Global business today chapter 12

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

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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),

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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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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

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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.

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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.