Although the path of internationalization by Asian firms follows a similar pattern to that of Western firms, the integration of CSR practices and the perception of socially responsible behavior by corporate managers differ amongst Asian and Western corporate leaders. For example, Chapple and Moon (2007) found that in industries where there still exists pressure to operate in irresponsible ways, Western MNCs are far more likely to pay attention to environmental and human rights issues than their Asian counterparts. In their study of seven Asian countries (i.e., India, South Korea, Philippines, Malaysia, Thailand, Singapore, and Indonesia) they found that Asian corporate managers, with the exception of Japanese managers, are more likely to pay attention to local cultural issues and national historical events when engaging in CSR activities but limit their stakeholder view to consumers’ and shareholders’ interests (Chapple and Moon 2007).They also find that religion plays a heavy role in guiding MNC corporate behavior, particularly in corporations influenced by the traditional Islamic focus on personal responsibility.

In addition to large MNCs, research has also investigated the relationship between internationalization and CSR among small and medium enterprises (SMEs). For example, Aguilera-Caracuel et al. (2010) find that SMEs engaged in international expansion are often more proactive towards in the environmental management arena. This is often related to their ability to accumulate skills and experience with different institutional requirements across the various countries where they operate. Their study also highlights the benefits associated with implementing innovative CSR initiatives in a homogenous and standardized manner across the various countries where the firm operates (Aguilera-Caracuel et al. 2010)

Some studies also highlight the benefits associated with proactive CSR behaviors, especially in the environmental management area. This view is supported by the study conducted byDam and Sholtens’ 2007 study, which shows that MNCs during internationalization “engage in ‘profit-maximizing’ CSR… are socially responsible… because they anticipate a benefit from these actions” (Dam and Sholtens 2007, 55). Large MNCs and firms with strict internal corporate environmental standards do not receive a comparative advantage from expanding to markets with lax environmental standards (Dam and Sholtens 2007). Only small and medium enterprises see a benefit from Pollution Haven Hypothesis (PHH) behavior where pollution-intensive industry is relocated to countries with low environmental standards. In this case, however, it is seen that there is actually a “race-to-the-top” phenomenon as briefly discussed before- the more an enterprise expands internationally, the more it targets high-income, low-population markets with high CSR standards, the more stakeholders weigh into its corporate governance, and thus environmental standards are raised with more knowledge and experience. It appears that the PHH behavior of small and medium enterprises of socially irresponsible corporations is limited to a certain segment of international growth before the corporations are once again pressured by new stakeholders to meet international standards and seek out environmentally friendly CSR policies due to profit-maximizing motives.

 

PRACTICAL RELEVANCE OF MNC INTERNATIONALIZATION ANALYSIS

 The literature reviewed above shows that local culture, size, industry, and consumer and shareholder pressures influence whether or not a corporation acts in a responsible manner. This information helps human rights, environmental, and labor agencies to develop appropriate tactics to pressure corporations towards a more homogenous and improved CSR approach throughout their global operations.  Contrary to the opinion of many anti-globalization unions and protestors such as those at World Trade Organization meetings in Seattle, Quebec City, and Hong Kong, it appears that increased exposure to international markets benefits corporations with high CSR standards and forces others to follow suit in the long run due to increased stakeholder exposure through expansion.

The case of Zhejiang Geely Holding Group, more commonly known as Geely offers an example of the positive relationship between a firm’s internationalization and CSR practice adoptions. In a very short period of time Geely moved from being a small domestic appliance maker to being a global automotive powerhouse, and expanded the range of its CSR initiatives. When Geely first began manufacturing automobiles, its products were reviewed as exceptionally unsafe and the company suffered from allegations of copyright and trademark rights violations from competing international automakers (Economist 2008). However, since its remarkable global expansion, which also included the purchase of venerable safety-distinguished automaker Volvo, Geely has managed to earn distinction as the “first among China’s self-owned brands in terms of CSR initiatives” from Ruder Finn, a leading independent communications agency, and Tsinghua University, one of China’s most renowned universities, and is awarded for its dedication to the development of its positive CSR strategy growth in China (Global Times 2013). The company donates funds to educational development initiatives at Zhejiang Geely Technician College, Beijing Geely University, and many other educational institutions to increase skilled employment in poverty-stricken regions of China (Global Times 2013). It has donated millions to disaster-relief funds in Taiwan and southern China in addition to improving the environmental and safety record of its vehicles (Global Times 2013). The founder and chairman of Geely, Li Shufu, proclaimed, “An enterprise without a sense of social responsibility will be kicked out of the market sooner or later, and it can never achieve sustainability” (Global Times 2013, 1).

Similar conclusions have been reached by observers in a fellow BRIC nation, Brazil. In the Brazilian corporate world, “generally speaking, the large and more globalized the [Brazilian] company, the more likely they are to have adopted CSR policies” (Bevins 2011, 1). “Brazilian companies have gone international, and that’s a new big pressure,” says Claudio Boechat, sustainability expert at the Fundação Dom Cabral, a prestigious business school. “When you go abroad, if you prove that you are more inclusive, you get more attention” (Bevins 2011, 1). Since 2003, as it gained more international exposure and yielded to the interests of the Brazilian government, Banco de Brasil has developed a regional development assistance portfolio in the sum of $6.2 million and doesn’t “take on clients involved in degrading work practices” or “assume the risk of credit with clients responsible for [serious environmental damage]” (Bevins 2011, 1).

Sberbank, the largest bank in Russia and Eastern Europe and the third largest bank in Europe, offers yet another example of the positive relationship between firm’s internationalization and adoption of CSR practices (Financial Times 2012). Today the company is known for its commitment to increase corporate transparency, environmental efficiency, and its larger investment into Russian science and education initiatives. Prior to its privatization and subsequent international exposure, Sberbank was the government-owned monopoly national bank of the USSR and provided all the necessary central bank services to the Communist-controlled state. Since its growth as an independent international banking institution, Sberbank has worked to improve the communication and transparency of its business dealings with stakeholders by developing its ‘Information Environment corporate project’ that provides extensive online and social media briefings by senior management to stakeholders on issues ranging from the signing of a new collective bargaining agreement to Sberbank’s involvement in preparations for Sochi 2014 (Sberbank 2010). The company has also aided in the development of an ‘Energy Efficient Neighborhood’ project in Tyumen, Russia, where plans are to achieve an average 25-30% reduction in energy use by eliminating inefficient sources of energy consumption and using state-of-the-art resource efficiency techniques (Sberbank 2010). Finally, Sberbank sponsors professional programs in the banking industry at leading Russian universities as well as hundreds of employee-led charity events that help children in orphanages overcome life challenges. Thanks in part to such initiatives, Sberbank has received the British magazine The Banker’s “2011 best banker in Central and Eastern Europe award” and a Russian National Banking Award as the bank with Russia’s “highest information openness”.

The evidence and literature reviewed in this paper suggest that firms with heightened global exposure, and especially large MNCs, need to adhere to the guidelines of a global corporate citizen or face banishment in the markets in the long run. Thus, action groups and stakeholder organizations that care about an increase in the diffusion of CSR practices worldwide should also encourage firms’ internationalization because it increases the likelihood of CSR practice adoption. While large MNCs are often reviled by the rhetoric of anti-global forces, active stakeholders have the opportunity to pressure growing and expanding MNCs to adopt homogenous CSR strategies in areas where CSR implementation is lacking. Stakeholders can expose work place, environmental, human rights, and ethical abuses and accidents to concerned consumers, government authorities, trade union leaders, and competitors. Thus, they may ensure that certain negative tendencies of globalization are reversed by further stimulating the development of a corporate culture whereby corporations compete not only on product and service quality and price, but also on their ability to deliver CSR and capture the limited goodwill of global stakeholders.

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