Chapter 3 the world marketplace business without borders

International Business Competing in the Global Marketplace

C h a r l e s W. L . H i l l U N I V E R S I T Y O F W A S H I N G T O N

G . To m a s M . H u l t M I C H I G A N S T A T E U N I V E R S I T Y

International Business Competing in the Global Marketplace

12e

INTERNATIONAL BUSINESS: COMPETING IN THE GLOBAL MARKETPLACE, TWELFTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2015, and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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F o r m y m o t h e r J u n e H i l l , a n d t h e m e m o r y o f m y f a t h e r,

M i k e H i l l — C h a r l e s W. L . H i l l

F o r G e r t & M a r g a r e t a H u l t , my parents—G. To m as M. Hul t

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about the AUTHORS C h a r l e s W. L . H i l l U n i v e r s i t y o f W a s h i n g t o n

Charles W. L. Hill is the Hughes M. and Katherine Blake Professor of Strategy and International Business at the Foster School of Business, University of Washington. The Foster School has a Center for International Business Education and Research (CIBER), one of only 17 funded by the U.S. Department of Education, and is con- sistently ranked as a Top-25 business school. Learn more about Professor Hill at foster.uw.edu/faculty-research/directory/charles-hill A native of the United Kingdom, Professor Hill received his PhD from the University of Manchester, UK. In addition to the University of Washington, he has served on the faculties of the University of Manchester, Texas A&M University, and Michigan State University. Professor Hill has published over 50 articles in top academic journals, including the Academy of Management Journal, Academy of Management Review, Strategic Management Journal, and Organization Science. Professor Hill has also published several textbooks including International Business (McGraw-Hill) and Global Busi- ness Today (McGraw-Hill). His work is among the most widely cited in the world in international business and strategic management. Beginning in 2014, Dr. Hill partnered with Dr. Tomas Hult in a formidable co-authorship of the IB franchise of textbooks (International Business, Global Business Today). This brought together two of the most cited international business scholars in history. Professor Hill has taught in the MBA, Executive MBA, Technology Management MBA, Management, and PhD programs at the University of Washington. During his time at the University of Washington he has received over 25 awards for teaching excellence, including the Charles E. Summer Outstanding Teaching Award. Professor Hill works on a private basis with a number of organizations. His clients have included Microsoft, where he has been teaching in-house executive education courses for two decades. He has also consulted for a variety of other large companies (e.g., AT&T Wireless, Boeing, BF Goodrich, Group Health, Hexcel, Microsoft, Philips Healthcare, Philips Medical Systems, Seattle City Light, Swedish Health Services, Tacoma City Light, Thompson Financial Services, WRQ, and Wizards of the Coast). Professor Hill has also served on the advisory board of several start-up companies. For recreation, Professor Hill enjoys skiing, and competitive sailing!

G . To m a s M . H u l t M i c h i g a n S t a t e U n i v e r s i t y

G. Tomas M. Hult is the John W. Byington Endowed Chair, professor of marketing and international business, and director of the International Business Center in the Eli Broad College of Business at Michigan State University. The Broad College has a Center for International Business Education and Research (CIBER), one of only 17 funded by the U.S. Department of Education, and is consistently ranked as a Top-25 business school. Learn more about Professor Hult at broad.msu.edu/ facultystaff/hult A native of Sweden, Professor Hult received a mechanical engineer degree in Sweden before obtaining a PhD at The University of Memphis. In addition to Michigan State University, he has served on the faculties of Florida State University

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and the University of Arkansas at Little Rock. Dr. Hult holds visiting professorships in the International Business group of his native Uppsala University, Sweden (since 2013) and the International Business division of Leeds University, UK (since 2010). Michigan State, Uppsala, and Leeds are all ranked in the top 10 in the world in international business research. Several studies have ranked Professor Hult as one of the most cited scholars in the world in business and management. He served as editor of Journal of the Academy of Marketing Science, a Financial Times Top-50 business journal, and has published more than 70 articles in premier business journals, including Journal of International Business Studies, Academy of Management Journal, Strategic Management Journal, Journal of Management, Journal of Marketing, Journal of the Academy of Marketing Science, Journal of Retailing, Journal of Operations Management, Decision Sciences, and IEEE. He has also published several textbooks including International Business (McGraw-Hill) and Global Business Today (McGraw-Hill). Dr. Hult’s other books include Second Shift: The Inside Story of the Keep GM Movement, Global Supply Chain Management, Total Global Strategy, and Extending the Supply Chain. He is a regular contributor of op-ed and articles in the popular press (e.g., Time, Fortune, World Economic Forum, The Conversation). Professor Hult is a well-known keynote speaker on international business, interna- tional marketing, global supply chain management, global strategy, and marketing strat- egy. He teaches in doctoral, master’s, and undergraduate programs at Michigan State University. He also teaches frequently in executive development programs and has developed a large clientele of the world’s top multinational corporations (e.g., ABB, Albertsons, Avon, BG, Bechtel, Bosch, BP, Defense Logistics Agency, Domino’s, FedEx, Ford, FreshDirect, General Motors, GroceryGateway, HSBC, IBM, Michigan Economic Development Corporation, Masco, NASA, Raytheon, Shell, Siemens, State Farm, Steelcase, Tech Data, and Xerox). Tomas Hult is an elected Fellow of the Academy of International Business (AIB), one of only about 90 scholars worldwide receiving this honor, and serves as the executive director and foundation president of AIB. He also serves on the U.S. District Export Council and holds board member positions on the International Trade Center of Mid-Michigan and the Sheth Foundation. Tomas enjoys tennis, golf, and traveling as his favorite recreational activities.

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brief CONTENTS

part one Introduction and Overview Chapter 1 Globalization 2

part two National Differences Chapter 2 National Differences in Political, Economic, and

Legal Systems 38

Chapter 3 National Differences in Economic Development 62

Chapter 4 Differences in Culture 90

Chapter 5 Ethics, Corporate Social Responsibility, and Sustainability 128

part three The Global Trade and Investment Environment Chapter 6 International Trade Theory 158

Chapter 7 Government Policy and International Trade 192

Chapter 8 Foreign Direct Investment 222

Chapter 9 Regional Economic Integration 252

part four The Global Monetary System Chapter 10 The Foreign Exchange Market 286

Chapter 11 The International Monetary System 312

Chapter 12 The Global Capital Market 340

part five The Strategy and Structure of International Business Chapter 13 The Strategy of International Business 362

Chapter 14 The Organization of International Business 392

Chapter 15 Entry Strategy and Strategic Alliances 430

part six International Business Functions Chapter 16 Exporting, Importing, and Countertrade 460

Chapter 17 Global Production and Supply Chain Management 486

Chapter 18 Global Marketing and R&D 516

Chapter 19 Global Human Resource Management 552

Chapter 20 Accounting and Finance in the International Business 582

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part seven Integrative Cases Global Medical Tourism 609

Venezuela under Hugo Chávez and Beyond 611

Political and Economic Reform in Myanmar 612

Will China Continue to Be a Growth Marketplace? 613

Lead in Toys and Drinking Water 614

Creating the World’s Biggest Free Trade Zone 616

Sugar Subsidies Drive Candy Makers Abroad 617

Volkswagen in Russia 618

The NAFTA Tomato Wars 619

Subaru’s Sales Boom Thanks to the Weaker Yen 620

The IMF and Ukraine’s Economic Crisis 621

The Global Financial Crisis and Its Aftermath: Declining Cross-Border Capital Flows 622

Ford’s Global Platform Strategy 624

Philips’ Global Restructuring 625

General Motors and Chinese Joint Ventures 626

Exporting Desserts by a Hispanic Entrepreneur 627

Apple: The Best Supply Chains in the World? 628

Domino’s Global Marketing 630

Siemens and Global Competitiveness 632

Microsoft and Its Foreign Cash Holdings 633

Glossary 635

Organization Index 645

Name Index 650

Subject Index 652

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THE PROVEN CHOICE FOR INTERNATIONAL BUSINESS

RELEVANT. PRACTICAL. INTEGRATED.

It is now more than a quarter of a century since work be- gan on the first edition of International Business: Compet- ing in the Global Marketplace. By the third edition the book was the most widely used international business text in the world. Since then its market share has only in- creased. The success of the book can be attributed to a number of unique features. Specifically, for the twelfth edition we have developed a learning program that

∙ Is comprehensive, state of the art, and timely. ∙ Is theoretically sound and practically relevant. ∙ Focuses on applications of international business

concepts. ∙ Tightly integrates the chapter topics throughout. ∙ Is fully integrated with results-driven technology. ∙ Takes full and integrative advantage of

globalEDGE.msu.edu—the Google-ranked #1 web resource for “international business resources.”

International Business, now in its twelfth edition, co- authored by Charles W. L. Hill and G. Tomas M. Hult, is a compre- hensive and case-oriented version of our text that lends itself to the core course in international business for those courses that want a deeper focus on the global monetary system, structure of international business, international accounting, and international finance. We cover more and integrated cases in International Business 12e and we provide a deeper treatment of the global capital market, the organization of an international business, interna- tional accounting, and international finance—topics that are allocated chapters in International Business 12e but are not attended to in the shorter treatment of IB in Global Business Today 10e. Like our shorter text, Global Business Today 10e (2017), International Business 12e, focuses on being current, rele- vant, application rich, accessible, and student focused. Our goal has always been to cover macro and micro is- sues equally and in a relevant, practical, accessible, and student focused approach. We believe that anything short of such a breadth and depth of coverage is a serious defi- ciency. Many of the students in these international busi- ness courses will soon be working in global businesses,

and they will be expected to understand the implications of international business for their organization’s strategy, structure, and functions in the context of the global mar- ketplace. We are proud and delighted to have put together this international business learning experience for the leaders of tomorrow. Over the years, and through now 12 editions, Dr. Charles Hill has worked hard to adhere to these goals. Since Global Business Today 9e (2015), and International Business 11e (2017), Charles’s co-author, Dr. Tomas Hult, follows the same approach. As a team, we have been guided not only by our own reading, teaching, and re- search but also by the invaluable feedback we received from professors and students around the world, from re- viewers, and from the editorial staff at McGraw-Hill Edu- cation. Our thanks go out to all of them.

RELEVANT AND COMPREHENSIVE

To be relevant and comprehensive, an international busi- ness package must

∙ Explain how and why the world’s cultures, coun- tries, and regions differ.

∙ Cover economics and politics of international trade and investment.

∙ Tackle international issues related to ethics, corpo- rate social responsibility, and sustainability.

∙ Explain the functions and form of the global mon- etary system.

∙ Examine the strategies and structures of interna- tional businesses.

∙ Assess the special roles of an international busi- ness’s various functions.

This text has always endeavored to be relevant, practical, and integrated. Too many other products have paid insuf- ficient attention to some portion of the topics mentioned, being skewed toward a particular portion of international business. Relevance and comprehensiveness also require cover- age of the major theories. It has always been a goal to incorporate the insights gleaned from recent academic scholarship into the book. Consistent with this goal,

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insights from the following research, as a sample of theoretical streams used in the book, have been incorporated:

∙ New trade theory and strategic trade policy. ∙ The work of Nobel Prize–winning economist

Amartya Sen on economic development. ∙ Samuel Huntington’s influential thesis on the

“clash of civilizations.” ∙ Growth theory of economic development champi-

oned by Paul Romer and Gene Grossman. ∙ Empirical work by Jeffrey Sachs and others on

the relationship between international trade and economic growth.

∙ Michael Porter’s theory of the competitive advan- tage of nations.

∙ Robert Reich’s work on national competitive advantage.

∙ The work of Nobel Prize–winner Douglass North and others on national institutional structures and the protection of property rights.

∙ The market imperfections approach to foreign direct investment that has grown out of Ronald Coase and Oliver Williamson’s work on transac- tion cost economics.

∙ Bartlett and Ghoshal’s research on the transna- tional corporation.

∙ The writings of C. K. Prahalad and Gary Hamel on core competencies, global competition, and global strategic alliances.

∙ Insights for international business strategy that can be derived from the resource-based view of the firm and complementary theories.

∙ Paul Samuelson’s critique of free trade theory. ∙ Conceptual and empirical work on global supply

chain management—logistics, purchasing (sourcing), operations, and marketing channels.

In addition to including leading-edge theory, in light of the fast-changing nature of the international business environment we have made every effort to ensure that this product was as up-to-date as possible when it went to press. A significant amount has happened in the world since we began revisions of this book. By 2018, more than $4 trillion per day was f lowing across na- tional borders and, as we will see in Chapter 1, trade across borders has almost exponentially increased in the last 15 years. The size of such flows fueled concern about the ability of short-term speculative shifts in global capital markets to destabilize the world economy.

What’s New in the Twelfth Edition

The world continued to become more global. Several Asian economies, most notably China and India, contin- ued to grow their economies at a rapid rate. New multina- tionals continued to emerge from developing nations in addition to the world’s established industrial powers. Increasingly, the globalization of the world economy affected a wide range of firms of all sizes, from the very large to the very small. And unfortunately, global terrorism and the attendant geopolitical risks keep emerging in various places glob- ally, many new and inconceivable just a decade ago. These represent a threat to global economic integration and activity. Plus, with the avenue of the United Kingdom opting to vote to leave the European Union, the election of President Donald Trump in the United States, and several elections around the world, the globe—in many ways—has paid more attention to nationalistic issues over trade. These topics and much more are integrated into this text for maximum learning opportunities. The success of the first eleven editions of International Business was based in part on the incorporation of leading- edge research into the text, the use of the up-to-date ex- amples and statistics to illustrate global trends and enterprise strategy, and the discussion of current events within the context of the appropriate theory. Building on these strengths, our goals for the twelfth edition have focused on the following:

1. Incorporate new insights from scholarly research.

2. Make sure the content covers all appropriate issues.

3. Make sure the text is up-to-date with events, statis- tics, and examples.

4. Add new and insightful opening and closing cases.

5. Incorporate value-added globalEDGE features in every chapter.

6. Connect every chapter to a focus on managerial implications.

7. Provide 20 new integrated cases that can be used as additional cases for specific chapters but, more importantly, as learning vehicles across multiple chapters.

As part of the overall revision process, changes have been made to every chapter in the book. All statistics have been updated to incorporate the most recently available data. As before, we are the only text in International Busi- ness that ensures that all material is up-to-date on virtu- ally a daily basis. The copyright for the book is 2019 but you are likely using the text in 2018, 2019, or 2020—we

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keep it updated to each semester you use the text in your course! We are able to do this by integrating globalEDGE features in every chapter. Specifically, the Google number-one-ranked globaledge.msu.edu site (for “interna- tional business resources”) is used in each chapter to add value to the chapter material and provide up-to-date data and information. This keeps chapter material constantly and dynamically updated for teachers who want to infuse globalEDGE material into the chapter topics, and it keeps students abreast of current developments in inter- national business. In addition to updating all statistics, figures, and maps to incorporate the most recently published data, a chapter-by-chapter selection of changes for the eleventh edition include the following:

Chapter 1: Globalization ∙ New opening case: Globalization of BMW,

Rolls-Royce, and the MINI ∙ New materials on international trade, trade agree-

ments, world production, and world population ∙ Explanations of differences in cross-border trade

and in-country production; the value of trade agreements; and population implications related to resource constraints

∙ New closing case: Uber: Going Global from Day One

Chapter 2: National Differences in Political, Economic, and Legal Systems

∙ New opening case: The Decline of Zimbabwe ∙ Updated section on Pseudo-Democracies ∙ Updated data and figure on corruption ∙ New country focus: Corruption in Brazil ∙ New closing case: Economic Transformation in

Vietnam

Chapter 3: National Differences in Economic Development

∙ New opening case: Economic Development in Bangladesh

∙ Updated data, maps and discussion on Differences in Economic Development

∙ Updated data, maps and discussion on the spread of democracy and market-based economic systems.

∙ New closing case: The Political and Economic Evolution of Indonesia

Chapter 4: Differences in Culture ∙ New opening case: The Swatch Group and Cultural

Uniqueness ∙ New management focus: China and Its Guanxi ∙ Deeper treatment of culture, values, and norms ∙ Worked with the foundation that most religions are

now pro-business ∙ Updated the Hofstede culture framework with new

research ∙ New closing case: The Emirates Group and

Employee Diversity

Chapter 5: Ethics, Corporate Social Responsibility, and Sustainability

∙ New opening case: Woolworths Group’s Corporate Responsibility Strategy 2020

∙ New management focus: “Emissionsgate” at Volkswagen

∙ Deeper focus on corporate social responsibility and sustainability at the country, company, and customer levels

∙ New closing case: UNCTAD Sustainable Develop- ment Goals

Chapter 6: International Trade Theory ∙ New opening case: Donald Trump on Trade ∙ Added discussion of Donald Trump’s views on

trade at appropriate points in the chapter. ∙ Expanded discussion of David Autor’s important

research on trade and employment in U.S. counties impacted by trade with China.

∙ New closing case: The Trans Pacific Partnership (TPP)

Chapter 7: Government Policy and International Trade

∙ New opening case: Boeing and Airbus Are in a Dogfight over Illegal Subsidies

∙ New section, The World Trading System under Threat, discussing the possible implications of BREXIT and the election of Donald Trump (who appears to hold mercantilist views on trade).

∙ New closing case: Is China Dumping Excess Steel Production?

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Chapter 8: Foreign Direct Investment ∙ New opening case: Foreign Direct Investment in

Retailing in India ∙ Updated data and discussion on FDI trends on the

world economy. ∙ New closing case: Burberry Shifts Its Strategy in

Japan

Chapter 9: Regional Economic Integration ∙ New opening case: Renegotiating NAFTA ∙ New section discussing the implications of

BREXIT for Britain and the European Union ∙ New section on the future of NAFTA in light of

Donald Trump’s election as president ∙ New closing case: The Push toward Free Trade in

Africa

Chapter 10: The Foreign Exchange Market ∙ New opening case: The Mexican Peso, the Japanese

Yen, and Pokemon Go ∙ New closing case: Apple’s Earnings Hit by Strong

Dollar

Chapter 11: The International Monetary System

∙ New opening case: Egypt and the IMF ∙ Updated discussion of exchange rates since 1973 to

reflect recent exchange rate movements. ∙ New closing case: China’s Exchange Rate Regime

Chapter 12: The Global Capital Market ∙ New opening case: Saudi Aramco ∙ New closing case: Alibaba’s Record-Setting IPO

Chapter 13: The Strategy of International Business

∙ New opening case: Sony’s Global Strategy ∙ Deeper discussion of the rise of regionalism ∙ Integration of global strategy thoughts ∙ New closing case: IKEA’s Global Strategy

Chapter 14: The Organization of International Business

∙ Revised opening case: Unilever’s Global Organization

∙ Revised Management Focus: Walmart International

∙ Revised Management Focus: Lincoln Electric and Culture

∙ New closing case: Organizational Architecture at P&G

Chapter 15: Entry Strategy and Strategic Alliances

∙ New opening case: Gazprom and Global Strategic Alliances

∙ Deeper treatment of entry modes and global strategic alliances

∙ Revised closing case: Starbucks’ Foreign Entry Strategy

Chapter 16: Exporting, Importing, and Countertrade

∙ New opening case: Tata Motors and Exporting ∙ globalEDGE-related material on company readi-

ness to export and company readiness to import material

∙ Revised management focus: Ambient Technologies and the Panama Canal

∙ New and revised material on globalEDGE Diagnostic Tools; focusing on CORE-Company Readiness to Export

∙ New closing case: Embraer and Brazilian Importing

Chapter 17: Global Production and Supply Chain Management

∙ New opening case: Alibaba and Global Supply Chains

∙ Revised and new material on global logistics, global purchasing, and global operations.

∙ Revised sections on Strategic Roles for Production Facilities, Make-or-Buy Decisions, and Global Supply Chain Functions

∙ New text for the sections on Role of Information Technology, Coordination in Global Supply Chains, and Interorganizational Relationships

∙ New closing case: Amazon’s Global Supply Chains

Chapter 18: Global Marketing and R&D ∙ New opening case: ACSI and Satisfying Global

Customers

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∙ Revised sections on Globalization of Markets and Brands, Configuring the Marketing Mix (with a great summary table and sample measures), and International Market Research

∙ Revised positioning of the Product Development section

∙ New closing case: Global Branding, Marvel Studios, and Walt Disney Company

Chapter 19: Global Human Resource Management

∙ New opening case: Building a Global Diverse Workforce at Sodexo

∙ New section: Building a Diverse Global Workforce ∙ New closing case: AstraZeneca

Chapter 20: Accounting and Finance in the International Business

∙ Revised opening case: Shoprite—Financial Success of a Food Retailer in Africa

∙ Revised materials on global accounting standards and organizations

∙ Revised closing case: Tesla, Inc.—Subsidizing Tesla Automobiles Globally

Integrated Cases

All of the 20 integrated cases are new for International Business 12e. Many of these cases build on previous open- ing and closing chapter cases that have been revised, up- dated, and oftentimes adopted a new angle or focus. A unique feature of the opening and closing cases for the chapters as well as the integrated cases at the back-end of the text is that we cover all continents of the world and we do so with regional or country issues and large, me- dium, and small company scenarios. This makes the 60 total cases we have included in International Business 12e remarkable wealthy as a learning program. As a heads up for teachers (and students), the Domino’s case is the lengthiest and most in-depth in the twelfth edition.

∙ Global Medical Tourism ∙ Venezuela under Hugo Chávez and Beyond

∙ Political and Economic Reform in Myanmar ∙ Will China Continue to be a Growth Marketplace ∙ Lead in Toys and Drinking Water ∙ Creating the World’s Biggest Free Trade Zone ∙ Sugar Subsidies Drive Candy Makers Abroad ∙ Volkswagen in Russia ∙ The NAFTA Tomato Wars ∙ Subaru’s Sales Boom Thanks to the Weaker Yen ∙ The IMF and Ukraine’s Economic Crisis ∙ The Global Financial Crisis and Its Aftermath:

Declining Cross-Border Capital Flows ∙ Ford’s Global Platform Strategy ∙ Philips’ Global Restructuring ∙ General Motors and Chinese Joint Ventures ∙ Exporting Desserts by a Hispanic Entrepreneur ∙ Apple: The Best Supply Chains in the World? ∙ Domino’s Global Marketing ∙ Siemens and Global Competitiveness ∙ Microsoft and Its Foreign Cash Holdings

Beyond Uncritical Presentation and Shallow Explanation

Many issues in international business are complex and thus necessitate considerations of pros and cons. To dem- onstrate this to students, we have adopted a critical ap- proach that presents the arguments for and against economic theories, government policies, business strate- gies, organizational structures, and so on. Related to this, we have attempted to explain the com- plexities of the many theories and phenomena unique to international business so the student might fully compre- hend the statements of a theory or the reasons a phenom- enon is the way it is. We believe that these theories and phenomena are explained in more depth in this work than they are in the competition, which seem to use the rationale that a shallow explanation is little better than no explanation. In international business, a little knowledge is indeed a dangerous thing.

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We have always believed that it is important to show students how the material covered in the text is rele- vant to the actual practice of international business. This is explicit in the later chapters of the book, which focus on the practice of international business, but it is not always ob- vious in the first half of the book, which considers many macroeconomic and political issues, from international trade theory and foreign direct investment flows to the IMF and the influence of inflation rates on foreign exchange quo- tations. Accordingly, at the end of each chapter in Parts Two, Three, and Four—where the focus is on the environment of international business, as opposed to particular firms—there is a section titled Focus on Managerial Implications. In this section, the managerial implications of the material discussed in the chapter are clearly explained.

Another tool that we have used to focus on managerial implica- tions is the Management Focus box. Most chapters have at least one Management Focus. Like the opening cases, the purpose of these boxes is

to illustrate the relevance of chapter material for the practice of international business.

Practical and Rich Applications

National Differences in Political, Economic, and Legal Systems Chapter 2 57

PRODUCT SAFETY AND PRODUCT LIABILITY

Product safety laws set certain safety standards to which a product must adhere. Prod- uct liability involves holding a firm and its officers responsible when a product causes in- jury, death, or damage. Product liability can be much greater if a product does not conform to required safety standards. Both civil and criminal product liability laws exist. Civil laws call for payment and monetary damages. Criminal liability laws result in fines or imprison- ment. Both civil and criminal liability laws are probably more extensive in the United States than in any other country, although many other Western nations also have compre- hensive liability laws. Liability laws are typically the least extensive in less developed na- tions. A boom in product liability suits and awards in the United States resulted in a dramatic increase in the cost of liability insurance. Many business executives argue that the high costs of liability insurance make American businesses less competitive in the global marketplace.

In addition to the competitiveness issue, country differences in product safety and lia- bility laws raise an important ethical issue for firms doing business abroad. When product safety laws are tougher in a firm’s home country than in a foreign country or when liability laws are more lax, should a firm doing business in that foreign country follow the more relaxed local standards or should it adhere to the standards of its home country? While the ethical thing to do is undoubtedly to adhere to home-country standards, firms have been known to take advantage of lax safety and liability laws to do business in a manner that would not be allowed at home.

TEST PREP Use SmartBook to help retain what you have learned. Access your instructor’s Connect course to check out SmartBook or go to learnsmartadvantage.com for help.

FOCUS ON MANAGERIAL IMPLICATIONS

THE MACRO ENVIRONMENT INFLUENCES MARKET ATTRACTIVENESS

The material discussed in this chapter has two broad implications for international business. First, the political, economic, and legal systems of a country raise impor- tant ethical issues that have implications for the practice of international business. For example, what ethical implications are associated with doing business in

totalitarian countries where citizens are denied basic human rights, corruption is rampant, and bribes are necessary to gain permission to do business? Is it right to oper-

ate in such a setting? A full discussion of the ethical implications of country differences in political economy is reserved for Chapter 5, where we explore ethics in international business in much greater depth. Second, the political, economic, and legal environments of a country clearly influence the attractiveness of that country as a market or investment site. The benefits, costs, and risks associated with doing business in a country are a function of that country’s political, eco- nomic, and legal systems. The overall attractiveness of a country as a market or investment site depends on balancing the likely long-term benefits of doing business in that country against the likely costs and risks. Because this chapter is the first of two dealing with issues of political economy, we will delay a detailed discussion of how political economy impacts the benefits, costs, and risks of doing business in different nation-states until the end of the next chapter, when we have a full grasp of all the relevant variables that are important for assessing benefits, costs, and risks. For now, other things being equal, a nation with democratic political institutions, a market- based economic system, and strong legal system that protects property rights and limits corruption is clearly more attractive as a place in which to do business than a nation that lacks democratic institutions, where economic activity is heavily regulated by the state, and where corruption is rampant and the rule of law is not respected. On this basis, for example,

LO 2-4 Explain the implications for management practice of national differences in political economy.

hiL29442_ch02_038-061.indd 57 12/29/17 11:48 AM

MANAGEMENT FOCUS

In the early 2000s, Walmart wanted to build a new store in San Juan Teotihuacan, Mexico, barely a mile from ancient pyramids that drew tourists from around the world. The owner of the land was happy to sell to Walmart, but one thing stood in the way of a deal: the city’s new zoning laws. These prohibited commercial development in the historic area. Not to be denied, executives at the headquarters of Walmart de Mexico found a way around the problem: They paid a $52,000 bribe to a local official to redraw the zon- ing area so that the property Walmart wanted to purchase was placed outside the commercial-free zone. Walmart then went ahead and built the store, despite vigorous local opposition, opening it in late 2004. A former lawyer for Walmart de Mexico subsequently contacted Walmart executives at the company’s corporate headquarters in Bentonville, Arkansas. He told them that Walmart de Mexico routinely resorted to bribery, citing the altered zoning map as just one example. Alarmed, execu- tives at Walmart started their own investigation. Faced with growing evidence of corruption in Mexico, top Walmart executives decided to engage in damage control, rather than coming clean. Walmart’s top lawyer shipped the case files back to Mexico and handed over responsibility for the investigation to the general council of Walmart de Mexico. This was an interesting choice as the very same general council was alleged to have authorized bribes. The gen- eral council quickly exonerated fellow Mexican executives, and the internal investigation was closed in 2006. For several years nothing more happened; then, in April 2012, The New York Times published an article detailing bribery by Walmart. The Times cited the changed zoning map and several other examples of bribery by Walmart: for example, eight bribes totaling $341,000 enabled Walmart to build a Sam’s Club in one of Mexico City’s most densely

Did Walmart Violate the Foreign Corrupt Practices Act? populated neighborhoods without a construction license, an environmental permit, an urban impact assessment, or even a traffic permit. Similarly, thanks to nine bribe pay- ments totaling $765,000, Walmart built a vast refrigerated distribution center in an environmentally fragile flood basin north of Mexico City, in an area where electricity was so scarce that many smaller developers were turned away. Walmart responded to The New York Times article by ramping up a second internal investigation into bribery that it had initiated in 2011. By mid-2015, there were reportedly more than 300 outside lawyers working on the investiga- tion, and it had cost more than $612 million in fees. In addi- tion, the U.S. Department of Justice and the Securities and Exchange Commission both announced that they had started investigations into Walmart’s practices. In Novem- ber 2012, Walmart reported that its own investigation into violations had extended beyond Mexico to include China and India. Among other things, it was looking into the alle- gations by the Times that top executives at Walmart, includ- ing former CEO Lee Scott Jr., had deliberately squashed earlier investigations. While the investigations are still on- going, in late 2016 people familiar with the matter stated that the federal investigation had not uncovered evidence of widespread bribery. Nevertheless, the company was ap- parently negotiating a settlement with the U.S. government that was estimated to be at least $600 million.

Sources: David Barstow, “Vast Mexican Bribery Case Hushed Up by Wal-Mart after Top Level Struggle,” The New York Times, April 21, 2012; Stephanie Clifford and David Barstow, “Wal-Mart Inquiry Reflects Alarm on Corruption,” The New York Times, November 15, 2012; Nathan Vardi, “Why Justice Department Could Hit Wal-Mart Hard over Mexican Bribery Allegations,” Forbes, April 22, 2012; Phil Wahba,”Walmart Bribery Probe by Feds Finds No Major Misconduct in Mexico,” Fortune, October 18, 2015; T. Schoenberg and M. Robinson, “Wal-Mart Balks at Paying $600 Million in Bribery Case,” Bloomberg, October 6, 2016.

international trade) to keep detailed records that would reveal whether a violation of the act has occurred. In 2012, evidence emerged that in its eagerness to expand in Mexico, Walmart may have run afoul of the FCPA (for details, see the Management Focus feature).

In 1997, trade and finance ministers from the member states of the Organisation for Economic Co-operation and Development (OECD), an association of 34 major econo- mies including most Western economies (but not Russia, India or China), adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.20 The convention obliges member states to make the bribery of foreign pub- lic officials a criminal offense.

Both the U.S. law and OECD convention include language that allows exceptions known as facilitating or expediting payments (also called grease payments or speed money),

54

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In addition, each chapter begins with an opening case that sets the stage for the chapter content and familiarizes students with how real international companies conduct business.

part two National Differences

3National Differences in Economic Development L E A R N I N G O B J E C T I V E S After reading this chapter, you will be able to:

LO3-1 Explain what determines the level of economic development of a nation.

LO3-2 Identify the macropolitical and macroeconomic changes occurring worldwide.

LO3-3 Describe how transition economies are moving toward market-based systems.

LO3-4 Explain the implications for management practice of national difference in political economy.

©Shafiqul Alam/Corbis News/Getty Images©Shafiqul Alam/Corbis News/Getty Images

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part seven cases

Integrative Cases For International Business, 12e, we have again included a set of 20 cases as value- added materials at the end of the text in addition to the 40 cases—opening and clos- ing cases—that appear in the 20 chapters. We started this practice of including short but integrative cases in the 11th edition to provide instructors and students with a bet- ter platform for learning across chapters.

The end-of-the-book cases fill strategically aligned objectives for the core features of In- ternational Business 12e. Specifically, we are able to build on and enhance the worldwide market leadership of our text and its focus on current, application-rich, relevant, and

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Case

Global Medical Tourism 1 4, 5 X X

Venezuela under Hugo Chávez and Beyond 2 3, 6 X X X

Political and Economic Reform in Myanmar 3 6, 7 X X X

Will China Continue to Be a Growth Marketplace? 4 7, 8 X X X

Lead in Toys and Drinking Water 5 4, 13 X X X

Creating the World’s Biggest Free Trade Zone 6 7, 8, 9 X X

Sugar Subsidies Drive Candy Makers Abroad 7 2, 3, 6 X X X

Volkswagen in Russia 8 7, 17 X X X

The NAFTA Tomato Wars 9 4, 6, 7 X X X

Subaru’s Sales Boom Thanks to the Weaker Yen 10 11, 12 X X

The IMF and Ukraine’s Economic Crisis 11 3, 12 X X X

The Global Financial Crisis and Its Aftermath: Declining Cross-Border Capital Flows

12 6, 8 X X X

Ford’s Global Platform Strategy 13 14, 17 X X X

Philips’ Global Restructuring 14 13 X X

General Motors and Chinese Joint Ventures 15 13, 14 X X

Exporting Desserts by a Hispanic Entrepreneur 16 15 X X X

Apple: The Best Supply Chains in the World? 17 13, 14, 15 X X X

Domino’s Global Marketing 18 16, 17 X X X

Siemens and Global Competitiveness 19 14 X X X

Microsoft and Its Foreign Cash Holdings 20 12, 14, 15 X X X X

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Globalization Chapter 1 35

research task g l o b a l e d g e . m s u . e d u

Use the globalEDGETM website (globaledge.msu.edu) to complete the following exercises:

1. As the drivers of globalization continue to pres- sure both the globalization of markets and the globalization of production, we continue to see the impact of greater globalization on worldwide trade patterns. HSBC, a large global bank, ana- lyzes these pressures and trends to identify op- portunities across markets and sectors through its trade forecasts. Visit the HSBC Global Con- nections site and use the trade forecast tool to identify which export routes are forecasted to see the greatest growth over the next 15 to 20 years. What patterns do you see? What types of coun- tries dominate these routes?

2. You are working for a company that is consider- ing investing in a foreign country. Investing in countries with different traditions is an impor- tant element of your company’s long-term strate- gic goals. As such, management has requested a report regarding the attractiveness of alternative countries based on the potential return of FDI. Accordingly, the ranking of the top 25 countries in terms of FDI attractiveness is a crucial ingre- dient for your report. A colleague mentioned a potentially useful tool called the Foreign Direct Investment (FDI) Confidence Index. The FDI Confidence Index is a regular survey of global executives conducted by A.T. Kearney. Find this index and provide additional information regard- ing how the index is constructed.

Uber, the controversial San Francisco–based ride-for-hire service, has made a virtue out of disrupting the estab- lished taxi business. From a standing start in 2009, the company has spread across the globe like wildfire. Uber’s strategy has been to focus on major metropolitan areas around the world. This strategy has so far taken Uber into about 600 cities in more than 80 countries. The privately held company is rumored to be generating annual reve- nues of around $10 billion. At the core of Uber’s business is a smartphone app that allows customers to hail a ride from the comfort of their own home, a restaurant, or a bar stool. The app shows cars in the area, notifies the rider when a car is on the way, and tracks the progress of the car on screen using GPS map- ping technology. The rider pays via the app using a credit card, so no cash changes hands. The driver takes 80 per- cent of the fee and Uber 20 percent. The price for the ride is determined by Uber using an algorithm that sets prices in order to match the demand for rides with the supply of cars on the road. Thus, if demand exceeds supply, the price for a ride will rise, inducing drivers to get on the road. Uber does not own any cars. Its drivers are independent contrac- tors with their own vehicles. The company is, in effect, a twenty-first-century version of an old-style radio taxi dis- patch company. Interestingly, Uber’s founders got their idea for the app-based service one snowy night in Paris when they were unable to find a taxi.

Historically, taxi markets around the globe have been tightly regulated by metropolitan authorities. The stated purpose of these regulations has often included (1) limit- ing the supply of taxis in order to boost demand for other forms of public transportation, (2) limiting the supply of taxis in order to reduce traffic congestion, (3) ensuring the safety of riders by only allowing licensed taxis to offer rides, (4) ensuring that the prices charged are “fair,” and (5) guaranteeing a reasonable rate of return to the owners of taxi licenses. In practice, widespread restrictions on the supply of taxi licenses have created shortages in many cities, making it dif- ficult to find a taxi, particularly at busy periods. In New York, the number of licenses barely increased from 11,787 in 1945 to 13,587 in 2017, even though the population ex- panded significantly. In Paris, the number of licenses was 14,000 in 1937 and had only increased to 17,137 by 2017, even though both the population and the number of visitors to the city had surged. The number of taxis in Milan was frozen between 1974 and 2014, despite Milan having a ratio of taxis to inhabitants that was one of the lowest for any major city. Whenever metropolitan authorities have tried to increase the number of taxis in a city, they have often been meet by strong resistance from established taxi companies. When the French tried to increase the number of taxis in Paris in 2007, a strike among transportation workers shut down the city and forced the government to back off.

C LO S I N G C A S E

Uber: Going Global from Day One

hiL29442_ch01_002-037.indd 35 12/30/17 1:35 PM

The Part Seven Integrated Cases are somewhat longer, allowing a more in- depth study of international companies. These cases can be used as stand-alone cases, in conjunction with a specific chap- ter, and also as integrated cases covering relevant and practical material from several chapters. The introduction to the Part Seven section discusses and lays out topics covered in each case.

A closing case to each chapter is designed to illustrate the rele- vance of chapter material for the practice of international busi- ness and provide continued in- sight into how real companies handle those issues.

xvii

To help students go a step further in expanding their application-level understanding of international business, each chapter incorporates two globalEDGE research tasks designed and written by Tomas Hult, Tunga Kiyak, and the team at Michigan State University’s International Business Center and their globaledge.msu.edu site. The exercises dovetail with the content just covered.

INTEGRATED PROGRESSION OF TOPICS

A weakness of many texts is that they lack a tight, inte- grated flow of topics from chapter to chapter. This book explains to students in Chapter 1 how the book’s topics are related to each other. Integration has been achieved by organizing the material so that each chapter builds on the material of the previous ones in a logical fashion.

Part One

Chapter 1 provides an overview of the key issues to be addressed and explains the plan of the book. Globaliza- tion of markets and globalization of production is the core focus.

Part Two

Chapters 2 through 4 focus on country differences in political economy and culture, and Chapter 5 on ethics, corporate social responsibility, and sustainability issues in international business. Most international business textbooks place this material at a later point, but we believe it is vital to discuss national differences first. After all, many of the central issues in international trade and investment, the global monetary system, international business strategy and structure, and international busi- ness functions arise out of national differences in politi- cal economy and culture.

Part Three

Chapters 6 through 9 investigate the political economy of global trade and investment. The purpose of this part is to describe and explain the trade and investment environ- ment in which international business occurs.

Part Four

Chapters 10 through 12 describe and explain the global monetary system, laying out in detail the monetary frame- work in which international business transactions are conducted.

Part Five

In Chapters 13 through 15 attention shifts from the envi- ronment to the firm. In other words, we move from a

macro focus to a micro focus at this stage of the book. We examine strategies and structures that firms adopt to compete effectively in the international business environment.

Part Six

In Chapters 16 through 20 the focus narrows further to investigate business functions and related operations. These chapters explain how firms can perform their key functions—exporting, importing, and countertrade; global production; global supply chain management; global marketing; global research and development (R&D); human resource management; accounting; and finance—to compete and succeed in the international business environment. Throughout the book, the relationship of new material to topics discussed in earlier chapters is pointed out to the students to reinforce their understanding of how the material comprises an integrated whole. We deliber- ately bring a management focus to the macro chapters (Chapters 1 through 12). We also integrate macro themes in covering the micro chapters (Chapters 13 through 20). Part Seven with its integrated cases also provides a great learning vehicle to better understand macro and micro issues.

ACCESSIBLE AND INTERESTING

The international business arena is fascinating and excit- ing, and we have tried to communicate our enthusiasm for it to the student. Learning is easier and better if the subject matter is communicated in an interesting, infor- mative, and accessible manner. One technique we have used to achieve this is weaving interesting anecdotes into the narrative of the text, that is, stories that illustrate theory. Most chapters also have a Country Focus box that pro- vides background on the political, economic, social, or cultural aspects of countries grappling with an interna- tional business issue.

McGRAW-HILL CONNECT INTERNATIONAL BUSINESS

Applied

Application Exercises A variety of interactive assignments within Connect re- quire students to apply what they have learned in a real- world scenario. These online exercises help students assess their understanding of the concepts at a higher level. Exer- cises include video cases, decision-making scenarios/cases from real-world companies, case analysis exercises, busi- ness models, processes, and problem-solving cases.

xviii

TEACHING SUPPORT

Within the Connect International Business’ Instructor Re- sources you can find a complete package to prepare you for your course.

∙ Instructor’s Manual. The Instructor’s Manual is a comprehensive resource designed to support you in effectively teaching your course. It includes course outlines; chapter overviews and outlines, teaching suggestions, chapter objectives, teaching suggestions for opening cases, lecture outlines, answers to critical discussion questions, teaching suggestions for the closing case, and two student activities; and video notes with discussion ques- tions for each video. The answers to globalEDGE research tasks are included.

∙ Test Bank. Approximately 100 true-false, multiple- choice, and essay questions per chapter are in- cluded in the test bank. We’ve aligned our test bank questions with Bloom’s Taxonomy and AACSB guidelines, tagging each question accord- ing to its knowledge and skill areas. Each test bank question also maps to a specific chapter learning objective listed in the text.

∙ PowerPoint Presentations. The PowerPoint pro- gram consists of one set of slides for every chapter, which include key text figures, tables, and maps. Quiz questions to keep students on their toes during classroom presentations are also included, along with instructor notes.

∙ International Business Video Program. McGraw-Hill offers the most comprehensive, diverse, and current video support for the International Business class- room. Updated monthly, our video program is the most current on the market. Additionally, video-based application exercises are assignable within Connect.

COURSE DESIGN AND DELIVERY

cesim GlobalChallenge Simulation

cesim is an international business simulation designed to develop student under-

standing of the interaction and complexity of various business disciplines and concepts in a rapidly evolving, competitive business environment. The simulation has a particular focus on creating long-term, sustainable, and profitable growth of a global technology company. Student teams make decisions about technology-based product roadmaps and global market and production strategies involving economics, finance, human re- sources, accounting, procurement, production, logistics, research and innovation, and marketing. cesim improves

the knowledge retention, business decision making, and teamwork skills of students.

CREATE

Instructors can now tailor their teaching resources to match the way they teach! With McGraw-Hill Create, www.mcgrawhillcreate.com, instructors can easily rearrange chapters, combine mate- rial from other content sources, and quickly upload and integrate their own content, such as course syllabi or teaching notes. Find the right content in Create by search- ing through thousands of leading McGraw-Hill textbooks. Arrange the material to fit your teaching style. Order a Create book and receive a complimentary print review copy in three to five business days or a complimentary electronic review copy via e-mail within one hour. Go to www.mcgrawhillcreate.com today and register.

TEGRITY CAMPUS

Tegrity makes class time available 24/7 by automati- cally capturing every lecture in a searchable format for students to review when they study and complete assignments. With a simple one-click start-and-stop process, you capture all computer screens and corresponding audio. Students can replay any part of any class with easy-to-use browser-based viewing on a PC or Mac. Educators know that the more students can see, hear, and experience class resources, the better they learn. In fact, studies prove it. With patented Tegrity “search anything” technology, students instantly recall key class moments for replay online or on iPods and mo- bile devices. Instructors can help turn all their students’ study time into learning moments immediately supported by their lecture. To learn more about Tegrity, watch a two- minute Flash demo at http://tegritycampus.mhhe.com.

BLACKBOARD® PARTNERSHIP

McGraw-Hill Education and Blackboard have teamed up to simplify your life. Now you and your students can access Con- nect and Create right from within your Blackboard course— all with one single sign-on. The grade books are seamless, so when a student completes an integrated Connect as- signment, the grade for that assignment automatically (and instantly) feeds your Blackboard grade center. Learn more at http://www.mheducation.com/highered/services/ mhcampus.html.

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McGRAW-HILL CAMPUS™

McGraw-Hill Campus is a new one-stop teaching and learning experience available

to users of any learning management system. This institu- tional service allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill Higher Educa- tion materials, including the award-winning McGraw-Hill Connect platform, from directly within the institution’s website. With McGraw-Hill Campus, faculty receive in- stant access to teaching materials (e.g., eTextbooks, test

banks, PowerPoint slides, animations, learning objectives, etc.), allowing them to browse, search, and use any in- structor ancillary content in our vast library at no addi- tional cost to instructor or students. In addition, students enjoy SSO access to a variety of free content (e.g., quiz- zes, flash cards, narrated presentations, etc.) and sub- scription-based products (e.g., McGraw-Hill Connect). With McGraw-Hill Campus enabled, faculty and stu- dents will never need to create another account to access McGraw-Hill products and services. Learn more at www.mhcampus.com.

■ Connect content is authored by the world’s best subject matter experts, and is available to your class through a simple and intuitive interface.

■ The Connect eBook makes it easy for students to access their reading material on smartphones and tablets. They can study on the go and don’t need internet access to use the eBook as a reference, with full functionality.

■ Multimedia content such as videos, simulations, and games drive student engagement and critical thinking skills. ©McGraw-Hill Education

■ Connect’s assignments help students contextualize what they’ve learned through application, so they can better understand the material and think critically.

■ Connect will create a personalized study path customized to individual student needs through SmartBook®.

■ SmartBook helps students study more efficiently by delivering an interactive reading experience through adaptive highlighting and review.

McGraw-Hill Connect® is a highly reliable, easy-to- use homework and learning management solution that utilizes learning science and award-winning adaptive tools to improve student results.

73% of instructors who use Connect

require it; instructor satisfaction increases by 28% when Connect

is required.

Homework and Adaptive Learning

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Education products more intelligent, reliable, and precise.

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■ Connect Insight® generates easy-to-read reports on individual students, the class as a whole, and on specific assignments.

■ The Connect Insight dashboard delivers data on performance, study behavior, and effort. Instructors can quickly identify students who struggle and focus on material that the class has yet to master.

■ Connect automatically grades assignments and quizzes, providing easy-to-read reports on individual and class performance.

■ Connect integrates with your LMS to provide single sign-on and automatic syncing of grades. Integration with Blackboard®, D2L®, and Canvas also provides automatic syncing of the course calendar and assignment-level linking.

■ Connect offers comprehensive service, support, and training throughout every phase of your implementation.

■ If you’re looking for some guidance on how to use Connect, or want to learn tips and tricks from super users, you can find tutorials as you work. Our Digital Faculty Consultants and Student Ambassadors offer insight into how to achieve the results you want with Connect.

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CONTENTS

part one Introduction and Overview

CHAPTER 1 Globalization 2 Opening Case Globalization of BMW, Rolls-Royce, and the MINI 3

Introduction 4

What Is Globalization? 6 The Globalization of Markets 6 The Globalization of Production 8

Management Focus Boeing’s Global Production System 9

The Emergence of Global Institutions 10

Drivers of Globalization 11 Declining Trade and Investment Barriers 11 Role of Technological Change 15

The Changing Demographics of the Global Economy 17

The Changing World Output and World Trade Picture 17 The Changing Foreign Direct Investment Picture 18

Country Focus India’s Software Sector 19

The Changing Nature of the Multinational Enterprise 20

Management Focus Wanda Group 22

The Changing World Order 22 Global Economy of the Twenty-First Century 23

The Globalization Debate 24 Antiglobalization Protests 24 Globalization, Jobs, and Income 25

Country Focus Protesting Globalization in France 26

Globalization, Labor Policies, and the Environment 28 Globalization and National Sovereignty 29 Globalization and the World’s Poor 30

Managing in the Global Marketplace 31

Chapter Summary 33

Critical Thinking and Discussion Questions 34

Research Task 35

Closing Case Uber: Going Global from Day One 35

Endnotes 36

part two National Differences

CHAPTER 2 National Differences in Political, Economic, and Legal Systems 38 Opening Case The Decline of Zimbabwe 39

Introduction 40

Political Systems 41 Collectivism and Individualism 41 Democracy and Totalitarianism 43

Country Focus Putin’s Russia 44

Economic Systems 46 Market Economy 46 Command Economy 47 Mixed Economy 48

Legal Systems 48 Different Legal Systems 49 Differences in Contract Law 50 Property Rights and Corruption 50

Country Focus Corruption in Brazil 53

Management Focus Did Walmart Violate the Foreign Corrupt Practices Act? 54

The Protection of Intellectual Property 55

Management Focus Starbucks Wins Key Trademark Case in China 56

Product Safety and Product Liability 57

Focus on Managerial Implications: The Macro Environment Influences Market Attractiveness 57

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Chapter Summary 58

Critical Thinking and Discussion Questions 59

Research Task 59

Closing Case Economic Transformation in Vietnam 59

Endnotes 61

CHAPTER 3 National Differences in Economic Development 62 Opening Case Economic Development in Bangladesh 63

Introduction 64

Differences in Economic Development 64

Map 3.1 GNI per capita, 2016 65 Map 3.2 GNI PPP per capita, 2016 66 Map 3.3 Average annual growth rate in GDP (%),

2007–2016 67 Broader Conceptions of Development: Amartya Sen 68

Map 3.4 Human Development Index, 2015 69

Political Economy and Economic Progress 69 Innovation and Entrepreneurship Are the Engines of Growth 69 Innovation and Entrepreneurship Require a Market Economy 70 Innovation and Entrepreneurship Require Strong Property Rights 70 The Required Political System 71

Country Focus Emerging Property Rights in China 72

Economic Progress Begets Democracy 72 Geography, Education, and Economic Development 72

States in Transition 73 The Spread of Democracy 73

Map 3.5 Freedom in the world, 2017 74 The New World Order and Global Terrorism 76 The Spread of Market-Based Systems 77

Map 3.6 Index of economic freedom, 2017 78

The Nature of Economic Transformation 78 Deregulation 78 Privatization 79

Country Focus India’s Economic Transformation 80

Legal Systems 81

Implications of Changing Political Economy 81

Focus on Managerial Implications: Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally 82

Chapter Summary 86

Critical Thinking and Discussion Questions 86

Research Task 87

Closing Case The Political and Economic Evolution of Indonesia 87

Endnotes 89

CHAPTER 4 Differences in Culture 90 Opening Case The Swatch Group and Cultural Uniqueness 91

Introduction 92

What Is Culture? 93 Values and Norms 93 Culture, Society, and the Nation-State 95 Determinants of Culture 96

Social Structure 96 Individuals and Groups 97 Social Stratification 99

Country Focus India and Its Caste System 100

Religious and Ethical Systems 102

Map 4.1 World Religions 103 Christianity 103 Islam 104

Country Focus Secularism in Turkey 107

Hinduism  108 Buddhism 109 Confusianism 110

Management Focus China and Its Guanxi 111

Language 112 Spoken Language 112 Unspoken Language 113

Education 113

Culture and Business 114

Cultural Change 117

Focus on Managerial Implications: Cultural Literacy and Competitive Advantage 119

Chapter Summary 121

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part three The Global Trade and Investment Environment

CHAPTER 6 International Trade Theory 158 Opening Case Donald Trump on Trade 159

Introduction 160

An Overview of Trade Theory 160 The Benefits of Trade 161 The Pattern of International Trade 162 Trade Theory and Government Policy 162

Mercantilism 163

Country Focus Is China Manipulating Its Currency in Pursuit of a Neo-Mercantilist Policy? 164

Absolute Advantage 164

Comparative Advantage 166 The Gains from Trade 167 Qualifications and Assumptions 168 Extensions of the Ricardian Model 169

Country Focus Moving U.S. White-Collar Jobs Offshore 173

Heckscher–Ohlin Theory 174 The Leontief Paradox 175

The Product Life-Cycle Theory 176 Product Life-Cycle Theory in the Twenty-First Century 176

New Trade Theory 177 Increasing Product Variety and Reducing Costs 177 Economies of Scale, First-Mover Advantages, and the Pattern of Trade 178 Implications of New Trade Theory 179

National Competitive Advantage: Porter’s Diamond 180

Factor Endowments 181 Demand Conditions 181 Related and Supporting Industries 181 Firm Strategy, Structure, and Rivalry 182 Evaluating Porter’s Theory 182

Focus on Managerial Implications: Location, First-Mover Advantages, and Government Policy 183

Critical Thinking and Discussion Questions 122

Research Task 123

Closing Case The Emirates Group and Employee Diversity 123

Endnotes 124

CHAPTER 5 Ethics, Corporate Social Responsibility, and Sustainability 128 Opening Case Woolworths Group’s Corporate Responsibility Strategy 2020 129

Introduction 130

Ethics and International Business 131 Employment Practices 131

Management Focus “Emissionsgate” at Volkswagen 132

Human Rights 133 Environmental Pollution 134 Corruption 135

Ethical Dilemmas 136

Roots of Unethical Behavior 137 Personal Ethics 137 Decision-Making Processes 138 Organizational Culture 139 Unrealistic Performance Goals 139 Leadership 139 Societal Culture 140

Philosophical Approaches to Ethics 140 Straw Men 140 Utilitarian and Kantian Ethics 142 Rights Theories 143 Justice Theories 144

Focus on Managerial Implications: Making Ethical Decisions Internationally 145

Management Focus Corporate Social Responsibility at Stora Enso 150

Chapter Summary 152

Critical Thinking and Discussion Questions 153

Research Task 154

Closing Case UNCTAD Sustainable Development Goals 154

Endnotes 155

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The Future of the WTO: Unresolved Issues and the Doha Round 210

Country Focus Estimating the Gains from Trade for America 213

Multilateral and Bilateral Trade Agreements 214 The World Trading System under Threat 214

Focus on Managerial Implications: Trade Barriers, Firm Strategy, and Policy Implications 215

Chapter Summary 217

Critical Thinking and Discussion Questions 218

Research Task 218

Closing Case Is China Dumping Excess Steel Production? 219

Endnotes 220

CHAPTER 8 Foreign Direct Investment 222 Opening Case Foreign Direct Investment in Retailing in India 223

Introduction 224

Foreign Direct Investment in the World Economy 224

Trends in FDI 224 The Direction of FDI 225 The Source of FDI 226

Country Focus Foreign Direct Investment in China 227

The Form of FDI: Acquisitions versus Greenfield Investments 228

Theories of Foreign Direct Investment 228 Why Foreign Direct Investment? 228

Management Focus Foreign Direct Investment by Cemex 230

The Pattern of Foreign Direct Investment 232 The Eclectic Paradigm 233

Political Ideology and Foreign Direct Investment 234 The Radical View 234 The Free Market View 235 Pragmatic Nationalism 235 Shifting Ideology 236

Benefits and Costs of FDI 237 Host-Country Benefits 237 Host-Country Costs 239 Home-Country Benefits 240

Chapter Summary 184

Critical Thinking and Discussion Questions 185

Research Task 186

Closing Case The Trans Pacific Partnership (TPP) 186

Appendix

International Trade and the Balance of Payments 188

Endnotes 190

CHAPTER 7 Government Policy and International Trade 192 Opening Case Boeing and Airbus Are in a Dogfight over Illegal Subsidies 193

Introduction 194

Instruments of Trade Policy 194 Tariffs 195 Subsidies 195

Country Focus Are the Chinese Illegally Subsidizing Auto Exports? 196

Import Quotas and Voluntary Export Restraints 197 Export Tariffs and Bans 198 Local Content Requirements 198 Administrative Policies 199 Antidumping Policies 199

The Case for Government Intervention 199

Management Focus Protecting U.S. Magnesium 200

Political Arguments for Intervention 201 Economic Arguments for Intervention 203

The Revised Case for Free Trade 205 Retaliation and Trade War 205 Domestic Policies 206

Development of the World Trading System 206 From Smith to the Great Depression 207 1947–1979: GATT, Trade Liberalization, and Economic Growth 207 1980–1993: Protectionist Trends 207 The Uruguay Round and the World Trade Organization 208 WTO: Experience to Date 209

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The North American Free Trade Agreement 271 The Andean Community 273 Mercosur 274 Central American Common Market, CAFTA, and CARICOM 275

Regional Economic Integration Elsewhere 275 Association of Southeast Asian Nations 275

Map 9.3 ASEAN countries 276 Regional Trade Blocs in Africa 277 Other Trade Agreements 277

Focus on Managerial Implications: Regional Economic Integration Threats 278

Chapter Summary 280

Critical Thinking and Discussion Questions 280

Research Task 281

Closing Case The Push toward Free Trade in Africa 281

Endnotes 283

part four The Global Monetary System

CHAPTER 10 The Foreign Exchange Market 286 Opening Case The Mexican Peso, the Japanese Yen, and Pokemon Go 287

Introduction 288

The Functions of the Foreign Exchange Market 289 Currency Conversion 289 Insuring against Foreign Exchange Risk 291

Management Focus Embraer and the Gyrations of the Brazilian Real 293

The Nature of the Foreign Exchange Market 293

Economic Theories of Exchange Rate Determination 294

Prices and Exchange Rates 295

Country Focus Quantitative Easing, Inflation, and the Value of the U.S. Dollar 299

Interest Rates and Exchange Rates 300 Investor Psychology and Bandwagon Effects 301 Summary of Exchange Rate Theories 301

Home-Country Costs 241 International Trade Theory and FDI 241

Government Policy Instruments and FDI 242 Home-Country Policies 242 Host-Country Policies 243 International Institutions and the Liberalization of FDI 244

Focus on Managerial Implications: FDI and Government Policy 244

Chapter Summary 247

Critical Thinking and Discussion Questions 247

Research Task 248

Closing Case Burberry Shifts Its Strategy in Japan 248

Endnotes 249

CHAPTER 9 Regional Economic Integration 252 Opening Case Renegotiating NAFTA 253

Introduction 254

Levels of Economic Integration 255

The Case for Regional Integration 257 The Economic Case for Integration 257 The Political Case for Integration 257 Impediments to Integration 258

The Case against Regional Integration 258

Regional Economic Integration in Europe 259 Evolution of the European Union 259

Map 9.1 Member states of the European Union in 2017 260

Political Structure of the European Union 260

Management Focus The European Commission and Intel 261

The Single European Act 262 The Establishment of the Euro 263

Country Focus The Greek Sovereign Debt Crisis 266

Enlargement of the European Union 268 British Exit from the European Union (BREXIT) 269

Regional Economic Integration in the Americas 270

Map 9.2 Economic integration in the Americas 270

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Focus on Managerial Implications: Currency Management, Business Strategy, and Government Relations 333

Management Focus Airbus and the Euro 335

Chapter Summary 336

Critical Thinking and Discussion Questions 337

Research Task 337

Closing Case China’s Exchange Rate Regime 338

Endnotes 339

CHAPTER 12 The Global Capital Market 340 Opening Case Saudi Aramco 341

Introduction 342

Benefits of the Global Capital Market 342 Functions of a Generic Capital Market 342 Attractions of the Global Capital Market 343

Management Focus The Industrial and Commercial Bank of China Taps the Global Capital Market 345

Growth of the Global Capital Market 347 Global Capital Market Risks 349

Country Focus Did the Global Capital Markets Fail Mexico? 350

The Eurocurrency Market 351 Genesis and Growth of the Market 351 Attractions of the Eurocurrency Market 351 Drawbacks of the Eurocurrency Market 353

The Global Bond Market 353 Attractions of the Eurobond Market 354

The Global Equity Market 354

Foreign Exchange Risk and the Cost of Capital 356

Focus on Managerial Implications: Growth of the Global Capital Market 356

Chapter Summary 357

Critical Thinking and Discussion Questions 358

Research Task 358

Closing Case Alibaba’s Record-Setting IPO 359

Endnotes 360

Exchange Rate Forecasting 302 The Efficient Market School 302 The Inefficient Market School 302 Approaches to Forecasting 302

Currency Convertibility 303

Focus on Managerial Implications: Foreign Exchange Rate Risk 304

Chapter Summary 307

Critical Thinking and Discussion Questions 308

Research Task 309

Closing Case Apple’s Earnings Hit by Strong Dollar 309

Endnotes 310

CHAPTER 11 The International Monetary System 312 Opening Case Egypt and the IMF 313

Introduction 314

The Gold Standard 315 Mechanics of the Gold Standard 315 Strength of the Gold Standard 315 The Period between the Wars: 1918–1939 316

The Bretton Woods System 317 The Role of the IMF 317 The Role of the World Bank 318

The Collapse of the Fixed Exchange Rate System 319

The Floating Exchange Rate Regime 320 The Jamaica Agreement 320 Exchange Rates since 1973 320

Country Focus The U.S. Dollar, Oil Prices, and Recycling Petrodollars 323

Fixed versus Floating Exchange Rates 324 The Case for Floating Exchange Rates 324 The Case for Fixed Exchange Rates 325 Who Is Right? 326

Exchange Rate Regimes in Practice 326 Pegged Exchange Rates 327 Currency Boards 327

Crisis Management by the IMF 328 Financial Crises in the Post–Bretton Woods Era 329

Country Focus The IMF and Iceland’s Economic Recovery 330

Evaluating the IMF’s Policy Prescriptions 331

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CHAPTER 14 The Organization of International Business 392 Opening Case Unilever’s Global Organization 393

Introduction 394

Organizational Architecture 395

Organizational Structure 396 Vertical Differentiation: Centralization and Decentralization 396

Management Focus Walmart International 398

Horizontal Differentiation: The Design of Structure 399 Integrating Mechanisms 405

Management Focus Dow—(Failed) Early Global Matrix Adopter 406

Control Systems and Incentives 410 Types of Control Systems 410 Incentive Systems 412 Control Systems, Incentives, and Strategy in the International Business 413

Processes 415

Organizational Culture 415 Creating and Maintaining Organizational Culture 416 Organizational Culture and Performance in the International Business 417

Management Focus Lincoln Electric and Culture 419

Synthesis: Strategy and Architecture 420 Localization Strategy 420 International Strategy 420 Global Standardization Strategy 421 Transnational Strategy 421 Environment, Strategy, Architecture, and Performance 421

Organizational Change 422 Organizational Inertia 422 Implementing Organizational Change 423

Chapter Summary 425

Critical Thinking and Discussion Questions 425

Research Task 426

Closing Case Organizational Architecture at P&G 426

Endnotes 427

part five The Strategy and Structure of International Business

CHAPTER 13 The Strategy of International Business 362 Opening Case Sony’s Global Strategy 363

Introduction 364

Strategy and the Firm 364 Value Creation 365 Strategic Positioning 366 The Firm as a Value Chain 368

Global Expansion, Profitability, and Profit Growth 370

Expanding the Market: Leveraging Products and Competencies 371 Location Economies 371 Experience Effects 373 Leveraging Subsidiary Skills 375 Profitability and Profit Growth Summary 376

Management Focus Leveraging Skills Worldwide at ArcelorMittal 377

Cost Pressures and Pressures for Local Responsiveness 377

Pressures for Cost Reductions 378 Pressures for Local Responsiveness 379

Management Focus Viacom International Media Networks 380

Choosing a Strategy 382 Global Standardization Strategy 383 Localization Strategy 384 Transnational Strategy 384 International Strategy 385

Management Focus Evolution of Strategy at Procter & Gamble 386

The Evolution of Strategy 387

Chapter Summary 388

Critical Thinking and Discussion Questions 388

Research Task 388

Closing Case IKEA’s Global Strategy 389

Endnotes 390

xxix

Opening Case Tata Motors and Exporting 461

Introduction 462

The Promise and Pitfalls of Exporting 463

Management Focus Ambient Technologies and the Panama Canal 465

Improving Export Performance 466 International Comparisons 466 Information Sources 466

Management Focus Exporting with Government Assistance 468

Service Providers 468 Export Strategy 469

Management Focus 3M’s Export Strategy 470

The globalEDGETM Exporting Tool 471

Export and Import Financing 472 Lack of Trust 473 Letter of Credit 474 Draft 475 Bill of Lading 475 A Typical International Trade Transaction 476

Export Assistance 477 Export-Import Bank 477 Export Credit Insurance 478

Countertrade 478 The Popularity of Countertrade 479 Types of Countertrade 479 Pros and Cons of Countertrade 480

Chapter Summary 481

Critical Thinking and Discussion Questions 482

Research Task 482

Closing Case Embraer and Brazilian Importing 483

Endnotes 484

CHAPTER 17 Global Production and Supply Chain Management 486 Opening Case Alibaba and Global Supply Chains 487

Introduction 488

Strategy, Production, and Supply Chain Management 488

Where to Produce 491 Country Factors 491

CHAPTER 15 Entry Strategy and Strategic Alliances 430 Opening Case Gazprom and Global Strategic Alliances 431

Introduction 432

Basic Entry Decisions 433 Which Foreign Markets? 433

Management Focus Tesco’s International Growth Strategy 434

Timing of Entry 434 Scale of Entry and Strategic Commitments 436 Market Entry Summary 437

Management Focus The Jollibee Phenomenon 438

Entry Modes 438 Exporting 439 Turnkey Projects 439 Licensing 440 Franchising 441 Joint Ventures 442 Wholly Owned Subsidiaries 444

Selecting an Entry Mode 444 Core Competencies and Entry Mode 445 Pressures for Cost Reductions and Entry Mode 446

Greenfield Venture or Acquisition? 446 Pros and Cons of Acquisitions 447 Pros and Cons of Greenfield Ventures 449 Which Choice? 450

Strategic Alliances 450 Advantages of Strategic Alliances 450 Disadvantages of Strategic Alliances 451 Making Alliances Work 451

Chapter Summary 454

Critical Thinking and Discussion Questions 455

Research Task 455

Closing Case Starbucks’ Foreign Entry Strategy 456

Endnotes 457

part six International Business Functions

CHAPTER 16 Exporting, Importing, and Countertrade 460

xxx

Communication Strategy 528 Barriers to International Communication 528 Push versus Pull Strategies 529

Management Focus Unilever among India’s Poor 530

Global Advertising 531

Pricing Strategy 533 Price Discrimination 533 Strategic Pricing 534 Regulatory Influences on Prices 535

Configuring the Marketing Mix 536

International Market Research 538

Product Development 541 The Location of R&D 542 Integrating R&D, Marketing, and Production 543 Cross-Functional Teams 544 Building Global R&D Capabilities 544

Chapter Summary 546

Critical Thinking and Discussion Questions 547

Research Task 548

Closing Case Global Branding, Marvel Studios, and Walt Disney Company 548

Endnotes 549

CHAPTER 19 Global Human Resource Management 552 Opening Case Building a Global Diverse Workforce at Sodexo 553

Introduction 554

Strategic Role of Global HRM: Managing a Global Workforce 555

Staffing Policy 556 Types of Staffing Policies 556 Expatriate Managers 560

Management Focus Expatriates at Royal Dutch Shell 562

Global Mindset 563

Training and Management Development 565 Training for Expatriate Managers 565 Repatriation of Expatriates 566

Management Focus Monsanto’s Repatriation Program 567

Management Development and Strategy 567

Management Focus IKEA Production in China 492

Technological Factors 493 Production Factors 496 The Hidden Costs of Foreign Locations 499

Management Focus H&M and Its Order Timing 500

Make-or-Buy Decisions 501

Global Supply Chain Functions 504 Global Logistics 504 Global Purchasing 506

Managing a Global Supply Chain 507 Role of Just-in-Time Inventory 508 Role of Information Technology 508 Coordination in Global Supply Chains 509 Interorganizational Relationships 510

Chapter Summary 511

Critical Thinking and Discussion Questions 512

Research Task 513

Closing Case Amazon’s Global Supply Chains 513

Endnotes 514

CHAPTER 18 Global Marketing and R&D 516 Opening Case ACSI and Satisfying Global Customers 517

Introduction 518

Globalization of Markets and Brands 519

Market Segmentation 521

Management Focus Marketing to Afro-Brazilians 522

Product Attributes 523 Cultural Differences 523 Economic Development 523 Product and Technical Standards 524

Distribution Strategy 524 Differences between Countries 524 Choosing a Distribution Strategy 527

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Financial Management: Global Money Management 595 Minimizing Cash Balances 596 Reducing Transaction Costs 597 Managing the Tax Burden 598 Moving Money across Borders 599

Chapter Summary 603

Critical Thinking and Discussion Questions 604

Research Task 605

Closing Case Tesla, Inc.—Subsidizing Tesla Automobiles Globally 605

Endnotes 606

part seven Integrative Cases

Global Medical Tourism 609

Venezuela under Hugo Chávez and Beyond 611

Political and Economic Reform in Myanmar 612

Will China Continue to Be a Growth Marketplace? 613

Lead in Toys and Drinking Water 614

Creating the World’s Biggest Free Trade Zone 616

Sugar Subsidies Drive Candy Makers Abroad 617

Volkswagen in Russia 618

The NAFTA Tomato Wars 619

Subaru’s Sales Boom Thanks to the Weaker Yen 620

The IMF and Ukraine’s Economic Crisis 621

The Global Financial Crisis and Its Aftermath: Declining Cross-Border Capital Flows 622

Ford’s Global Platform Strategy 624

Philips’ Global Restructuring 625

General Motors and Chinese Joint Ventures 626

Exporting Desserts by a Hispanic Entrepreneur 627

Apple: The Best Supply Chains in the World? 628

Domino’s Global Marketing 630

Siemens and Global Competitiveness 632

Microsoft and Its Foreign Cash Holdings 633

Glossary 635

Organization Index 645

Name Index 650

Subject Index 652

Performance Appraisal 568 Performance Appraisal Problems 568 Guidelines for Performance Appraisal 569

Compensation 569 National Differences in Compensation 569

Management Focus McDonald’s Global Compensation Practices 570

Expatriate Pay 570

Building a Diverse Global Workforce 572

International Labor Relations 573 The Concerns of Organized Labor 574 The Strategy of Organized Labor 574 Approaches to Labor Relations 575

Chapter Summary 576

Critical Thinking and Discussion Questions 577

Research Task 577

Closing Case AstraZeneca 578

Endnotes 579

CHAPTER 20 Accounting and Finance in the International Business 582 Opening Case Shoprite—Financial Success of a Food Retailer in Africa 583

Introduction 584

National Differences in Accounting Standards 585

International Accounting Standards 586

Management Focus Chinese Accounting 587

Accounting Aspects of Control Systems 588 Exchange Rate Changes and Control Systems 589 Transfer Pricing and Control Systems 590 Separation of Subsidiary and Manager Performance 591

Financial Management: The Investment Decision 591 Capital Budgeting 592 Project and Parent Cash Flows 592

Management Focus Black Sea Oil and Gas Ltd. 593

Adjusting for Political and Economic Risk 593 Risk and Capital Budgeting 594

Financial Management: The Financing Decision 595

xxxii

ACKNOWLEDGMENTS

Numerous people deserve to be thanked for their assistance in preparing this book. First, thank you to all the people at McGraw-Hill Education who have worked with us on this project:

Bruce Gin, Content Project Manager (Assessment)

Jennifer Pickel, Senior Buyer

Egzon Shaqiri, Designer

Carrie Burger, Content Licensing Specialist

Susan Gouijnstook, Managing Director

Michael Ablassmeir, Director

Anke Braun Weekes, Executive Portfolio Manager

Katie Benson Eddy, Product Developer

Harvey Yep, Content Project Manager (Core)

Anthony C. Koh, University of Toledo

Laura Kozloski Hart, Barry University

Katarina Lagerstrom, Uppsala University

Steve Lawton, Oregon State University

Ruby Lee, Florida State University

Joseph W. Leonard, Miami University

Vishakha Maskey, West Liberty University

David N. McArthur, Utah Valley University

Shelly McCallum, Saint Mary’s University of Minnesota

Emily A. Morad, Reading Area Community College

Tim Muth, Florida Institute of Technology

Sunder Narayanan, New York University

Eydis Olsen, Drexel University

Daria Panina, Texas A&M University

Hoon Park, University of Central Florida

Dr. Mahesh Raisinghani, Texas Women’s University

Brian Satterlee, Liberty University

Dwight Shook, Catawba Valley Community College

Brenda Sternquist, Michigan State University

Michael Volpe, University of Maryland

James Whelan, Manhattan College

Man Zhang, Bowling Green State University

Yeqing Bao, University of Alabama, Huntsville

Jacobus F. Boers, Georgia State University

Peter Buckley, Leeds University

Ken Chinen, California State University, Sacramento

Macgorine A. Cassell, Fairmont State University

David Closs, Michigan State University

Ping Deng, Maryville University of St. Louis

Betty J. Diener, Barry University

Abiola O. Fanimokun, Pennsylvania State University, Fayette

John Finley, Columbus State University

Pat Fox, Marion Technical College

David Frayer, Michigan State University

Connie Golden, Lakeland Community College

Martin Grossman, Bridgewater State University

Sanjay Gupta, Michigan State University

Michael Harris, East Carolina University

Kathy Hastings, Greenville Technical College

Chip Izard, Richland College

Jan Johanson, Uppsala University

Candida Johnson, Holyoke Community College

Sara B. Kimmel, Mississippi College

Tunga Kiyak, Michigan State University

Second, our thanks go to the reviewers who provided good feedback that helped shape this book through the last few editions:

A special thanks to David Closs and David Frayer for allowing us to borrow elements of the sections titled Strategic Roles for Production Facilities; Make-or-Buy Decisions; Global Supply Chain Functions; Coordination in Global Sup- ply Chains; and Interorganizational Relationships for Chapter 17 of this text from Tomas Hult, David Closs, and David Frayer, Global Supply Chain Management, New York: McGraw Hill (2014).

International Business Competing in the Global Marketplace

Globalization L E A R N I N G O B J E C T I V E S After reading this chapter, you will be able to:

LO1-1 Understand what is meant by the term globalization.

LO1-2 Recognize the main drivers of globalization.

LO1-3 Describe the changing nature of the global economy.

LO1-4 Explain the main arguments in the debate over the impact of globalization.

LO1-5 Understand how the process of globalization is creating opportunities and challenges for management practice.

part one Introduction and Overview

1

©jvdwolf/123RF

Globalization of BMW, Rolls-Royce, and the MINI

delivers the promise of effortless power, luxury, quality, and perfect sanctuary. The entry-level Rolls Royce Ghost carries a price tag around $250,000, and the models es- calate from that price point. Rolls-Royce has, from its early days of daring experimentation, created a vision for luxury that is rooted in constantly chasing perfection. This perfec- tion drives the supreme quality, exquisite hand craftsman- ship, and attention to the finest detail to maintain its global position as the pinnacle luxury automobile manufacturer in the world. Like Rolls-Royce, the MINI also traces its roots to the United Kingdom. MINI is a car brand that is owned by BMW that specializes in small cars. The full platform of MINI cars is small, with the idea of maximizing the experience and concentrating on the essential. A long-standing attention to clever solutions with distinctive designs unlocks urban driving and caters to cus- tomers’ individual needs. The most iconic is the MINI Cooper, named after British racing legend John Cooper. The MINI Cooper product line has a uniquely sporting blend of classic British mini-car heritage and appeal with precise German en- gineering and construction. According to the MINI team, they are targeting affluent urban dwellers in their 20s and 30s who enjoy the fun, freedom, and individuality that the MINI cars offer—or perhaps we should just say they target newly graduated college students living in cities! To help with its targeting of affluent urban dwellers for the MINI or the even more affluent clientele for the BMW or Rolls-Royce, the BMW Group’s leaders have studied brands outside of the automobile industry to create the company’s future retail strategy. Enter the “product ge- nius.” BMW’s product genius is a noncommissioned car expert who will spend whatever time it takes or is needed to educate customers about their car choices, options, and any issue that the customer wants to get more information on. This shifts the “performance” from closing the sale of a car to making the customer satisfied, which lessens the typical pressure most customers feel when walking in to a car dealership (and likewise lessens the pressure of the salesperson to sell a car to get commission).

Sources: Jonathan M. Gitlin, “The 2017 BMW M760i Is a Hell of a Car, but Is It an M?” ARS Technica, February 8, 2017; “BMW at 100: Bavar- ian Rhapsody,” The Economist, March 12, 2016; Carmine Gallo, “BMW Radically Rethinks the Car Buying Experience,” Forbes, April 18, 2014; “How German Cars Beat British Motors—and Kept Going,” BBC News, August 2, 2013; Hannah Elliott, “The Best Luxury Sedan Is Still a BMW,” Bloomberg BusinessWeek, June 6, 2016.

O P E N I N G C A S E Bayerische Motoren Werke, which is German for Bavarian Motor Works, is better known globally for its acronym BMW (bmwgroup.com). BMW was created as a combination of three German manufacturing companies: Rapp Motoren- werke and Bayerische Flugzeugwerke in Bavaria and Fahrzeugfabrik Eisenach in Thuringia. Aircraft engine manufacturer Rapp Motorenwerke became Bayerische Motorenwerke in 1916, and the company added motorcy- cles to its product repertoire in 1923. BMW expanded to automobiles in 1929 when it purchased Fahrzeugfabrik Eisenach, which built Austin 7 cars under a license from Dixi. Fittingly, the first BMW car was called the BMW Dixi. Globally, BMW is known for streamlined design, incred- ible luxury, and top-notch performance. The company has more than 125,000 employees, delivers about 2.4 million vehicles annually, and has a revenue of €95 billion (about $103 billion in U.S. dollars). Its leadership spans products in automobiles, motorcycles, and aircraft engines. Innovation is one of the main success factors for the BMW Group, and innovation is infused into all of BMW’s product lines. The company claims that focusing on the future is an important part of BMW’s identity, day-to-day work, and the reason for its global success. In addition to the well-known BMW brand, BMW also owns the iconic Rolls-Royce brand and the distinctive MINI automobiles. BMW and “driving pleasure” are synonymous, even by people not owning a BMW! BMW creates driving pleasure from the perfect combination of dynamic, sporty perfor- mance; ground-breaking innovations; and breath-taking design. With a range of car models, a unique feature of BMW is its “M” designation models that takes the “driving pleasure” to another level. BMW “M” (for Motorsport) was initially created to facilitate BMW’s racing program but has since become a supplement to BMW’s vehicles portfolio with specially modified higher trim features. BMW M is part of an outstanding motorsports heritage and stands for high performance out of passion, with the latest addition to the line being the BMW M760. It’s the evolutionary link that connects BMW and Rolls-Royce, bridging the gap between the 7 Series and the entry-level Rolls-Royce Ghost. Rolls-Royce is considered the most exclusive luxury au- tomobile brand in the world. This reputation is rooted in the brand’s long history and rich tradition. Rolls-Royce

3

4 Part 1 Introduction and Overview

Introduction

Over the past five decades, a fundamental shift has been occurring in the world econ- omy. We have been moving away from a world in which national economies were rela- tively self-contained entities, isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; and by national differences in government regulation, culture, and business systems. And, as we will see later on in this chapter as well as throughout the text, international trade across country borders has become the norm, with an almost exponential increase in trade during the last decade.

We are moving toward a world in which barriers to cross-border trade and investment are declining; perceived distance is shrinking due to advances in transportation and tele- communications technology; material culture is starting to look similar the world over; and national economies are merging into an interdependent, integrated global economic system. The process by which this transformation is occurring is commonly referred to as globalization. At the same time, recent political world events (e.g., increase of terrorism, United Kingdom voting to leave the European Union, and the elections around the globe of nationalistic politicians) create tension and uncertainty regarding the future of global trade activities.

Interestingly, as the opening case outlines, BMW’s focus on the future is an impor- tant part of the company’s identity, its day-to-day work, and the reason for its global success. The futuristic perspective of BMW manifests itself in innovation, striving for improvement, positive change, and improved performance at all times to make cus- tomers satisfied and feel that they receive value for the money they spend on BMW products. Innovation is one of the main success factors for the BMW Group, and in- novation is infused into all of BMW’s product lines. Likewise, proponents of increased trade argue that cross-cultural engagement and trade across country borders is the fu- ture and that returning back to a nationalistic perspective is the past. Meanwhile, the nationalistic argument rests in citizens wanting their country to be sovereign, self- sufficient as much as possible, and basically in charge of their own economy and country environment. As with any debate, both arguments and sides have merit. We will ex- plore all aspects of today’s global marketplace in this text through 20 integrated and topical chapters.

Focusing on the increase in globalization, the rise of Uber, which we discuss in the clos- ing case in this chapter, is an illustration of the trend toward the unique opportunities that globalization can present to a company. From a standing start in 2009, Uber has built a global ride-for-hire taxi service that by 2018 could be found in more than 600 cities in more than 70 countries. Uber customers visiting London, New York, Athens, Paris, or Hong Kong can now quickly find rides by using the Uber app on their smartphone. Uber has rapidly built a global brand. Its strategy was to be “born global” virtually from day one of the company’s founding. In doing so, it is similar to many other modern technology busi- nesses such as Facebook, Google, and Amazon that have also rapidly built a global presence.

At the same time, it has not always been smooth sailing for Uber. Local authorities have banned or placed tight restrictions on Uber’s service in many cities around the world. Uber’s brash American ways have not always endeared them to local regulators, drivers, and customers. It is perhaps true, as critics have noted, that Uber might have done even better internationally if it had adapted its entry strategy to take local differences in regula- tions, culture, and political realities into account. With the rise in nationalism in many countries, companies like Uber face potential barriers to entry and operations that were hard to foresee just a few years ago.

That said, globalization now does have an impact on almost everything we do. For example, the average American—let’s call the person Isabelle—might drive to work in a car that was designed in Germany and assembled in Mexico by Ford from components made in the United States and Japan, which were fabricated from Korean steel and

Globalization Chapter 1 5

Malaysian rubber. Isabelle may have filled the car with gasoline at a Shell service sta- tion owned by a British-Dutch multinational company. The gasoline could have been made from oil pumped out of a well off the coast of Africa by a French oil company that transported it to the United States in a ship owned by a Greek shipping line. While driving to work, Isabelle might talk to her stockbroker (using a hands-free, in-car speaker) on an Apple iPhone that was designed in California and assembled in China using chip sets produced in Japan and Europe, glass made by Corning in Kentucky, and memory chips from South Korea. She could tell the stockbroker to purchase shares in Lenovo, a multinational Chinese PC manufacturer whose operational headquarters is in North Carolina and whose shares are listed on the New York Stock Exchange.

This is the world in which we live. And, interestingly, in many cases we simply do not know or perhaps even care to know where the product was deigned and where it was made. This is a change in attitude and interest. Just a couple of decades ago, “Made in the USA” or “Made in Germany” had strong meaning and referred to something (e.g., U.S. often stood for quality and Germany often stood for sophisticated engineering). The country of origin for a product has now given way to “Made by BMW,” and the company is the quality assurance platform, not the country. In many cases, it goes even beyond the company to the personal relationships a customer has developed with a rep- resentative of a company—here we focus on what has become know as CRM (customer relationship management).

Whether it is still quality associated with the country of a product’s origin or the assur- ance given by a specific company regardless of where they manufacture the product, we live in a world where the volume of goods, services, and investments crossing national borders has expanded faster than world output for more than half a century. It is a world where more than $5 trillion in foreign exchange transactions are made every day, where $19 trillion of goods and $5 trillion of services are sold across national borders every year.1 It is a world in which international institutions such as the World Trade Organiza- tion and gatherings of leaders from the world’s most powerful economies continue to work for even lower barriers to cross-border trade and investment. It is a world where the symbols of material and popular culture are increasingly global: from Coca-Cola and Starbucks to Sony PlayStations, Facebook, Netflix video streaming service, IKEA stores, and Apple iPads and iPhones. It is also a world in which vigorous and vocal groups pro- test against globalization, which they blame for a list of ills from unemployment in devel- oped nations to environmental degradation and the Westernization or Americanization of local culture. These protesters now come from environmental groups, which have been around for some time, and more recently also from nationalistic groups focused on countries being more sovereign.

For businesses, the globalization process has produced many opportunities. Firms can expand their revenues by selling around the world and/or reduce their costs by producing in nations where key inputs, including labor, are cheap. The global expansion of enter- prises has been facilitated by generally favorable political and economic trends. Since the collapse of communism over a quarter of a century ago, the pendulum of public policy in many nations has swung toward the free market end of the economic spectrum. Regula- tory and administrative barriers to doing business in foreign nations have been reduced, while those nations have often transformed their economies, privatizing state-owned enter- prises, deregulating markets, increasing competition, and welcoming investment by foreign businesses. This has allowed businesses both large and small, from both advanced nations and developing nations, to expand internationally.

As globalization unfolds, it is transforming industries and creating anxiety among those who believed their jobs were protected from foreign competition. Historically, while many workers in manufacturing industries worried about the impact foreign competition might have on their jobs, workers in service industries felt more secure. Now, this too is chang- ing. Advances in technology, lower transportation costs, and the rise of skilled workers in