Kellogg World Alumni Magazine, Spring 2004Kellogg School of Management
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A world of ideas
The Kellogg School's international curriculum prepares students for the challenges of the global market — wherever their professional journey may take them

By Rebecca Lindell

  Kellogg Professor
© Nathan Mandell
Prof. Mark Finn finds a world of difference in accounting practices from country to country.
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When Tapiwa Mashingaidze '04 was deciding where he would gain the best preparation for a global business career, he quickly narrowed his sights on the Kellogg School.

Mashingaidze saw that Kellogg was one of the few schools targeted for recruitment by the International Finance Corp., the World Bank arm that promotes sustainable private-sector development.

"It suggested to me that Kellogg had an international perspective, and particularly a perspective geared toward developing countries," says the Zimbabwean native, who plans to work in emerging markets.

That fact, combined with the school's "vibrant personality" and location in Evanston, directly adjacent to Chicago, a city he found intriguing, made the business-school choice an easy one.

Mashingaidze hasn't been disappointed. In addition to studying a host of international issues, he has helped found the Kellogg Emerging Markets Club and served on a task force to enhance the schoolís global curriculum.

He also has met many Kellogg alumni working in emerging markets, including a mentor who is "guiding me in all sorts of directions I wouldnít previously have considered."

"I've been extremely satisfied with my decision," says Mashingaidze, who worked in investment banking in the United Kingdom prior to enrolling at Kellogg.

Mashingaidze is not alone. Whether or not they are seeking global business careers, most Kellogg School students today graduate with a portfolio of international management and leadership skills. A global spirit infuses almost every corner of the school, from conferences and research to coursework and extracurricular activities.

Much of that energy flows directly from the Kellogg student body. One out of every three students hails from overseas. Half of their American classmates have lived abroad for three months or more. Many students have worked for multinational companies and understand firsthand the importance of operating in the global arena.

Nearly three years ago, Kellogg pulled together its many international offerings under the banner of the International Business and Markets Program. Chaired by Professor Daniel Spulber, the program represents the school's efforts to organize its global curriculum around its traditional academic disciplines.

Doing so allows Kellogg to offer a full slate of courses on international economics, finance, management, accounting and marketing. Just as important, it satisfies a demand that students have been increasingly expressing for the past several years.

"We heard what they were telling us, and we followed their interests," says Spulber, the Elinor Hobbs Distinguished Professor of International Business.

"World events have contributed to our international focus. The World Trade Organization has come to the fore, and there's a greater interest in international trade," Spulber adds. "But I think Kellogg students have long had an international dimension, and itís their interest thatís gotten everything going."

The heart of the program is the International Business major. Its core course, International Business Strategy, covers topics such as strategic alliances, importing and exporting, and foreign direct investment. The course has proven so popular that Kellogg will add a sixth section next year to meet student demand.

In addition to the core course, International Business majors must take three electives. Offerings include the perennially popular Global Initiatives in Management program, better known as GIM. The course offers students the chance to research international business issues overseas during a focused research trip to one of roughly 15 countries.

The most popular destination is China, whose fast-growing population and economy are being closely watched by students and faculty alike. In fact, research on China by Kellogg School students will soon find a wider audience through a book, Kellogg on China, to be published next year by the Northwestern University Press.

"The students in the GIM program tend to pick up on issues that are very topical, and a lot of their projects have focused on how companies are dealing with things like marketing, entry strategy and copyright piracy," says Anuradha Dayal-Gulati, editor of the book and faculty adviser for the China GIM program. "There's not a lot of recent research on China out there, so weíve taken the best of the student projects and put them into this book."

Initiatives such as this illustrate the value Kellogg places on student input, particularly when it comes to enhancing its international programs. This year, the school is rolling out several new global business classes. The offerings are a response to student demand for more focused international coursework, says Mashingaidze, the student representative on the committee convened by Dean Dipak C. Jain to study the issue.

The spring 2004 quarter, for example, will mark the introduction of International Business Strategy in Nonmarket Environments. The new class will address topical issues such as the role of the International Monetary Fund in developing nations and corruption in emerging markets.

"In the past, students have said, 'I don't need any international coursework because I won't be doing international work,'" Mashingaidze says. "Increasingly, that's not going to be possible.

"Microsoft, for example, sells in every country of the world, as do Kraft and Procter & Gamble. Everything will be to some extent international, and there will be a demand for us to respond to that as an institution."

The Kellogg faculty is up to the task. Bolstered by the school's International Business and Markets Research Center, Kellogg professors are undertaking cutting-edge research into a broad range of global issues. "Our bench strength is fantastic," Spulber says.

Below, a few Kellogg School professors share a sampling of the issues under exploration.

Accounting models in the global arena
Mark Finn, clinical associate professor of accounting and international business, is fascinated by the different ways companies around the world approach their accounting statements.

In the United States, for example, companies are generally reluctant to disclose information that could cast their businesses in a negative light or subject them to legal liability. But that's not always the case overseas.

Increasingly, companies doing business in emerging markets are releasing all sorts of information about their impact on the environment, the composition of their work force, and other social concerns.

"In the United States, you can get a lot of this data from the government, but it's not produced in a way that's easily consumable by stakeholders," Finn notes. "In many other countries, companies really feel compelled to report to all stakeholders the social projects they have underway."

In some countries, these disclosures are required. In others, these "sustainability reports" are simply regarded as a good business practice.

"I think it is related to a whole set of concerns regarding globalization and the social role of internationals," Finn says.

"Thereís a demand by investors for this information, because they are concerned about the future of their investments. Also, there's pressure fromvarious stakeholders — employees, unions, the governments of countries in which these companies operate. And now there are increasingly prominent mutual funds specializing in 'green' companies. For them, these disclosures are very helpful."

Finn is investigating the factors that motivate companies in emerging markets to make these disclosures. One possible reason is a desire to allay the local citizenry's concerns about exploitation and environmental degradation. Some of the most proactive firms in this regard include multinational mining companies in South Africa, where concerns about responsible economic growth have emerged in tandem with that country's transition to black majority rule. Many of these companies are eager to be seen as willing participants in the transition to a new social democracy, Finn notes, and their openness can help make their case.

"Their disclosures on social metrics will certainly be seen as important, because of the political pressure to restructure the big corporations that were prominent under apartheid," Finn says.

Finn, who teaches courses on international and advanced accounting at Kellogg and serves as director of the GIM program, is also investigating how certain industries in other nations — particularly technology companies in India — account for intangible assets in their reports. Their more aggressive approach clashes with methods used in the United States, and Finn is interested in how the two compare.

"The international arena is a richer place to study these things," Finn says. "Various non-stockholder groups are more active; companies are facing different pressures to provide more information. There are a lot of politics involved, and that has a very interesting impact on accounting models."

Analyzing compensation across borders
Companies moving sales managers overseas can find themselves in a quandary.

The managers expect — and deserve — additional compensation for their relocation and new responsibilities. But the extra pay and perks can be grossly out of scale to those received by managers from the local labor force. So how are companies to reward their managers, without seeming insensitive to local norms?

Kellogg Professor  
© Nathan Mandell
Prof. Anne Coughlan studies cross-cultural compensation.

That is a question Anne Coughlan, associate professor of marketing, is exploring in a broader research project on international differences in sales force compensation.

"Companies care a lot about these issues," Coughlan says. "If you're not sensitive, you'll create the wrong incentives."

Ample research exists on the topic on a country-by-country basis. But Coughlan's project is venturing into uncharted territory, in part because it has proven so difficult to compare compensation packages between countries. Certain incentives are valued more highly in some countries than in others, and differing tax systems can distort the relative differences in pay.

Coughlan and her co-authors are analyzing the compensation of 14,000 salespeople and 4,000 managers in France, the United Kingdom, Germany and the Netherlands.

Her co-researchers include Erin Anderson of INSEAD and Dominique Rouzies of HEC, both in France. The team is being aided by an international consulting firm, which is providing standardized data on salaries, commissions, perquisites, health plans and other non-compensation benefits.

The numbers take into account many other factors affecting the status of each worker, including seniority, job difficulty, the size of the company, and the degree of risk he or she handles.

"There's a feeling that to motivate excellence, a greater proportion of a workerís pay should be based on commission," Coughlan says. "Here we're seeing that's not enough. The tax regimes in these countries differ significantly. Some countries have much more progressive tax rates and much more draconian tax structures. In some cases, even though some people may be paid more highly, their total income will drop.

"If you're an international company, you need to look at these differences country-to-country, because they will have a vast effect on how you want to pay."

Even if companies are not moving many workers across borders, they still need to understand incentive issues in local markets, Coughlan adds.

"In the United Kingdom, for example, it's very, very important to give someone a car," she says. "The higher in the organization you rise, the better the car. That has a lot of meaning in the U.K.

"But in the Netherlands, vacation matters. People are always talking about the amount of vacation they are getting, not their gross pay level."

Yet Coughlan warns against drawing simple conclusions from such observations.

"I'm pretty skeptical about cultural arguments that the Brits are about cars and the Dutch are about vacations," she says. "When you tease apart the tax structure, you understand it much better."

The impact of institutions on trade
One country sets complex standards for many of its products, forcing producers to adapt to its markets. Another has a legal system renowned for its integrity and efficiency.

Kellogg Professor  
© Nathan Mandell
Prof. Johannes Moenius analyses how national institutions impact trade.

What do these have to do with a nation's success as a trading partner? A great deal, according to Johannes Moenius, assistant professor of management and strategy.

"The quality of a country's institutions has a compositional affect on its trade," he says. "It will spur exports in more complex areas."

Moenius analyzes the ways a nation's institutions impact its trade. Institutions, in this case, include product standards, as well as domestic institutions such as the legal system. "They are part of the technical infrastructure of the society," he explains, "and they promote competition because they tell exactly what you have to produce." Markets in nations without well-written standards will be harder to penetrate — and will see less competition as a result.

Markets with ample product standards and well-functioning legal systems increase competition and draw more trading partners, Moenius notes. "If your product lines depend on on-time delivery, you can't go for an unreliable partner," he says. "Having good institutions in a country will make that country a more attractive trading partner because you can go in there and get your money back."

Countries whose institutions operate at a high level tend to export more complicated products, such as automobiles and technology goods, Moenius says. Countries with less effective institutions usually export simpler products, such as food and raw materials.

Smaller companies seeking to enter emerging markets with poorly developed institutions will find themselves at a particular disadvantage, Moenius says.

"With good-quality institutions, you can rely on the labor market supply. But in other countries, you have to develop that from scratch. You find more big conglomerates in countries with less-developed institutions because they have to do everything in-house. They have to be big to attract capital and develop their international labor market."

The Kellogg professors' observations are of particular interest to those who seek to promote trade in emerging markets.

"Policy makers have an influence on the quality of their institutions," Moenius says. "You can talk to their governments about improving them. You can't change the types of products produced in a country, while the quality of the institutions is the government's choice. It's a variable."

Kellogg Professor  
© Nathan Mandell
Currency markets are part of Prof. Sergio Rebeloís academic interests.

Making sense of currency devaluations
Sergio Rebelo, the Tokai Bank Distinguished Professor of International Finance, keeps a close eye on the currency markets. Understanding the dynamics surrounding them — and how they affect local markets — is a prime focus of his research.

Among his findings: that not all prices are affected equally when the value of the local currency plummets.

Conventional thinking says that the rate of inflation coincides with the rate of currency depreciation. Many exchange-rate models rely on this concept, which is also used in valuation exercises and by companies as they decide how to set prices.

But this prediction is often "terribly off the mark," Rebelo says. For example, he notes that when the Korean currency depreciated by roughly 40 percent between October 1997 and October 1998, inflation during the subsequent year was only 7 percent.

This and other discrepancies set Rebelo and his co-researchers on a quest to determine a better way to predict the impact of currency devaluations on the rate of inflation. Their study led them to go beyond conventional data sources, such as the Consumer Price Index, to gain a more accurate view of price behavior during the currency crises of the past decade. Episodes studied include the devaluations in Mexico in 1994, Asia in 1997, Brazil in 1999 and Argentina and Turkey in 2001.

Among Rebelo's discoveries: that the prices of various goods move in predictable patterns after devaluations, depending on their position in the market.

Goods produced solely for local consumption — housing, education, health and transportation — seem least affected by currency devaluations.

That hasn't proven true for imports and exports at the dock, whose prices often reflect the impact of exchange rate fluctuations. But in retail stores, the prices of these goods tend to be more stable. Local distribution costs, such as labor, real estate and transportation services, can account for up to 50 percent of the price of the typical consumer good.

These costs tend to stabilize retail prices, even when currency values are swinging, Rebelo says.

In addition to his work on devaluations and inflation, Rebelo investigates the causes of business cycles, the effects of economic policy on economic growth, and the causes and consequences of currency crises. His findings yield important insights for managers operating in an increasingly global economy.

"Companies are fragmenting production all over the world," Rebelo says. "It's important to understand the international business environment, the behavior of exchange rates, and how to protect yourself from exchange-rate fluctuations."

Finn, Coughlan, Moenius and Rebelo are just a few of the Kellogg School professors exploring international business issues. Scores of their Kellogg colleagues are also breaking new ground as they seek to answer questions raised by the global economy.

For the Kellogg students charting careers that will take them around the world and home again, this faculty research serves as a beacon into the future.

©2002 Kellogg School of Management, Northwestern University