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International Business

Environments & Operations

New York, NY

John D. Daniels

University of Miami

Lee H. Radebaugh

Brigham Young University

Daniel P. Sullivan

University of Delaware

Sixteenth Edition

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Preface xxii About the Authors xxix

Part one: Background for International Business 1 1 Globalization and International Business 1

Part two: Comparative Environmental Frameworks 25 2 The Cultural Environments Facing Business 25 3 The Political and Legal Environments Facing Business 57 4 The Economic Environments Facing Business 93 5 Globalization and Society 129

Part three: Theories and Institutions: Trade and Investment 153 6 International Trade and Factor Mobility Theory 153 7 Governmental Influence on Trade 183 8 Cross-National Cooperation and Agreements 207

Part Four: World Financial Environment 235 9 Global Foreign-Exchange Markets 235 10 The Determination of Exchange Rates 257 11 Global Capital Markets 279

Part Five: Global Strategy, Structure, and Implementation 301 12 The Strategy of International Business 301 13 Country Evaluation and Selection 335 14 Export and Import 361 15 Direct Investment and Collaborative Strategies 397 16 The Organization of International Business 427

Part Six: Managing International Operations 461 17 Marketing Globally 461 18 Global Operations and Supply-Chain Management 493 19 International Accounting

and Finance Issues 517 20 International Human Resource Management 545

Brief Contents

iii

Contents

Preface xxii About the Authors xxix

• Part one: Background For international BuSineSS 1

1 Globalization and International Business 1 CASE: The Globalized Business of Sports 2

Introduction 4

Why Study About Globalization, IB, and Their Relationship? 5 How Does IB Fit In? 5 The Study of IB 5

The Forces Driving Globalization and IB 6 Factors in Increased Globalization 7

The Criticisms of Globalization 10 Threats to National Sovereignty 10 Environmental Stress 11 Growing Income Inequality and Personal Stress 11

Point-Counterpoint Is Offshoring of Production a Good Strategy? 12

Why Companies Engage in IB 14 Sales Expansion 14 Resource Acquisition 14 Risk Reduction 14

IB Operating Modes 15 Merchandise Exports and Imports 15 Service Exports and Imports 15 Investments 16 Types of International Organizations 16

Why do Companies’ External Environments Affect How they May Best Operate Abroad? 16

Physical Factors 17 Institutional Factors 17 The Competitive Environment 18

Looking to the Future Three Major Scenarios on Globalization’s Future 19

CASE: Carnival Cruise Lines 21

Endnotes 23

iv

Contents v

• Part two: comParative environmental FrameworkS 25

2 The Cultural Environments Facing Business 25 CASE: Saudi Arabia’s Dynamic Culture 26

Culture’s Importance in IB and Trickiness To Assess 29 National Cultures as a Point of Reference 29 The People Factor 30 Building Cultural Awareness 31 Shortcomings in Cultural Assessments 31

Influences on Cultural Formation and Change 32 Sources of Change 32 Language as Both a Diffuser and Stabilizer of Culture 32 Religion as a Cultural Stabilizer 34

Major Behavioral Practices Affecting Business 35 Issues in Social Stratification 35 Work Motivation 37 Relationship Preferences 40 Risk-Taking Behavior 40 Information and Task Processing 41

Problems in Communicating Across Cultures 42 Translation of Spoken and Written Language 42 Silent Language 43

Guidelines For Cultural Adjustment 45 Host Society Acceptance 45 Degree of Cultural Differences 45 Ability to Adjust: Culture Shock 46 Company and Management Orientations 46 Strategies for Instituting Change 47

Point-Counterpoint Does IB Lead To Cultural Imperialism? 48

Looking to the Future Scenarios on The Evolvement of National Cultures 50

CASE: Tesco PLC: Leveraging Global Knowledge 52

Endnotes 55

3 The Political and Legal Environments Facing Business 57 CASE: China: Big Opportunities, Complicated Risks 58

Politics, Laws, and Operating Internationally 60

The Political Environment 62 Individualism 62

vi Contents

Collectivism 62 Political Ideology 63 Democracy 64 Totalitarianism 65

The State of Political Freedom 67 The Prevalence of Political Freedom 68 The Struggles of Political Freedom 68 The Allure of Authoritarianism 71

Looking to the Future Political Ideology and MNEs’ Actions 72

Political Risk 74 Classifying Political Risk 74

Point-Counterpoint Proactive Political Risk Management: The Superior Approach 76

The Legal Environment 78 Types of Legal Systems 79 The Foundation of Legality 80 Mapping the Basis of Law 81 Which Rule When? 82 Implications to Managers 84

Legal Issues Facing International Companies 84 Operational Concerns 85 Strategic Concerns 86

Politics, Law, and the Business Environment 88

CASE: It’s a Knockoff World 89

Endnotes 91

4 The Economic Environments Facing Businesses 93 CASE: Emerging Economies: Comeback or Collapse? 94

International Economic Analysis 95 Navigating Challenges 96

Who’s Who in the Global Business Environment 97 Developed Economies 97 Developing Economies 98 Economies in Transition 100 The Issue of Different Degrees of Development 101

Economic Freedom 103 The Value of Economic Freedom 105 The Prevalence of Economic Freedom 106 Economic Freedom and Type of Economic Environment 107 The Paradox of Promise Versus Prevalence 107

Contents vii

Looking to the Future State Capitalism: Detour or Destination? 110

Types of Economic Systems 111 The Market Economy 111 The Command Economy 112 Mixed Economy 113

Assessing Economic Development, Performance, and Potential 114 Monetary Measures 114 Improving Economic Analytics 116 The Wildcard: The Shadow Economy 118 Sustainability and Stability 119 Sustainability 119 Stability 120

Point-Counterpoint Growth: Positive and Productive? 121

Elements of Economic Analysis 123 Integrating Economic Analysis 123 Economic Freedom, Innovation, and Competitiveness 125

CASE: Economic Environments of the West: Problems, Puzzles, and the 4th Industrial Revolution 126

Endnotes 128

5 Globalization and Society 129 CASE: Ecomagination and the Global Greening

of GE 130

Introduction 132

Stakeholder Trade-Offs 132

The Economic Impact of the MNE 133 Balance-of-Payments Effects 134 Growth and Employment Effects 135

The Foundations of Ethical Behavior 136 Why Do Companies Care About Ethical Behavior? 137

The Cultural Foundations of Ethical Behavior 137 Relativism Versus Normativism 137

The Legal Foundations of Ethical Behavior 138 Legal Justification: Pro and Con 138

Corruption and Bribery 139 Petrobras: Corruption in Brazil with a Global Twist 140 The Consequences of Corruption 140 What’s Being Done About Corruption? 141

viii Contents

Ethics and the Environment 142 What Is “Sustainability”? 142 Global Warming and The Paris Agreement on Climate Change 143

Ethical Dilemmas of Labor Conditions 144

Point-Counterpoint Should MNEs Accept Full Responsibility for the Unethical Behavior of Their Employees? 144

The Problem of Child Labor 146 What MNEs Can and Can’t Do 147

Corporate Codes of Ethics: How Should a Company Behave? 147 Motivations for Corporate Responsibility 147 Developing a Code of Conduct 147

Looking to the Future Dealing with Ethical Dilemmas in the Global Economy 148

CASE: Anglo American PLC in South Africa: What Do You Do When Costs Reach Epidemic Proportions? 149

Endnotes 151

• Part three: theorieS and inStitutionS: trade and inveStment 153

6 International Trade and Factor Mobility Theory 153 CASE: The Evolution of Taiwan’s International Trade 154

Introduction: Why Do Policymakers Rely on International Trade and Factor Mobility Theories? 156

Interventionist and Free Trade Theories 158 Mercantilism 158 Neomercantilism 158 Free Trade Theories 159 Theory of Absolute Advantage 159 Theory of Comparative Advantage 161 Theories of Specialization: Some Assumptions and Limitations 162

Theories to Explain National Trade Patterns 164 How Much Does A Country Trade? 164 What Types of Products Does A Country Trade? 166 With Whom Do Countries Trade? 167

The Dynamics of Export Capabilities 168 Product Life Cycle (PLC) Theory 168 The Diamond of National Competitive Advantage 170

The Theory and Major Effects of Factor Mobility 172

Contents ix

Point-Counterpoint Should Nations Use Strategic Trade Policies? 172

Why Production Factors Move 174 Effects of Factor Movements 175

The Relationship between Trade and Factor Mobility 176 Substitution 176 Complementarity 176

Looking to the Future Scenarios That May Change Trade Patterns 177

CASE: Ecuador: A Rosy Export Future? 179

Endnotes 182

7 Governmental Influence on Trade 183 CASE: The U.S.–Vietnamese Catfish Dispute 184

Conflicting Outcomes of Trade Protectionism 186 The Role of Stakeholders 187

Economic Rationales for Governmental Trade Intervention and Outcome Uncertainties 187

Fighting Unemployment 187 Protecting “Infant Industries” 188 Developing an Industrial Base 189 Economic Relationships with Other Countries 190

Governments’ Noneconomic Rationales and Outcome for Trade Intervention 192

Maintaining Essential Industries 192 Promoting Acceptable Practices Abroad 193

Point-Counterpoint Should Governments Impose Trade Sanctions? 193

Maintaining or Extending Spheres of Influence 195 Preserving National Culture 195

Major Instruments of Trade Control 195 Tariffs: Direct Price Influences 195 Nontariff Barriers: Direct Price Influences 196 Nontariff Barriers: Quantity Controls 198

How Companies Deal With Governmental Trade Influences 201

Tactics for Dealing with Import Competition 201 Convincing Decision-Makers 201 Involving the Industry and Stakeholders 201 Preparing for Changes in the Competitive Environment 202

Looking to the Future Dynamics and Complexity of Future World Trade 202

x Contents

CASE: Should U.S. Imports of Prescription Drugs from Canada Be Widened? 203

Endnotes 205

8 Cross-National Cooperation and Agreements 207 CASE: Toyota’s European Drive 208

Forms of Economic Integration 209

The World Trade Organization—Global Integration 210 GATT: Predecessor to the WTO 210 What Does the WTO Do? 210

Regional Economic Integration 211 Bilateral Agreements 211 Geography Matters 211 The Effects of Integration 212

Major Regional Trading Groups 213 The European Union 214 The North American Free Trade Agreement (NAFTA) 218 Regional Economic Integration in the Americas 221 Regional Economic Integration in Asia 223 Regional Economic Integration in Africa 225

Point-Counterpoint Is Regional Economic Integration a Good Idea? 226

The United Nations and Other NGOs 227

Commodity Agreements 229 Commodities and the World Economy 229 Consumers and Producers 229 The Organization of the Petroleum Exporting Countries (OPEC) 230

Looking to the Future Will the WTO Overcome Bilateral and Regional Integration Efforts? 231

CASE: Walmart Goes South 232

Endnotes 234

• Part Four: world Financial environment 235

9 Global Foreign-Exchange Markets 235 CASE: Going Down to the Wire in the Money-Transfer

Market 236

What is Foreign Exchange and Who are The Major Players in The Market? 237

Contents xi

Some Aspects of The Foreign-Exchange Market 238 How to Trade Foreign Exchange 238 Global OTC Foreign-Exchange Instruments 239 Size, Composition, and Location of the Foreign-Exchange Market 239 Foreign-Exchange Trades and Time Zones 241

Major Foreign-Exchange Markets 243 The Spot Market 243 The Forward Market 244 Options 244 Futures 245

The Foreign-Exchange Trading Process 245 Banks and Exchanges 245 Top Exchanges for Trading Foreign Exchange 246

How Companies Use Foreign Exchange 247 Cash Flow Aspects of Imports and Exports 247 Other Financial Flows 248

Point-Counterpoint Is It OK to Speculate on Currency? 249

Looking to the Future Where Are Foreign-Exchange Markets Headed? 251

CASE: Do Yuan to Buy Some Renminbi? 252

Endnotes 255

10 The Determination of Exchange Rates 257 CASE Venezuela’s Rapidly Changing Currency 258

Introduction 259

The International Monetary Fund 260 Origin and Objectives 260 The IMF Today 260 The Role of the IMF in Global Financial Crises 261 Evolution to Floating Exchange Rates 261

Exchange-Rate Arrangements 262 Three Choices: Hard Peg, Soft Peg, or Floating Arrangement 262 Hard Peg 263 Soft Peg 263 Floating Arrangement 263 The Euro 263

Point-Counterpoint Should Africa Develop a Common Currency? 265

Determining Exchange Rates 266 Nonintervention: Currency in a Floating-Rate World 266

xii Contents

Intervention: Currency in a Fixed-Rate or Managed Floating-Rate World 267 Black Markets 268 Foreign-Exchange Convertibility and Controls 268 Exchange Rates and Purchasing Power Parity 269 Exchange Rates and Interest Rates 271 Other Factors in Exchange-Rate Determination 272

Forecasting Exchange-Rate Movements 272 Fundamental and Technical Forecasting 272 Fundamental Factors to Monitor 272

Business Implications of Exchange-Rate Changes 273 Marketing Decisions 273 Production Decisions 274 Financial Decisions 274

Looking to the Future Changes in the Relative Strength of Global Currencies 274

Case: Welcome to the World of Sony—Unless the Falling Yen Rises (or Falls) Again 275

Endnotes 278

11 Global Capital Markets 279 CASE: Tax Wars: Pfizer Versus the U.S. Government 280

The Finance Function 281 The Role of the CFO 281

Capital Structure 282 Leveraging Debt Financing 282 Factors Affecting the Choice of Capital Structure 282

Global Debt Markets 284 Eurocurrencies and the Eurocurrency Market 284 International Bonds 285 Global Equity Markets 286 The Size of Global Stock Markets 287

Taxation of Foreign-Source Income 289 International Tax Practices 289 Taxing Branches and Subsidiaries 290 Transfer Prices 292 Double Taxation and Tax Credit 293 Dodging Taxes 294

Offshore Financing and Offshore Financial Centers 294 What is an OFC? 294

Contents xiii

Point-Counterpoint Should Offshore Financial Centers and Aggressive Tax Practices Be Eliminated? 296

Looking to the Future The Growth of Capital Markets and the Drive by Governments to Capture More Tax Revenues by MNEs 297

CASE: Does the Devil Really Wear Prada? 298

Endnotes 300

• Part Five: gloBal Strategy, Structure, and imPlementation 301

12 The Strategy of International Business 301 CASE: Zara’s Disruptive Vision: Data-Driven Fast-Fashion 302

Strategy in the MNE 304 Getting Started: Vision and Mission 305 Moving Onward: Strategic Planning 307

Making Sense to Make Strategy 307

The Role of Resources, Capabilities, and Competencies 308

The Quest to Create Value 310 The Cost Leadership Strategy 310 The Differentiation Strategy 311 The Integrated Cost Leadership/Differentiation Strategy 312

Point-Counterpoint Is Strategic Planning Productive? 313

Organizing Value Creation: The Value Chain 314 Configuring the Value Chain 315

Looking to the Future Digits, Widgets, and Changing Location Advantages 319

Global Integration Versus Local Responsiveness 321 The Potential for Standardization 322 The Characteristics of Consumer Preferences 323 The Effect of Institutional Agents 324 Global Integration and Local Responsiveness: Mapping their Interaction 324

International Corporate-Level Strategies 326 The International Strategy 326 The Localization Strategy 328 Global Strategy 329 Transnational Strategy 330

xiv Contents

CASE: The Multinational Enterprise of the Future: Leading Scenarios 332

Endnotes 334

13 Country Evaluation and Selection 335 CASE Burger King® 336

The Importance of Location 338

Comparing Countries Through Scanning 338 Why Is Scanning Important? 338 Scanning Versus Detailed Analysis 339

Opportuniity and Risk Variables 340 Opportunities: Sales Expansion 340 Opportunities: Resource Acquisition 341 Risks 343 Analyzing and Relating the Opportunity and Risk Variables 348

Sources and Shortcomings of Comparative Country Information 350

Some Problems with Research Results and Data 350 External Sources of Information 351 Internally Generated Data 352

Point-Counterpoint Should Companies Operate in and Send Employees to Violent Areas? 352

Alternatives for Allocating Resources among Locations 353 Alternative Gradual Commitments 353 Geographic Diversification Versus Concentration 354 Reinvestment and Harvesting 355

Noncomparative Location Decisions 356

Looking to the Future Conditions That May Cause Prime Locations to Change 356

CASE: Carrefour 357

Endnotes 360

14 Export and Import 361 CASE: SpinCent: The Decision to Export 362

Introduction 364

Exporting: Principles and Practices 365 Who are Exporters? 366 The Matter of Advantages 366 Characteristics of Exporters 367

Contents xv

Exporting: Motivation and Methods 368 Profitability 368 Productivity 369 Diversification 369

Export: Start-Up and Expansion 370 Incremental Internationalization 370 The Born-Global Phenomenon 371 The Influence of Time and Place 371 The Wildcard of Serendipity 372 Approaches to Exporting 372 Which Approach When? 373

Point-Counterpoint Exporting E-waste: A Fair Solution? 374

Importing: Principles and Practices 378 Characteristics of Importers 378

Importing: Motivation and Methods 379 Import Drivers 379 Who Are Importers? 380

Importing and Exporting: Problems and Pitfalls 380

Financial Risks 381 Customer Management 381 International Business Expertise 382 Marketing Challenges 382 Top Management Commitment 382 Government Regulation 383 Trade Documentation 384

Importing and Exporting: Resources and Assistance 385

Public Agencies 386 Private Agents 387

Reconciling Opportunity and Challenge: An Export Plan 390

Looking to the Future Technology Transforms International Trade 391

Countertrade 393 Costs 393 Benefits 394

CASE: The Borderfree Option: Going Global—Simplified 394

Endnotes 396

xvi Contents

15 Direct Investment and Collaborative Strategies 397 CASE: Meliá Hotels International 398

Introduction 401

Why Export and Import May Not Suffice 402 When It’s Cheaper to Produce Abroad 403 When Transportation Costs Too Much 403 When Domestic Capacity Isn’t Enough 403 When Products and Services Need Altering 403 When Trade Restrictions Hinder Imports 403 When Country of Origin Becomes an Issue 404

Why and How do Companies Make Wholly Owned FDI 404 Reasons for Wholly Owned Foreign Direct Investment 404 Acquisition Versus Greenfield 405

Why Companies Collaborate 406 General Motives for Collaborative Arrangements 406 International Motives for Collaborative Arrangements 408

Forms of and Choice of Collaborative Arrangements 409 Some Considerations in Choosing a Form 409

Point-Counterpoint Should Countries Limit Foreign Control of Key Industries? 410

Licensing 411 Franchising 412 Management Contracts 413 Turnkey Operations 413 Joint Ventures (JVs) 414 Equity Alliances 415

Why Collaborative Arrangements Fail or Succeed 415 Reasons for Failure 416 Helping Collaborative Operations Succeed 417

Looking to the Future Growth in Project Size and Complexity 420

CASE: The oneworld Airline Alliance 421

Endnotes 425

16 The Organization of International Business 427 CASE: Organizing Global Operations: The “Gore

Way” 428

Introduction 430

Contents xvii

Changing Times, Changing Organizations 430 Expanding Scope of IB 431 The Internet as a Design Standard 431 Managerial Standards 431 Social Contract 432 Change and Challenge: MNEs Respond 432

Classical Organization Structures 433 Vertical Differentiation 433 Horizontal Differentiation 435 The Functional Structure 435 Divisional Structures 436 Global Matrix Structure 439 Mixed Structure 440

Neoclassical Structures 440 The Challenge of Boundaries 440 The Goal of Boundarylessness 441 The Network Structure 442 Virtual Organization 443 Neoclassical Structures in Action 444 Pitfalls of Neoclassical Structures 444

Point-Counterpoint The Hierarchical Structure: The Superior Format 445

Coordination Systems 447 Coordination by Standardization 448 Coordination by Plan 449 Coordination by Mutual Adjustment 450

Control Systems 451 Bureaucratic Control 451 Market Control 451 Clan Control 452 Control Mechanisms 452 Which Control System When? 453

Organizational Culture 453 A Key Piece of the Performance Puzzle 453 The Power of Common Cause 454 Developing an Organizational Culture 455

Looking to the Future The Rise of Corporate Universities 456

CASE: Building a Magical Organization at Johnson & Johnson 458

Endnotes 460

xviii Contents

• Part Six: managing international oPerationS 461

17 Marketing Globally 461 CASE: Tommy Hilfiger 462

International Marketing Strategies: Orientations, Segmentation, and Targeting 463

Marketing Orientations 464 Segmenting and Targeting Markets 466

Product Policies: Country Adaptation Versus Global Standardization 467

Why Firms Adapt Products 467 Alteration Costs 468 The Product Line: Extent and Mix 469

International Pricing Complexities 469 Potential Obstacles in International Pricing 469

Should Promotion Differ Among Countries? 472 The Push–Pull Mix 472 Some Problems in International Promotion 473

International Branding Strategies 475 Global Brand Versus Local Brands 476

Point-Counterpoint Should Home Governments Regulate Their Companies’ Marketing in Developing Countries? 477

Distribution Practices and Complications 479 Deciding Whether to Standardize 479 Internalization or Not? 480 Distribution Partnership 480 Distribution Challenges and Opportunities 481

Gap Analysis: A Tool for Helping to Manage the International Marketing Mix 482

Usage Gaps 483 Product-Line Gaps 484 Distribution and Competitive Gaps 484 Aggregating Countries’ Programs 484

Looking to the Future How Might International Market Segmentation Evolve? 485

CASE: Grameen Danone Foods in Bangladesh 486