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Challenges and Opportunities in

International Business v. 1.0

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This is the book Challenges and Opportunities in International Business (v. 1.0).

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Table of Contents About the Authors................................................................................................................. 1 Acknowledgements ............................................................................................................... 3 Dedications ............................................................................................................................. 4 Preface..................................................................................................................................... 5 Chapter 1: Introduction ....................................................................................................... 9

What Is International Business?................................................................................................................. 18 Who Is Interested in International Business? ........................................................................................... 23 What Forms Do International Businesses Take?....................................................................................... 28 The Globalization Debate ............................................................................................................................ 32 Ethics and International Business.............................................................................................................. 42 End-of-Chapter Questions and Exercises................................................................................................... 47

Chapter 2: International Trade and Foreign Direct Investment .............................. 50 What Is International Trade Theory? ........................................................................................................ 56 Political and Legal Factors That Impact International Trade ................................................................. 67 Foreign Direct Investment .......................................................................................................................... 82 Tips in Your Entrepreneurial Walkabout Toolkit..................................................................................... 92 End-of-Chapter Questions and Exercises................................................................................................... 94

Chapter 3: Culture and Business...................................................................................... 96 What Is Culture, Anyhow? Values, Customs, and Language.................................................................. 103 What Are the Key Methods Used to Describe Cultures? ........................................................................ 110 Understanding How Culture Impacts Local Business Practices ............................................................ 124 Global Business Ethics ............................................................................................................................... 132 Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 146 End-of-Chapter Questions and Exercises................................................................................................. 150 Additional References ............................................................................................................................... 154

Chapter 4: World Economies........................................................................................... 155 Classifying World Economies.................................................................................................................... 167 Understanding the Developed World ...................................................................................................... 181 Developing World ...................................................................................................................................... 191 Emerging Markets...................................................................................................................................... 207 Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 230 End-of-Chapter Questions and Exercises................................................................................................. 235

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Chapter 5: Global and Regional Economic Cooperation and Integration ............. 237 International Economic Cooperation among Nations............................................................................ 248 Regional Economic Integration ................................................................................................................ 257 The United Nations and the Impact on Trade......................................................................................... 280 End-of-Chapter Questions and Exercises................................................................................................. 293

Chapter 6: International Monetary System................................................................. 295 What Is the International Monetary System?......................................................................................... 301 What Is the Role of the IMF and the World Bank?.................................................................................. 321 Understanding How International Monetary Policy, the IMF, and the World Bank Impact Business Practices...................................................................................................................................................... 340 Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 345 End-of-Chapter Questions and Exercises................................................................................................. 346

Chapter 7: Foreign Exchange and the Global Capital Markets................................ 348 What Do We Mean by Currency and Foreign Exchange?....................................................................... 353 Understanding International Capital Markets ....................................................................................... 364 Venture Capital and the Global Capital Markets .................................................................................... 380 Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 386 End-of-Chapter Questions and Exercises................................................................................................. 391

Chapter 8: International Expansion and Global Market Opportunity Assessment ......................................................................................................................... 393

Global Strategic Choices ............................................................................................................................ 400 PESTEL, Globalization, and Importing ..................................................................................................... 410 International-Expansion Entry Modes .................................................................................................... 423 CAGE Analysis ............................................................................................................................................. 433 Scenario Planning and Analysis ............................................................................................................... 442 End-of-Chapter Questions and Exercises................................................................................................. 449

Chapter 9: Exporting, Importing, and Global Sourcing ............................................ 451 What is Importing and Exporting?........................................................................................................... 456 Countertrade .............................................................................................................................................. 471 Global Sourcing and Its Role in Business................................................................................................. 475 Managing Export and Import ................................................................................................................... 483 What Options Do Companies Have for Export and Import Financing? ................................................ 491 Tips in Your Walkabout Toolkit ............................................................................................................... 498 End-of-Chapter Questions and Exercises................................................................................................. 502

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Chapter 10: Strategy and International Business ...................................................... 506 Business and Corporate Strategy ............................................................................................................. 512 Generic Strategies ...................................................................................................................................... 519 International Strategy ............................................................................................................................... 530 The Five Elements of Strategy .................................................................................................................. 539 Managing the International Business with the P-O-L-C Framework.................................................... 546 End-of-Chapter Questions and Exercises................................................................................................. 552

Chapter 11: Global Entrepreneurship and Intrapreneurship ................................. 554 Entrepreneurship....................................................................................................................................... 562 What Do Entrepreneurs Do? ..................................................................................................................... 571 Business Entrepreneurship across Borders............................................................................................. 585 From Entrepreneurship to Born-Global Firms........................................................................................ 595 From Entrepreneurship to Intrapreneurship ......................................................................................... 601 End-of-Chapter Questions and Exercises................................................................................................. 609

Chapter 12: Winning through Effective, Global Talent Management .................... 612 The Changing Role of Strategic Human Resources Management in International Business.............620 The Global War for Talent ......................................................................................................................... 631 Effective Selection and Placement Strategies ......................................................................................... 639 The Roles of Pay Structure and Pay for Performance ............................................................................ 649 Tying It All Together—Using the HRM Balanced Scorecard to Gauge and Manage Human Capital, Including Your Own................................................................................................................................... 659 Tips in Your Walkabout Toolkit ............................................................................................................... 667 End-of-Chapter Questions and Exercises................................................................................................. 668

Chapter 13: Harnessing the Engine of Global Innovation ........................................ 671 An Introduction to Research and Development (R&D) .......................................................................... 676 Intellectual Property Rights around the Globe....................................................................................... 684 How to Organize and Where to Locate Research and Development Activities ...................................691 Increasing Speed and Effectiveness of International Innovation......................................................... 699 Innovation for the Bottom of the Pyramid ............................................................................................. 706 End-of-Chapter Questions and Exercises................................................................................................. 711

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Chapter 14: Competing Effectively through Global Marketing, Distribution, and Supply-Chain Management ............................................................................................. 714

Fundamentals of Global Marketing.......................................................................................................... 720 Critical Decision Points in Global Marketing .......................................................................................... 734 Standardized or Customized Products .................................................................................................... 739 Global Sourcing and Distribution ............................................................................................................. 746 Global Production and Supply-Chain Management ............................................................................... 753 End-of-Chapter Questions and Exercises................................................................................................. 762

Chapter 15: Understanding the Roles of Finance and Accounting in Global Competitive Advantage.................................................................................................... 764

International Accounting Standards ....................................................................................................... 773 Accounting in International Business...................................................................................................... 778 Fundamentals of Finance .......................................................................................................................... 783 Financial Management in International Business .................................................................................. 794 Global Money Management: Moving Money across Borders ................................................................ 803 End-of-Chapter Questions and Exercises................................................................................................. 810

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About the Authors

Mason A. Carpenter

Mason (PhD, 1997, University of Texas at Austin) is the M. Keith Weikel professor of leadership at the Univeristy of Wisconsin Madison’s Wisconsin School of Business. His research in strategic management concerns corporate governance, top management teams, social networks, and the strategic management of global startups and is published widely in leading management and strategy journals. He is also author of numerous books used in leading undergraduate, MBA, and educutive education courses around the world, including Principles of Management published by Unnamed Publisher. He is associate editor of the Academy of Management Review and serves on the editorial board of the Strategic Management Journal. At the University of Wisconsin, he is responsible for the undergraduate, MBA, and ExecMBA courses in business, corporate, and global strategy. With others, he has also advised the top management teams and business unit leaders of Fiskars, SABMiller, GE, Harley Davidson, Rockwell International, Vivendi, Kerry Ingredients, Covance, Danisco, Badger Meter, and Banta in the areas of strategy formulation, strategy implementation, and strategic change. His teaching accomplishments include MBA Professor of the Year, notoriety as one of the two most popular professors in several BusinessWeek MBA program polls, the Larson Excellence in Teaching award from the Wisconsin School of Business, and, most recently, a Distinguished Teaching award from the University of Wisconsin-Madison. He also works to integrate experiential and behavioral perspectives of strategic management into the classroom through positions on the BPS and SMS Executive Committees, Doctoral and New Faculty BPS consortia, and the widely-used BPS Strategy Teaching Toolkit.

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Sanjyot P. Dunung

Sanjyot is president of Atma Global (www.atmaglobal.com), a publisher of innovative learning products and solutions for the corporate, higher education, and K-12 markets. The company’s mission is to create engaging, best-of-class, global learning products and solutions focusing on countries, cultures, and global business issues. Sanjyot is a recognized leader in the field of cross-cultural learning and has more than fifteen years of extensive experience in developing leading-edge, multimedia learning solutions. Notably, she is the author of Doing Business in Asia: The Complete Guide, focusing on the cultural issues of conducting business in twenty Asian countries (1995 and 1998 by Simon & Schuster). Sanjyot periodically authors articles on doing business internationally. Further, she has appeared on CNBC-TV, CNN International, Bloomberg TV, and various radio programs and is often a guest speaker at conferences and seminars addressing international business and entrepreneurship. Her book, Straight Talk About Starting and Growing Your Own Business, was released in November 2005 by McGraw Hill; she has two entrepreneurship books, Starting Your Business and Growing Your Business with Business Expert Press. Sanjyot also worked as a banker in New York with American and Japanese banks. Sanjyot was selected as a protégé member of the Committee of 200. She’s cofounder and president of the Dunung-Singh Foundation, committed to providing educational opportunities and hope to underprivileged children. She also served as a member of the board of directors of the US Committee for UNICEF (United Nations Children’s Fund). Sanjyot mentors Afghan women entrepreneurs through Project Artemis. Sanjyot’s academic history includes a BA from Northwestern University and an MBA, with an emphasis in international finance, from Thunderbird, School of Global Management. She is the school’s 1997 recipient of the Distinguished Alumni award. Sanjyot was born in India; was raised in Liverpool, England and Chicago, and now lives in New York with her three sons.

About the Authors

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Acknowledgements

This book would not have been possible without our combined eagerness to be innovative and creative inspired by our publisher and friend Jeff Shelstad, the gentle but persistent chiding of Jenn Yee, and the helpful gap filling of Melissa Yu, Andrea Meyer, Claire Hunter, and Sailaja Kattubadi. We also thank Margaret Lannamann for doing such a great job keeping all the balls in the air.

We also like to thank the following colleagues whose comprehensive feedback and suggestions for improving the material helped us make a better text:

W. Todd Brotherson, Southern Virginia University

Rezaul Karim, Des Moines Area Community College

James Laurie, Penn State Berks

Phyllis Shafer, Brookdale Community College

C. Warren Ferguson, Schreiner University

Thomas Voigt, Judson University

John Capela, St. Joseph’s College

Jeff Bruns, Bacone College

B. Barbara Boerner, Brevard College

Helena Hannonen, Brigham Young University Hawaii

Katherine Whitman, Mt. Saint Mary’s College

Verl Anderson, Dixie State College

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Dedications

Mason

I dedicate my work on our book to my wife, Lisa, and my kinetically active boys, Zachary and Wesley.

Sanjyot

To my boys—Yash, Anand, and Shanth—for making sure the sun always rises in my world.

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Preface

Thank you for using Carpenter and Dunung’s International Business! If you are an instructor or a student, by using this book, you are part of an exciting revolution in the college textbook industry spurred by Unnamed Publisher. Why is that? Well, international business is concerned with business transactions and relationships that cross borders. And due to the fact that technology and institutions make it easier to make business happen across borders more quickly and effectively than ever before, your Flat World textbook is published by a company leading the wave of new global business start-ups in the publishing industry.

But is the world really flat? Well, no, not in a geographic sense. We learned that many years ago (right?). And despite some business prognostications about the business world being flat, it still takes quite a bit of planning and care to conduct international business as optimally as possible, which is why you have this book and why you are in an international business course.

Traditionally, international business textbooks have relied on academic theory to educate students. We’re offering a new novel approach—a blend of the academic and the practitioner.

Most international business books are like global maps in a book, coupled with encyclopedias of international business terms and concepts. That is to say, they provide information but don’t help you understand what is really relevant in today’s constantly changing global business arena or how to apply concepts to real- life business scenarios and decisions. Moreover, many aspects of doing business globally are evolving and don’t remain static. By teaming Carpenter, the academic, and Dunung, the practitioner, our international business textbook is different. We not only provide access to maps and essential concepts and information but also focus on the tips and tools that allow you to best exploit such information (and knowledge + information = power) in an ever-chpranging global business arena.

Strategy and entrepreneurship form the cornerstones of our approach—offering students Tips in the Walkabout Toolkit to enable tangible application of complex concepts. Our orientation is both strategic and entrepreneurial where we speak to technologically savvy students who see national borders as bridges and not barriers. Moreover, while we use the lexicon of international business, through our strategic and entrepreneurial orientation, we develop students’ knowledge of international contexts with the aim that they may launch, run, and work in any

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organization that is global in scope (or is wrestling with global competition or other global threats).

Strategy is concerned with competition and competitive advantage, while entrepreneurship is concerned with creating new opportunities where none previously existed. These areas are important to you in an international business course because more and more organizations conduct at least some of their business across borders. If you are a budding entrepreneur then international business increases your entrepreneurial playground.

As revolutionary as the technology delivery behind this book and our unique academic-practitioner authorship approach is—we’ve made sure to cover all of the fundamental basics required in a high-quality, solid international business textbook.

Organization

The overarching logic of the book is intuitive—organized around answers to the what, where, why, and how of international business.

WHAT? Section one introduces what is international business and who has an interest in it. Students will sift through the globalization debate and understanding the impact of ethics on global businesses. Additionally, students will explore the evolution of international trade from past to present, with a focus on how firms and professionals can better understand today’s complex global business arena by understanding the impact of political and legal factors. The section concludes with a chapter on understanding how cultures are defined and the impact on business interactions and practices with tangible tips for negotiating across cultures.

WHERE? Section two develops student knowledge about key facets of the global business environment and the key elements of trade and cooperation between nations and global organizations. Today, with increasing numbers of companies of all sizes operating internationally, no business or country can remain an island. Rather, the interconnections between countries, businesses, and institutions are inextricable. Even how we define the world is changing. No longer classified into simple and neat categories, the rapid changes within countries are redefining how global businesses think about developed, developing, and emerging markets. This section addresses the evolving nature of country classifications and helps develop a student’s ability to comprehend the rationale of how to analyze a specific country’s stage of development—rather than just memorize which countries are emerging. Further, this section provides a unique approach and takes country-related “deep

Preface

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dives” that give greater detail about specific key countries. This section ends with chapters devoted to providing accessible discussions of complex financial concepts within the global monetary system and the global capital markets, including currency and global venture capital.

WHY? Section three develops knowledge about how a student or organization can exploit opportunities in that global environment. Students will learn about the fundamental choices they have in terms of international expansion and why such choices matter. Using different models of internationalization and global market assessment, they will also learn why international business opportunities vary in their promise and complexity. In this section, students also do a deeper dive into the topics of exporting, importing, and global sourcing since these are likely to be the first forms of international business a student will encounter.

HOW? Section four is devoted to strategy and entrepreneurship in a flattening world and how key organizational activities can be managed for global effectiveness. This part of the book shifts gears from the perspective of existing businesses to that of new business possibilities. Our objective is to highlight strategy, entrepreneurship, and strategic and entrepreneurial opportunities in a flat and flattening world. Beyond the basics of international strategy and entrepreneurship, students will be exposed to international human resource management so that they can better understand the global war for talent. They will also develop good fundamental knowledge of international research and development, marketing, distribution, finance, and accounting.

Features

Each chapter contains several staple and innovative features as follows:

• opening cases—cases that are relatively timeless from an international business perspective and current and topical

• sidebars titled “Did You Know”—factoids about international business • sidebars titled “Amusing Anecdote”—factoids about global marketing

snafus and other mistakes coupled with related key international business facts

• sidebars titled “An Eye on Ethics,” which provide examples of the ethical issues that arise in international business

• chapter summaries • end of chapter exercises based on AACSB learning standards—these

exercises include review questions, experiential exercises, ethical dilemmas, and exercises related to the opening chapter case

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• a closing section titled “Tools in Your Walkabout Kit” with specific and practical tools related to international business

• supplemental support materials by chapter

As you’d expect, our textbook also provides a set of end-of-chprapter questions that are mapped to AACSB learning standards, such that the instructor will be able to measure how well students are grasping course content while ensuring alignment with the AACSB guidelines.

We recognize that you have choices on textbooks for your course, but hope that our innovative approach to both essential global business content and technology delivery options will encourage you to join our revolution.

With thanks,

Mason and Sanjyot

Preface

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Chapter 1

Introduction

WHAT’S IN IT FOR ME?

1. What is international business? 2. Who has an interest in international business? 3. What forms do international businesses take? 4. What is the globalization debate? 5. What is the relationship between international business and ethics?

This chapter introduces you to the study of international business. After reading a short case study on Google Inc., the Internet search-engine company, you’ll begin to learn what makes international business such an essential subject for students around the world. Because international business is a vital ingredient in strategic management and entrepreneurship, this book uses these complementary perspectives to help you understand international business. Managers, entrepreneurs, workers, for-profit and nonprofit organizations, and governments all have a vested interest in understanding and shaping global business practices and trends. Section 1.1 "What Is International Business?" gives you a working definition of international business; Section 1.2 "Who Is Interested in International Business?" helps you see which actors are likely to have a direct and indirect interest in it. You’ll then learn about some of the different forms international businesses take; you’ll also gain a general understanding of the globalization debate. This debate centers on (1) whether the world is flat, in the sense that all

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markets are interconnected and competing unfettered with each other, or (2) whether differences across countries and markets are more significant than the commonalities. In fact, some critics negatively describe the “world is flat” perspective as globaloney! What you’ll discover from the discussion of this debate is that the world may not be flat in the purest sense, but there are powerful forces, also called flatteners, at work in the world’s economies. Section 1.5 "Ethics and International Business" concludes with an introductory discussion of the relationship between international business and ethics.

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Opening Case: Google’s Steep Learning Curve in China

Image courtesy of Kit Eaton.

Of all the changes going on in the world, the Internet is the one development that many people believe makes our world a smaller place—a flat or flattening world, according to Thomas Friedman, Pulitzer Prize–winning author of The World Is Flat: A Brief History of the Twenty-First Century and The Lexus and the Olive Tree: Understanding Globalization. Because of this flattening effect, Internet businesses should be able to cross borders easily and profitably with little constraint. However, with few exceptions, cross-border business ventures always seem to challenge even the most able of competitors, Internet-based or not. Some new international ventures succeed, while many others fail. But in every venture the managers involved can and do learn something new. Google Inc.’s learning curve in China is a case in point.

In 2006, Google announced the opening of its Chinese-language website amid great fanfare. While Google had access to the Chinese market through Google.com at the time, the new site, Google.cn, gave the company a more powerful, direct vehicle to further penetrate the approximately 94 million households with Internet access in China. As company founders Larry Page and Sergey Brin said at the time, “Unfortunately, access for Chinese users to the Google service outside of China was slow and unreliable, and some content was restricted by complex filtering within each Chinese ISP. Ironically, we were unable to get much public or governmental attention paid to the issue. Although we dislike altering our search results in any way, we ultimately decided that staying out of China simply meant diminishing service and influence there. Building a real operation in China should increase our influence on market practices and certainly will enhance our service to the Chinese people.”Larry Page and Sergey Brin, “2005 Founders’ Letter,” Google

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Investor Relations, December 31, 2005, accessed October 25, 2010, http://investor.google.com/corporate/2005/founders-letter.html.

A Big Market, Bigger Concerns

Fast-growing China represents a large market.

© 2003–2011, Atma Global Inc.

Google’s move into China gave it access to a very large market, but it also raised some ethical issues. Chinese authorities are notorious for their hardline censorship rules regarding the Internet. They take a firm stance against risqué content and have objected to The Sims computer game, fearing it would corrupt their nation’s youth. Any content that was judged as possibly threatening “state security, damaging the nation’s glory, disturbing social order, and infringing on other’s legitimate rights” was also banned.John Oates, “Chinese Government Censors Online Games,” Register, June 1, 2004, accessed November 12, 2010, http://www.theregister.co.uk/2004/06/01/ china_bans_games. When asked how working in this kind of environment fit with Google’s informal motto of “Don’t be evil” and its code-of-conduct aspiration of striving toward the “highest possible standard of ethical business,” Google’s executives stressed that the license was just to set up a representative office in Beijing and no more than that—although they did concede that Google was keenly interested in the market. As reported to the

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http://investor.google.com/corporate/2005/founders-letter.html
http://www.theregister.co.uk/2004/06/01/china_bans_games
http://www.theregister.co.uk/2004/06/01/china_bans_games
business press, “For the time being, [we] will be using the [China] office as a base from which to conduct market research and learn more about the market.”Lucy Sherriff, “Google Goes to China,” Register, May 11, 2005, accessed January 25, 2010, http://www.theregister.co.uk/2005/05/11/google_china. Google likewise sidestepped the ethical questions by stating it couldn’t address the issues until it was fully operational in China and knew exactly what the situation was.

One Year Later

© Google, Inc.

Google appointed Dr. Kai-Fu Lee to lead the company’s new China effort. He had grown up in Taiwan, earned BS and PhD degrees from Columbia and Carnegie Mellon, respectively, and was fluent in both English and Mandarin. Before joining Google in 2005, he worked for Apple in California and then for Microsoft in China; he set up Microsoft Research Asia, the company’s research-and- development lab in Beijing. When asked by a New York Times reporter about the cultural challenges of doing business in China, Lee responded, “The ideals that we uphold here are really just so important and noble. How to build stuff that users like, and figure out how to make money later. And ‘Don’t Do Evil’ [referring to the motto ‘Don’t be evil’]. All of those things. I think I’ve always been an idealist in my heart.”Clive Thompson, “Google’s China Problem (and

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http://www.theregister.co.uk/2005/05/11/google_china
China’s Google Problem),” New York Times, April 23, 2006, accessed January 25, 2010, http://www.nytimes.com/2006/04/23/magazine/23google.html.

Despite Lee’s support of Google’s utopian motto, the company’s conduct in China during its first year seemed less than idealistic. In January, a few months after Lee opened the Beijing office, the company announced it would be introducing a new version of its search engine for the Chinese market. Google’s representatives explained that in order to obey China’s censorship laws, the company had agreed to remove any websites disapproved of by the Chinese government from the search results it would display. For example, any site that promoted the Falun Gong, a government-banned spiritual movement, would not be displayed. Similarly (and ironically) sites promoting free speech in China would not be displayed, and there would be no mention of the 1989 Tiananmen Square massacre. As one Western reporter noted, “If you search for ‘Tibet’ or ‘Falun Gong’ most anywhere in the world on google.com, you’ll find thousands of blog entries, news items, and chat rooms on Chinese repression. Do the same search inside China on google.cn, and most, if not all, of these links will be gone. Google will have erased them completely.”Clive Thompson, “Google’s China Problem (and China’s Google Problem),” New York Times, April 23, 2006, accessed January 25, 2010, http://www.nytimes.com/2006/04/23/magazine/ 23google.html.

Google’s decision didn’t go over well in the United States. In February 2006, company executives were called into congressional hearings and compared to Nazi collaborators. The company’s stock fell, and protesters waved placards outside the company’s headquarters in Mountain View, California. Google wasn’t the only American technology company to run aground in China during those months, nor was it the worst offender. However, Google’s executives were supposed to be different; given their lofty motto, they were supposed to be a cut above the rest. When the company went public in 2004, its founders wrote in the company’s official filing for the US Securities and Exchange Commission that Google is “a company that is trustworthy and interested in the public good.” Now, politicians and the public were asking how Google could balance that with making nice with a repressive Chinese regime and the Communist Party behind it.Larry Page and Sergey Brin, “2004 Founders’ IPO Letter,” Google Investor Relations, August 18, 2004, accessed October 25, 2010, http://investor.google.com/corporate/2004/ipo-founders-letter.html. One exchange between Rep. Tom Lantos (D-CA) and Google Vice President Elliot Schrage went like this:

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http://www.nytimes.com/2006/04/23/magazine/23google.html
http://www.nytimes.com/2006/04/23/magazine/23google.html
http://www.nytimes.com/2006/04/23/magazine/23google.html
http://investor.google.com/corporate/2004/ipo-founders-letter.html
Lantos: You have nothing to be ashamed of?

Schrage:

I am not ashamed of it, and I am not proud of it…We have taken a path, we have begun on a path, we have done a path that…will ultimately benefit all the users in China. If we determined, congressman, as a result of changing circumstances or as a result of the implementation of the Google.cn program that we are not achieving those results then we will assess our performance, our ability to achieve those goals, and whether to remain in the market.Declan McCullagh, “Congressman Quizzes Net Companies on Shame,” CNET, February 15, 2006, accessed January 25, 2010, http://news.cnet.com/Congressman-quizzes-Net-companies- on-shame/2100-1028_3-6040250.html.

See the video “Google on Operating inside China” at http://news.cnet.com/ 1606-2-6040114.html. In the video, Schrage, the vice president for corporate communications and public affairs, discusses Google’s competitive situation in China. Rep. James Leach (R-IA) subsequently accuses Google of becoming a servant of the Chinese government.

Google Ends Censorship in China

In 2010, Google announced that it was no longer willing to censor search results on its Chinese service. The world’s leading search engine said the decision followed a cyberattack that it believes was aimed at gathering information on Chinese human rights activists.Jessica E. Vascellaro, Jason Dean, and Siobhan Gorman, “Google Warns of China Exit over Hacking,” January 13, 2010, accessed November 12, 2010, http://online.wsj.com/article/ SB126333757451026659.html#ixzz157TXi4FV. Google also cited the Chinese government’s restrictions on the Internet in China during 2009.Tania Branigan, “Google to End Censorship in China over Cyber Attacks,” Guardian, January 13, 2010, accessed November 12, 2010, http://www.guardian.co.uk/technology/ 2010/jan/12/google-china-ends-censorship. Google’s announcement led to speculation whether Google would close its offices in China or would close Google.cn. Human rights activists cheered Google’s move, while business pundits speculated on the possibly huge financial costs that would result from losing access to one of the world’s largest and fastest-growing consumer markets.

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http://news.cnet.com/Congressman-quizzes-Net-companies-on-shame/2100-1028_3-6040250.html
http://news.cnet.com/Congressman-quizzes-Net-companies-on-shame/2100-1028_3-6040250.html
http://news.cnet.com/1606-2-6040114.html
http://news.cnet.com/1606-2-6040114.html
http://online.wsj.com/article/SB126333757451026659.html#ixzz157TXi4FV
http://online.wsj.com/article/SB126333757451026659.html#ixzz157TXi4FV
http://www.guardian.co.uk/technology/2010/jan/12/google-china-ends-censorship
http://www.guardian.co.uk/technology/2010/jan/12/google-china-ends-censorship
In an announcement provided to the US Securities and Exchange Commission, Google’s founders summarized their stance and the motivation for it. Below are excerpts from Google Chief Legal Officer David Drummond’s announcement on January 12, 2010.David Drummond, “A New Approach to China,” Official Google Blog, January 12, 2010, accessed January 25, 2010, http://googleblog.blogspot.com/2010/01/new-approach-to-china.html.

Like many other well-known organizations, we face cyberattacks of varying degrees on a regular basis. In mid-December, we detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China, resulting in the theft of intellectual property from Google. However, it soon became clear that what at first appeared to be solely a security incident—albeit a significant one—was something quite different.

First, this attack was not just on Google. As part of our investigation, we have discovered that at least twenty other large companies from a wide range of businesses—including the Internet, finance, technology, media, and chemical sectors—have been similarly targeted. We are currently in the process of notifying those companies, and we are also working with the relevant US authorities.

Second, we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists. Based on our investigation to date, we believe their attack did not achieve that objective. Only two Gmail accounts appear to have been accessed, and that activity was limited to account information (such as the date the account was created) and subject line, rather than the content of emails themselves.

Third, as part of this investigation but independent of the attack on Google, we have discovered that the accounts of dozens of US-, China- and Europe-based Gmail users who are advocates of human rights in China appear to have been routinely accessed by third parties. These accounts have not been accessed through any security breach at Google, but most likely via phishing scams or malware placed on the users’ computers.

We have taken the unusual step of sharing information about these attacks with a broad audience, not just because of the security and human rights implications of what we have unearthed, but also because this information goes to the heart of a much bigger global debate about freedom of speech. In the last

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http://googleblog.blogspot.com/2010/01/new-approach-to-china.html
two decades, China’s economic reform programs and its citizens’ entrepreneurial flair have lifted hundreds of millions of Chinese people out of poverty. Indeed, this great nation is at the heart of much economic progress and development in the world today.

The decision to review our business operations in China has been incredibly hard, and we know that it will have potentially far-reaching consequences. We want to make clear that this move was driven by our executives in the United States, without the knowledge or involvement of our employees in China who have worked incredibly hard to make Google.cn the success it is today. We are committed to working responsibly to resolve the very difficult issues raised.

The Chinese government’s first response to Google’s announcement was simply that it was “seeking more information.”Tania Branigan, “Google Challenge to China over Censorship,” Guardian, January 13, 2010, accessed January 25, 2010, http://www.guardian.co.uk/technology/2010/jan/13/google-china-censorship- battle. In the interim, Google “shut down its censored Chinese version and gave mainlanders an uncensored search engine in simplified Chinese, delivered from its servers in Hong Kong.”Harry McCracken, “Google’s Bold China Move,” PCWorld, March 23, 2010, accessed November 12, 2010, http://www.pcworld.com/article/192130/googles_bold_china_move.html. Like most firms that venture out of their home markets, Google’s experiences in China and other foreign markets have driven the company to reassess how it does business in countries with distinctly different laws.

Opening Case Exercises

(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)

1. Can Google afford not to do business in China? 2. Which stakeholders would be affected by Google’s managers’

possible decision to shut down its China operations? How would they be affected? What trade-offs would Google be making?

3. Should Google’s managers be surprised by the China predicament?

Chapter 1 Introduction

17

http://www.guardian.co.uk/technology/2010/jan/13/google-china-censorship-battle
http://www.guardian.co.uk/technology/2010/jan/13/google-china-censorship-battle
http://www.pcworld.com/article/192130/googles_bold_china_move.html
1.1 What Is International Business?

LEARNING OBJECTIVES

1. Know the definition of international business. 2. Comprehend how strategic management is related to international

business. 3. Understand how entrepreneurship is related to international business.

The Definition of International Business

As the opening case study on Google suggests, international business relates to any situation where the production or distribution of goods or services crosses country borders. Globalization1—the shift toward a more interdependent and integrated global economy—creates greater opportunities for international business. Such globalization can take place in terms of markets, where trade barriers are falling and buyer preferences are changing. It can also be seen in terms of production, where a company can source goods and services easily from other countries. Some managers consider the definition of international business to relate purely to “business,” as suggested in the Google case. However, a broader definition of international business may serve you better both personally and professionally in a world that has moved beyond simple industrial production. International business2 encompasses a full range of cross-border exchanges of goods, services, or resources between two or more nations. These exchanges can go beyond the exchange of money for physical goods to include international transfers of other resources, such as people, intellectual property (e.g., patents, copyrights, brand trademarks, and data), and contractual assets or liabilities (e.g., the right to use some foreign asset, provide some future service to foreign customers, or execute a complex financial instrument). The entities involved in international business range from large multinational firms with thousands of employees doing business in many countries around the world to a small one-person company acting as an importer or exporter. This broader definition of international business also encompasses for-profit border-crossing transactions as well as transactions motivated by nonfinancial gains (e.g., triple bottom line, corporate social responsibility, and political favor) that affect a business’s future.

Strategic Management and Entrepreneurship

A knowledge of both strategic management and entrepreneurship will enhance your understanding of international business. Strategic management3 is the body

1. The shift toward a more interdependent and integrated global economy.

2. All cross-border exchanges of goods, services, or resources between two or more nations. These exchanges can go beyond the exchange of money for physical goods to include international transfers of other resources, such as people, intellectual property, and contractual assets or liabilities.

3. The body of knowledge that answers questions about the development and implementation of good strategies; mainly concerned with the determinants of firm performance.

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of knowledge that answers questions about the development and implementation of good strategies and is mainly concerned with the determinants of firm performance. A strategy4, in turn, is the central, integrated, and externally oriented concept of how an organization will achieve its performance objectives.Mason Carpenter and William G. Sanders, Strategic Management: A Dynamic Perspective, Concepts and Cases (Upper Saddle River, NJ: Pearson Education, 2007). One of the basic tools of strategy is a SWOT (strengths, weaknesses, opportunities, threats)5 assessment. The SWOT tool helps you take stock of an organization’s internal characteristics—its strengths and weaknesses—to formulate an action plan that builds on what it does well while overcoming or working around weaknesses. Similarly, the external part of SWOT—the opportunities and threats—helps you assess those environmental conditions that favor or threaten the organization’s strategy. Because strategic management is concerned with organizational performance—be that social, environmental, or economic—your understanding of a company’s SWOT will help you better assess how international business factors should be accounted for in the firm’s strategy.

Entrepreneurship6, in contrast, is defined as the recognition of opportunities (i.e., needs, wants, problems, and challenges) and the use or creation of resources to implement innovative ideas for new, thoughtfully planned ventures. An entrepreneur7 is a person who engages in entrepreneurship. Entrepreneurship, like strategic management, will help you to think about the opportunities available when you connect new ideas with new markets. For instance, given Google’s current global presence, it’s difficult to imagine that the company started out slightly more than a decade ago as the entrepreneurial venture of two college students. Google was founded by Larry Page and Sergey Brin, students at Stanford University. It was first incorporated as a privately held company on September 4, 1998. Increasingly, as the Google case study demonstrates, international businesses have an opportunity to create positive social, environmental, and economic values across borders. An entrepreneurial perspective will serve you well in this regard.

4. The central, integrated, and externally oriented concept of how an organization will achieve its performance objectives.

5. A strategic management tool that helps an organization take stock of its internal characteristics (strengths and weaknesses) to formulate an action plan that builds on what it does well while overcoming or working around weaknesses and also assess external environmental conditions (opportunities and threats) that favor or threaten the organization’s strategy.

6. The recognition of opportunities (needs, wants, problems, and challenges) and the use or creation of resources to implement innovative ideas for new, thoughtfully planned ventures.

7. A person who engages in entrepreneurship.

Chapter 1 Introduction

1.1 What Is International Business? 19

Spotlight on International Strategy and Entrepreneurship

Hemali Thakkar and three of her fellow classmates at Harvard found a way to mesh the power of play with electrical power. The foursome invented “a soccer ball with the ability to generate electricity,” Thakkar said.“Harnessing the Power of Soccer,” interview with Thakkar Hemali by Ike Sriskandarajah, October 20, 2010, accessed November 12, 2010, http://www.loe.org/shows/ segments.htm?programID=10-P13-00044&segmentID=5. Every kick of the ball creates a current that’s captured for future use. Fifteen minutes of play lights a lamp for three hours.

Called the sOccket, the soccer ball can bring off-grid electricity to developing countries. Even better, the soccer ball can replace kerosene lamps. Burning kerosene is not only bad for the environment because of carbon dioxide emissions but it’s also a health hazard: according to the World Bank, breathing kerosene fumes indoors has the same effects as smoking two packs of cigarettes per day.Ariel Schwartz, “The SOccket: A Soccer Ball to Replace Kerosene Lamps,” Fast Company, January 26, 2010, accessed November 12, 2010, http://www.fastcompany.com/blog/ariel-schwartz/sustainability/soccket- soccer-ball-replace-kerosene-lamps.

How did the idea of sOccket emerge? All four students (Jessica Lin, Jessica Matthews, Julia Silverman, and Hemali Thakkar) had experience with developing countries, so they knew that kids love playing soccer (it’s the world’s most popular sport). They also knew that most of these kids lived in homes that had no reliable energy.Clark Boyd, “SOccket: Soccer Ball by Day, Light by Night,” Discovery News, February 18, 2010, accessed November 12, 2010, http://news.discovery.com/tech/soccket-soccer-ball-by-day-light-by- night.html.

As of November 2010, the sOccket prototype cost $70 to manufacture, but the team hopes to bring the cost down to $10 when production is scaled up.Ike Sriskandarajah, “Soccer Ball Brings Off-Grid Electricity Onto the Field,” The Atlantic, November 3, 2010, accessed November 12, 2010, http://www.theatlantic.com/technology/archive/2010/11/soccer-ball-brings- off-grid-electricity-onto-the-field/65977. One ingenious way to bring costs down is to set up facilities where developing-world entrepreneurs assemble and sell the balls themselves.

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1.1 What Is International Business? 20

http://www.loe.org/shows/segments.htm?programID=10-P13-00044&segmentID=5
http://www.loe.org/shows/segments.htm?programID=10-P13-00044&segmentID=5
http://www.fastcompany.com/blog/ariel-schwartz/sustainability/soccket-soccer-ball-replace-kerosene-lamps
http://www.fastcompany.com/blog/ariel-schwartz/sustainability/soccket-soccer-ball-replace-kerosene-lamps
http://news.discovery.com/tech/soccket-soccer-ball-by-day-light-by-night.html
http://news.discovery.com/tech/soccket-soccer-ball-by-day-light-by-night.html
http://www.theatlantic.com/technology/archive/2010/11/soccer-ball-brings-off-grid-electricity-onto-the-field/65977
http://www.theatlantic.com/technology/archive/2010/11/soccer-ball-brings-off-grid-electricity-onto-the-field/65977
At this point it’s also important to introduce you to the concepts of intrapreneurship8 and the intrapreneur9. Intrapreneurship is a form of entrepreneurship that takes place inside a business that is already in existence. An intrapreneur, in turn, is a person within the established business who takes direct responsibility for turning an idea into a profitable finished product through assertive risk taking and innovation. An entrepreneur is starting a business, while an intrapreneur is developing a new product or service in an already existing business. Thus, the ideas of entrepreneurship can be applied not only in new ventures but also in the context of existing organizations—even government.

KEY TAKEAWAYS

• International business encompasses a full range of cross-border exchanges of goods, services, or resources between two or more nations. These exchanges can go beyond the exchange of money for physical goods to include international transfers of other resources, such as people, intellectual property (e.g., patents, copyrights, brand trademarks, and data), and contractual assets or liabilities (e.g., the right to use some foreign asset, provide some future service to foreign customers, or execute a complex financial instrument).

• Strategic management is the body of knowledge that answers questions about the development and implementation of good strategies and is mainly concerned with the determinants of firm performance. Because strategic management is concerned with organizational performance, your understanding of a company’s SWOT (strengths, weaknesses, opportunities, threats) helps you better assess how international business factors should be accounted for in the firm’s strategy.

• Entrepreneurship is the recognition of opportunities (i.e., needs, wants, problems, and challenges) and the use or creation of resources to implement innovative ideas. Entrepreneurship helps you think about the opportunities available when you connect new ideas with new markets.

8. A form of entrepreneurship that takes place in a business that is already in existence.

9. A person within an established business who takes direct responsibility for turning an idea into a profitable finished product through assertive risk taking and innovation.

Chapter 1 Introduction

1.1 What Is International Business? 21

EXERCISES

(AACSB: Reflective Thinking, Analytical Skills)

1. What is international business? 2. Why is an understanding of strategy management important in the

context of international business? 3. Why is an understanding of entrepreneurship important in the context

of international business?

Chapter 1 Introduction

1.1 What Is International Business? 22

1.2 Who Is Interested in International Business?

LEARNING OBJECTIVES

1. Know who has an interest in international business. 2. Understand what a stakeholder is and why stakeholder analysis might

be important in the study of international business. 3. Recognize that an organization’s stakeholders include more than its

suppliers and customers.

The Stakeholders

As you now know, international business refers to a broad set of entities and activities. But who cares about international business in the first place? To answer this question, let’s discuss stakeholders and stakeholder analysis. A stakeholder10 is an individual or organization whose interests may be affected as the result of what another individual or organization does.Mason Carpenter, Talya Bauer, and Berrin Erdogan, Principles of Management (Nyack, NY: Unnamed Publisher, 2009), accessed January 5, 2011, http://www.gone.2012books.lardbucket.org/printed-book/127834. Stakeholder analysis11 is a technique you use to identify and assess the importance of key people, groups of people, or institutions that may significantly influence the success of your activity, project, or business. In the context of what you are learning here, individuals or organizations will have an interest in international business if it affects them in some way—positively or negatively.Management Sciences for Health and the United Nations Children’s Fund, “Stakeholder Analysis,” The Guide to Managing for Quality, 1998, accessed November 21, 2010, http://erc.msh.org/quality/ ittools/itstkan.cfm. That is, they have something important at stake as a result of some aspect of international business.

10. An individual or organization whose interests may be affected as the result of what another individual or organization does.

11. A technique used to identify and assess the importance of key people, groups of people, or institutions that may significantly influence the success of an activity, project, or business.

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http://2012books.lardbucket.org/attribution.html?utm_source=inline
http://www.gone.2012books.lardbucket.org/printed-book/127834
http://erc.msh.org/quality/ittools/itstkan.cfm
http://erc.msh.org/quality/ittools/itstkan.cfm
Global business professionals conduct stakeholder analysis in order to understand how operations in different countries impact the overall corporate strategy.

© 2003–2011, Atma Global Inc.

Obviously, Google and its managers need to understand international business because they do business in many countries outside their home country. A little more than half the company’s revenues come from outside the United States.“Google Announces First Quarter 2009 Results,” Google Investor Relations, April 16, 2009, accessed January 25, 2010, http://investor.google.com/releases/ 2009Q1_google_earnings.html. Does this mean that international business wouldn’t be relevant to Google if it only produced and sold its products in one country? Absolutely not! Factors of international business would still affect Google—through any supplies it buys from foreign suppliers, as well as the possible impact of foreign competitors that threaten to take business from Google in its home markets. Even if these factors were not present, Google could still be affected by price swings—for instance, in the international prices of computer parts, even if they bought those parts from US suppliers. After all, the prices of some of the commodities used to make those parts are determined globally, not locally. Beyond its involvement in web advertising, which requires massive investments in computer-server farms around the world, Google is increasingly active in other products and services—for example, cell phones and the operating systems they use.

Chapter 1 Introduction

1.2 Who Is Interested in International Business? 24

http://investor.google.com/releases/2009Q1_google_earnings.html
http://investor.google.com/releases/2009Q1_google_earnings.html
So far, this chapter has covered only how a business and its managers should understand international business, regardless of whether their organization sells or produces products or services across borders. Who else might be an international business stakeholder beyond Google and its management? First, Google is likely to have to pay taxes, right? It probably pays sales taxes in markets where it sells its products, as well as property and payroll taxes in countries where it has production facilities. Each of these governmental stakeholders has an important economic interest in Google. Moreover, in many countries, the government is responsible for protecting the environment. Google’s large computer-server farms consume energy and generate waste, and its products (e.g., cell phones) come in disposable packaging, thus impacting the environment in places where they are manufactured and sold.

Beyond the company and governments, other stakeholder groups might include industry associations, trade groups, suppliers, and labor. For instance, you’ve already learned that Google is an Internet search-engine company, so it could be a member of various computer-related industry associations. Labor is also a stakeholder. This can include not only the people immediately employed by a business like Google but also contract workers or workers who will lose or gain employment opportunities depending on where Google chooses to produce and sell its products and services.

Chapter 1 Introduction

1.2 Who Is Interested in International Business? 25

Did You Know?

From our opening case, you’ve learned a little about how different countries deal with personal privacy. At about the same time Google was experiencing difficulty protecting individuals’ privacy in China, its managers in Italy were being convicted of violating consumer-privacy laws. Google executives had been accused of breaking Italian law by allowing a video clip of four boys bullying another child to be posted online.“Google Bosses Convicted in Italy,” BBC News, February 24, 2010, accessed November 21, 2010, http://news.bbc.co.uk/2/hi/8533695.stm. The video had originally been posted by the boys themselves and Google removed the video when Italy’s Interior Ministry requested its removal.J. R. Raphael, “Italy’s Google Convictions Set a Dangerous Precedent,” PCWorld, February 24, 2010, accessed November 21, 2010, http://www.pcworld.com/article/190191/ italys_google_convictions_set_a_dangerous_precedent.html. The three Google executives were absolved of the defamation charges but convicted of privacy violations.Colleen Barry, “Three Google Employees Convicted in Italian Court of Privacy Violations,” Associated Press, February 24, 2010, accessed November 21, 2010, http://www.cleveland.com/world/index.ssf/2010/02/ three_google_employees_convict.html. Google said that the conviction of its top Italian managers “attacks the ‘principles of freedom’ of the Internet and poses a serious threat to the web.”Paul McNamara, “Conviction of Google Execs in Italy Sheer Madness,” PCWorld, February 24, 2010, accessed April 5, 2010, http://www.pcworld.com/article/190125/ conviction_of_google_execs_in_italy_sheer_madness.html. Following the conviction, several privacy advocates stepped up to speak out in Google’s defense—a position quite contrary to their typical stances in Google privacy stories.Jaikumar Vijayan, “Conviction of Google Execs Alarms Privacy Advocates,” PCWorld, February 24, 2010, accessed April 5, 2010, http://www.pcworld.com/article/190175/ conviction_of_google_execs_alarms_privacy_advocates.html.

Chapter 1 Introduction

1.2 Who Is Interested in International Business? 26

http://news.bbc.co.uk/2/hi/8533695.stm
http://www.pcworld.com/article/190191/italys_google_convictions_set_a_dangerous_precedent.html
http://www.pcworld.com/article/190191/italys_google_convictions_set_a_dangerous_precedent.html
http://www.cleveland.com/world/index.ssf/2010/02/three_google_employees_convict.html
http://www.cleveland.com/world/index.ssf/2010/02/three_google_employees_convict.html
http://www.pcworld.com/article/190125/conviction_of_google_execs_in_italy_sheer_madness.html
http://www.pcworld.com/article/190125/conviction_of_google_execs_in_italy_sheer_madness.html
http://www.pcworld.com/article/190175/conviction_of_google_execs_alarms_privacy_advocates.html
http://www.pcworld.com/article/190175/conviction_of_google_execs_alarms_privacy_advocates.html